Market Presents Opportunity for Non-Index Investors

# What the market looks like beneath the headline index

The S&P 500's small move disguises a much broader set of price actions. The percentage of stocks trading above their 200-day moving average sits at about 45%, below the roughly 50% level many investors treat as a sign of a healthy market. The Invesco S&P 500 Equal Weight ETF (RSP) is down 4.5%, showing the equal-weighted picture is weaker than the market-cap-weighted headline S&P 500, which is only down roughly 0.76%.

Interest rates at both the short end (2-year) and longer end (10-year and 30-year) have risen. That lifts discount rates and puts pressure on many stocks that are rate-sensitive—while a small group of high-growth AI-related names continues to support the cap-weighted index.

# Where the weakness sits

Small-cap measures and sector equal-weighted groupings are showing meaningful declines.

• Russell 2000: down about 6.88% and with RSI at levels that have historically aligned with short-term bottoms.
• Avantis US Small Cap Value ETF (a proxy for small-cap value): down about 6.2%. That exposure is heavy in financials, consumer discretionary, industrials and energy.
• Dimensional US High Profitability ETF (quality/profitability factor): just down about 1%, illustrating that some factor exposures are holding up.

Specific small-cap group moves called out include consumer discretionary down ~11%, industrials down ~12.3%, financials down ~8.6%. Small-cap energy was up 37% year-to-date but has also pulled back roughly 8% in the recent move. Large-cap equal-weight sector groups—consumer discretionary, industrials, financials and real estate—are mostly down roughly 7.7%–10%.

# Why this can be viewed as an opportunity

The market's divergence—concentration in a handful of growth names while many underlying stocks correct—creates potential opportunities for investors who are not tied to market-cap-weighted indexing.

Two broad strategies are presented:

• Buy strength: target price momentum and companies with fundamental momentum. Momentum strategies rely on periodic reconstitution so that winning names are refreshed.
• Buy weakness: target mean reversion across beaten-down segments, accepting that recovery can take time and some names may never regain prior levels. Diversification matters because winners must offset losers.

Which path you choose should depend on your strategy rules and conviction. The author notes common investor hesitation around timing entries and the emotional cost of waiting for a deeper pullback.

• Decide whether you invest on strength or weakness and stick to the critical operational elements of that strategy (e.g., reconstitution rules for momentum, diversification for mean-reversion).

The author references personal practice: managing the Daedalus Income and Crystalys portfolios and holding about $50,000 in cash ready for deployment.

# Bottom line

Headline indexes can understate underlying market weakness. The divergence provides openings for non-index investors who have clear rules for momentum or reversion strategies, the discipline to follow those rules, and a plan for the emotional dimension of investing.