Participation is waning... but signs are not pointing to this translating to a drop in performance. We explore this idea today.
Its no question that participation has dropped over the last few weeks. As noted in our recent research piece, the bullish percent for the NYSE (^BPNYSE) reversed lower to open the month of August. This established a lower participation top than at other points over the last few years… a net negative at first glance. To understand if this is truly a negative development, however, it may be useful to re-define what these indicators truly are. Remember, “participation” is a function of how many stocks are moving up or down… not of pure performance. It is true that most times the two go hand in hand, but there are certainly instances (most recently in 2023) where the two can disconnect.
Today’s article will focus mainly on this idea through the lens of ^BPNDX which measures the percentage of Nasdaq-100 stocks trading on PnF buy signals. Currently sitting at 44%, the reading is well below 2025 highs (82%) and is lower than even the small cap 600 ^BPSPSML, a group which has failed to put in any form of upside action so far this year. Despite this, NDX representative QQQ still bests small cap IJR by over 15%... confirming that sometimes, greater participation ≠ greater performance. While the decrease in participation for 2025 leader NDX is certainly notable (and perhaps a tad concerning if it persists…) remember that these readings are telling you who is driving market movement. To put it simply, markets can still advance at the hands of just a few stocks. That kind of market environment might be uncomfortable at best… but big stocks trudging higher while others go through fits and spurs of catching up is certainly nothing new.
To explore this idea further, we can look at two technically acceptable Nasdaq-100 representatives. Cap weighted QQQ holds a strong 5.75 fund score, and while it is a tad extended around current levels the overall picture is still quite strong. Equal-weighted QQEW has pulled back off July highs but is still up ~9% this year and holds a 5.10 fund score. With the understanding that participation is waning, we can compare the two against each other using a sensitive 1% chart. As you might expect, QQQ has maintained a RS buy signal against QQEW since 2023, most recently posting its fourth consecutive buy signal as it moved to all-time relative highs to open August.
All this to say, take this as further confirmation that the core of the market continues to dominate. While arguments for investment can be made for several equal weighted options (QQEW, RSP, etc.) the overall risk/reward picture isn’t as attractive at current levels as mega-cap names lead markets to all-time highs.
