The average stocks are outperforming the market—and that could be a good thing

While the S&P 500 appears to be consolidating after its breakout out to record highs, two technical analysts believe that another way of looking at the market suggests that further gains are ahead.

Chris Verrone, technical analyst at Strategas, said Wednesday on CNBC's "Power Lunch" that the average stock within the capitalization-weighted S&P 500 is doing better than the index itself. In other words, if the S&P 500 were viewed by giving the same weight to each of its components during 2016, then the performance would be better.

Within the S&P 500, the influence of one of the index's individual components on the S&P's performance depends on the value of that company's available shares. For this reason, Apple makes up about 3 percent of the index, while Diamond Offshore comprises less than 0.01 percent.

An alternate way of looking at how large-cap stocks are doing is taking each of the stocks in the S&P 500 as an equal component, so that each has a weight of about 0.2 percent. When the normal S&P 500 is compared to this equal-weighted version, one finds that the alternate way of looking at the index is outperforming nicely, indicating that smaller stocks are outperforming their larger peers.

In fact, while the S&P 500 is up almost 6 percent this year, Verrone says that if you equally weighed all the stocks in the S&P 500, the index is actually up closer to 9 percent. According to Verrone, this shows positive signs for the market.

"The outperformance of the equal-weight index suggests that participation in the rally has broadened out, it's not just the large weights driving returns," he said in an email Thursday.

Piper Jaffray technical analyst Craig Johnson also sees this as a good sign. As small- and mid-cap stocks rise in the S&P 500, Johnson sees the market following.

"I do see the breadth of the market start to pick up," he told CNBC on Tuesday. "February had very low readings, but now the market is broadening and [that's a sign that] the bull market is moving higher."

Johnson sees the market moving 8 to 9 percent higher by year-end.


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Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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