A Difficult Market Is Complicated by Unusual Strength in Just 7 Stocks
Will this corrective action continue, or will the indexes be saved once again by the 'Magnificent Seven'?
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Following the Fed interest-rate decision on Wednesday afternoon, selling momentum accelerated on Thursday.
The Nasdaq 100 QQQ led to the downside with a drop of 1.8%, but it was a very broad bear attack with more than four stocks declining for each one advancing. The most notable-and worrisome development was that new 12-month lows expanded to 725 names.
The major question now is how deep will this corrective action go. There has been substantial technical damage, and everyone is aware that there is negative seasonality at work for another week or so.
Can this market find its footing, attract dip buyers, and develop a rally into the end of the year?
Before answering that question, it is very important to understand the nature of the market action. The business media and many technicians focus solely on the indexes, but the indexes have been wildly misleading about the market's health all year.
According to Jim Bianco, the market-cap increase in the S&P 500 this year has been 11.7%, and the "Magnificent Seven"/AI names -- Nvidia NVDA , Apple AAPL , Microsoft MSFT , Alphabet GOOGL , Amazon AMZN , and Tesla TSLA -- account for 9.87% of it. The other 493 stocks in the S&P 500 have only increased 1.84%. That is hardly a bull market that so many have been celebrating.
The smaller the stock, the worse the performance has been this year. The Russell 2000 ETF IWM is up 1.17% year to date, and the Russell Microcap Index IWC is down 7.08%.
Inflation and high-interest rates are hurting the vast majority of the market, while the AI theme is boosting seven mega-cap names that don't have significant debt and are unaffected by interest rates or inflation to any great degree.
This two-tiered market action isn't a big secret. It doesn't receive much media coverage, but most astute investors are painfully aware of it.
The question that is at the forefront now is how the current corrective action will impact the two groups of stocks. A very large part of the market has been in a bear market for a long time and is now acting even worse. The Magnificent Seven have been in a bull market and driven the indexes, but now they are correcting. Will the big-cap names continue to outperform and avoid a bear market, or will they struggle and weigh down the rest of the market that has been so bad for so long?
The biggest problem that the market faces is that it will be very hard for the 493 stocks in the S&P 500 to do much if the seven mighty giants are struggling. The market just doesn't rotate in that way due to the prevalence of indexing and the use of index ETFs. Big-cap technology always gets the majority of the inflows when the indeses are the main trading vehicle.
We are due for some sort of oversold bounce at this point, but we will see how the big-cap names act versus everything else. It is still a bear market for most stocks, but will big caps join the misery?
(AAPL, GOOGL, AMZN and MSFT are holdings in TheStreet's. Action Alerts PLUS portfolio Want to be alerted before the portfolio buys or sells these stocks? Learn more now.)
At the time of publication, Rev Shark had no positions in any securities mentioned.
