Half of Stocks Now Trading Under Key Average
It was another positive day with broader action but most of the market isn’t participating.
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It was another solid day of gains, with Cisco Systems (CSCO) and Nvidia (NVDA) driving the AI sector and semiconductors closing at a new high again. Breadth was better, with 58% of stocks higher on the day and new highs leading new lows by 215 to 160.
A Bull Market by Index Construction
What is most notable about this market is that, despite the highs in the indices, more than half of all stocks, 51.3%, are trading below their 200-day simple moving averages. If the indices themselves were below that line, we would be hearing endlessly about a bear market and what investors should do to protect themselves. Instead the same internal action gets read as a healthy bull market, and the only reason for the difference is index construction. A handful of giant names is holding the line, and that is enough to set the narrative for everyone else.
This is the gap between what the indexes say and what the average portfolio is actually experiencing. The tape is telling two stories at once, and which one you hear depends entirely on whether you are looking at the S&P 500 or at the stocks you happen to own.
The Diversified Investor Gets Worn Out
A lot of folks are frustrated right now because they cannot keep pace with the narrow strength using a diversified portfolio. It is worth being clear about what is happening to them. They are not doing anything wrong. They are doing the textbook thing, spreading risk across sectors and names, and the market is punishing that discipline because leadership has narrowed to so few stocks. Prudence feels like a mistake, and that is a hard thing to sit through. Unlike the internet bubble in 1999 and 2000, we aren’t seeing the giddy excitement among retail investors, because the kinds of stocks they favor are not working.
A market that makes the disciplined approach feel foolish week after week is wearing people down, and the danger is that they abandon a sound process at the worst possible moment. The FOMO is hard to resist, but holding to a sound process is the smart move and will pay off.
What Resolves the Divergence
A divergence like this does not last forever. It resolves one of two ways. Either the lagging majority of stocks catches up and breadth broadens out to confirm the index highs, or the handful of leaders rolls over and the indexes come back to meet the reality of the average stock. Which of those it turns out to be matters far more than the fact that we closed at a record on Thursday.
I am watching breadth closely for guidance. A real broadening, more stocks reclaiming that 200-day line, more new highs across more sectors, would tell us the bull case is getting healthier. A stumble in the leaders with nothing underneath to support them would tell us something else. For now the trend is up and there is no reason to fight it, but something significant is coming and I’ll be ready to react when it hits.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre was long NVDA.
