The Most Important Dynamic in This Market Can’t Be Ignored
Things will eventually 'revert to the mean' and there will be great opportunities, but it's not that easy.
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For the seventh trading session out of the last eight, the S&P 500 looked very poor early in the day and then accelerated higher into the close. These late rallies have been quite lopsided, with just a few big-caps driving the moving, and Tuesday, it was even more lopsided.
A big gain in Apple AAPL of over 7% drove the Nasdaq and Nasdaq 100 QQQ to new all-time highs but covered up poor action in the rest of the market. The most obvious problem was that the DJIA was down 0.3%, and the Russell 2000 IWM declined 0.6%. Overall market breadth was solidly negative, with around 3,750 names increasing, while 5,450 declined.
One of the more remarkable facts about the current market action is that while the Nasdaq hit a new all-time high, there were 132 stocks in the index hitting new 12-month lows and only 81 making new 12-month highs. This is highly unusual, but it illustrates how a very small group of stocks like Apple and Nvidia NVDA cover up what is really going on with the average stock.
Another illustration of this is that only 7% of stocks in the S&P 500 have outperformed the index over the past year. In other words, 93% of stocks are underperforming the index. If you aren’t in that small group of names, then you are lagging the benchmarks.
I’ve been writing about this lopsided market action for years, and it is tiresome, but it is the most important dynamic in the market and can’t be ignored. The popular business media pays almost no attention to this because all they really care about are the indexes and a few big names that receive the most attention from casual market observers. It is too complicated to talk about narrowness and breadth because they don’t fit in the headlines.
At some point, this dynamic will "revert to the mean," and there will be great opportunities for those who are aggressive in playing the rotation, but it is going to take patience and vigilance to time it with some degree of precision.
On Wednesday, we have CPI in the morning, the Fed policy decision, and a Powell press conference. There are unlikely to be any big surprises, but events like these produce strong reactions regardless. I’ll have more in the morning about what to look for.
Have a good evening. I’ll see you Wednesday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
