The Bull Market Is a Cheap Fake
Don't be fooled, this is not a real bull market. If the indexes reflected the action in the average stock, we would be talking about something completely different.
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Unless you have been living in a cave, you are probably aware of how the S&P 500 and Nasdaq 100 QQQ have recently hit new all-time highs. What is not as well known is that this is primarily due to narrow strength in a few big-cap names such as Nvidia NVDA, Microsoft MSFT, and Alphabet GOOGL.
Numerous statistics illustrate how lopsided this action has been. One that I’m looking at right now is the percentage of stocks over their 200-day simple moving average. That number hit a high of 65% on March 28 and is currently around 48% as I write.
If a stock is below its 200-day simple moving average price, it likely has been down-trending and is not far from recent lows. Many momentum traders won’t even look at stocks that are below that level.
This sort of lackluster action in so many stocks is the hallmark of a bear market, but the business media doesn’t really care about that fact. The only fact that matters to most news outlets that discuss the market is the indexes. If they are acting well, then it’s a bull market, even if half of the stocks are in a technical bear market, which is defined as more than 20% below recent highs.
To put it simply, this is not a real bull market. It is a bull market in a very small group of stocks that influence the indexes to a far greater degree than anything else. If the indexes reflected the action in the average stock, we would be talking about bear markets, and the news reports would sound very gloomy.
In many ways, a fake bull market is much more difficult for most investors than an outright bear market. In a fake bull market, very few investors can outperform the indexes because anyone holding a diversified portfolio will have many big losers in their accounts.
Another problem with a fake bull market is that it keeps sentiment artificially inflated and prevents the conditions that will help the broader market find support and start acting better. There isn’t any fear of causing the sort of downside volatility that creates new opportunities.
Conditions will shift at some point, but it is important to recognize that this is a fake bull market and that we are dealing with a tremendous amount of bearish action in individual stocks. This makes me optimistic about the next market cycle, but it is a tough slog right now, and patience is mandatory.
I’m doing little as I watch many of my favorite stocks drift lower on light volume.
At the time of publication, Rev Shark had no positions in any securities mentioned.
