The Nasdaq Is Bullish. The Market? Not So Much.
The action under the surface is historically poor while the Nasdaq hits a high.
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We have flat action early Tuesday following Monday’s strong move. That move surprised many people and was driven largely by poor positioning. There was some positive news flow, primarily around U.S.-China AI cooperation ahead of Thursday’s Trump-Xi summit, but the reaction was outsized because so many people were leaning the wrong way.
It is well known that the week after September options expiration is one of the weakest seasonal stretches of the year, and many traders were anticipating some market struggles.
The Indexes Hide More Than They Reveal
Monday was one of the starkest illustrations I have seen of a problem I have been writing about all year.
The indexes are widely regarded by the investment community as equivalent to the stock market. If the indexes are strong, then the market is in great shape, and vice versa. The reality is that the indexes are often hiding the true picture of what is happening. Monday was a particularly lopsided day.
Investor’s Business Daily uses a market-timing methodology that focuses on key indexes. IBD raised its recommended exposure to the maximum 80% to 100% on Monday’s action, from 60% to 80%. Their reasoning was that the Nasdaq gapped up, closed at an all-time high, and broke out of a cup-with-handle base. The index made a new high on a strong move, and their model went all in. The logic there is understandable.
At the same time they raised their allocation, they pointed out the dramatic gap in performance. The Nasdaq rose 2.3%, the S&P 1.5%, the Dow 0.7%, and the Russell 2000 just 0.5%. The higher-quality small-cap index came off its intraday high to close up less than 0.3%.
The average gain among the “Megacap 8” was 3%. So the record close was a product of eight stocks while everything below them lagged badly. The IBD model doesn’t care what moved the indexes. Their model doesn’t make any distinction between a broad or narrow market.
The Numbers Underneath Are Alarming
The breadth data tells a different story than the indexes. On Monday, only 1% of the S&P 500 made a new all-time high and just 1.2% made a 52-week high. On the other side, 5% of the index hit a 52-week low.
Nearly 23% of the S&P is at a one-month low and more than 12% is at a three-month low. On a day the index closed at a record, five times as many of its members hit 52-week lows as 52-week highs.
This Is Not One Data Point
There is a growing body of evidence that Monday’s action is historically unusual, and none of it is comforting. The analyst Jason Goepfert has flagged two highly unusual events.
First, there have been only two days in history when the S&P rallied at least 1% to within 1% of a new high while more of its stocks fell to new lows than new highs. The prior two were July 23, 1929, and December 21, 1999.
Second, and more broadly, he notes that we have not seen breadth this bad in almost a 100 years while the S&P is knocking on new highs. The percentage of stocks in long-term uptrends is plunging even as the index sits near a record. The only remotely similar setups were January 1973 and November 1999.
Put those together and you have four historical analogs: 1929, 1973, 1999, and 1999. Every one of them was a major market top or the direct lead-in to one. I am not making a top call off a set of statistics, and neither is he. But when the only comparable moments in a century are the most infamous tops on record, that is not something to wave away because of a cup-and-handle pattern and strong narrow action.
Why This Keeps Happening
The reason the indexes get treated as the market is that it is convenient for almost everyone whose job depends on them. The media generalizes because it is simpler to report about an index level than to explain that 23% of stocks are at a one-month low on an up day.
Brokers, pundits, and the exposure models all defer to the index because that is the yardstick they are measured against. They are graded on the S&P, so they talk about the S&P, and a narrow move that lifts a few mega-caps gets reported as a strong market.
That is a convenience, not an analysis, and it is exactly the gap I focus on when evaluating the market. When the index says one thing and the components say another, the components are telling you what is actually happening. If you are trading the indexes the focus on the indexes makes sense, but if you are focused on individual stocks then it is highly deceptive and misleading.
Game Plan
None of this makes me want to short anything. A market can stay narrow and top-heavy for a good while before it matters, and being out of position is still forcing buying that can carry the mega-caps further. But it does keep me from believing Monday was a valid breakout and an all-clear signal. The indexes are lying about the health of individual stocks.
I am staying selective and watching the same thing I have been watching. Whether the individual names on my list develop and hold, whether breadth improves, whether the new-high list expands beyond a handful of giants. That is what tells me the market is actually turning.
A record close with 5% of the index at 52-week lows is not going to make me a bull.
At the time of publication, Rev Shark had no positions in any securities mentioned.
