"To every rule there is an exception - and an idiot ready to demonstrate it."
Market sentiment was very positive over the weekend as first the Dow Jones Industrial Average (DJIA) and then the Nasdaq exploded to new all-time highs last week. However, many market pundits aren't quite as celebratory as they note that the move was extremely narrow and was produced by a small handful of big-cap stocks such as 3M Co. (MMM) , Amazon.com Inc. (AMZN) and Intel Corp. (INTC) .
There are quite a few statistics that are being thrown around that demonstrate how narrow this action has been, but the more important issue is whether the narrowness calls into question the likelihood that the trend will continue higher. Will exceptional action in a few stocks help to propel the whole market?
Typically, narrow markets have strong rotations. The action last week was classic as first the DJIA moved and then, rather than broaden out into other names, that money flowed into a small number of big-cap Nasdaq names on Friday. There was plenty of poor action hidden under the surface as money stayed in the big, visible names that drive the indices.
The bulls scoff at talk about narrowness as they focus on the indices, but for stock pickers it is the key issue in this market. The indices look very different than many of the underlying stocks and it is not at all easy to put more cash to work when the choice is between chasing something such as Amazon or trying to find a setup in a group such as biotechnology that has been struggling for weeks.
One chart that is making the rounds lately is how the equal-weight S&P 500 (RSP) is underperforming the S&P 500 (SPY) . That is not particularly important if you are riding the trend of the indices, but it is extremely important if you are a stock picker. You must be extremely selective or you are going to lag the indices.
Narrow markets create performance anxiety as it is harder for money managers to keep pace. This situation often leads to more narrowness as everyone tries to chase performance in the same small group of stocks. Eventually that practice will lead to issues, but in the short term the strongest stocks tend to stay strong and the market stays narrow.
The thing that was most notable was that all the stocks that led the market were all earnings-driven plays. This was a news-driven market rather than a technically driven rally like it had been for most of the summer.
News matters more, and that is important because there is plenty more on the agenda this week. We start off with possible indictments by special prosecutor Robert Mueller, the likely announcement of a new Federal Reserve chairman, details about tax policy and then some key earnings reports such as Facebook Inc. (FB) . There will be plenty of justifications for whatever the market does next.
The narrowness of the action is going to be a key issue. News plays are the most likely to do best and the indices are not going to be representative of the action in the great bulk of the remaining stocks. Stay very selective with your stock picking. The rally needs to broaden quickly to keep the indices hitting new highs. The likelihood that momentum slows fast is quite high.
We have a slightly negative start on the day as we await more news flow.