I enjoy the dialogue that Rev Shark and Doug Kass often have about the markets and trends and the back-and-forth they generate with each other in Columnist Conversations. I've been friends with both Rev Shark and Doug for many years and have learned a lot from each of them -- much of it from reading them on these pages.
At any rate, this morning Rev and Doug had this back-and-forth:
Those Lying Indices
James "Rev Shark" DePorre
I see quite a bit of discussion the last couple days of the theme that Jim Cramer and I highlighted on Monday, which is how poorly the average stock has done compared to the indices. ZeroHedge just picked up a story showing that the average stock's distance from its own one-year high is 19%. Obviously that is quite different than the major indices. That is consistent with my charts showing how the number of stocks over the 200-day MA have declined sharply. That percentage is now around 29%, down from 50% a year ago.
Back to Rev
The bifurcated market -- featured by narrowing leadership and faltering "soldiers" -- has been in place for a year. It has been my principal technical concern -- which has joined numerous fundamental concerns. You seem to be more concerned recently. So, my question is -- why are you now concerned it will impact the markets when the trend has been in place for more than a year? I suspect that narrowing has been an explanation of the "mixed" market this year -- a market of haves and have-nots.
What Lies Beneath
James "Rev Shark" DePorre
Dougie, I have been writing about the misleading indices all year. The situation has become even worse recently and I think it becomes more evident as people start to evaluate performance over the years. This disconnect will eventually be resolved and will cause some chaos as it happens. I simply want to elevate recognition of the issue as we have some catalysts in place with the Fed and the end of the year upon us.
This is something I've also seen my good friend Robert Marcin hit on many times in the last year:
"Thanks, @CodyWillard, I had a few good ones this year, most importantly beating up readers to sell all spring and calling for major divergences that would have the average stock down much more than indices. Anything sold then was a big winner most likely. And that was after a COMMANDO LONG run from last fall into the rally high. Come to think of it, I took a lot of grief from the bulls for that sell call and a lot of grief from the bears for the commando long one. Tuff life, the contrarian."
And you see the carnage in so many individual stocks across every sector of the economy and market. For every First Solar (FSLR), there's a SunEdison (SUNE) and a Vivint Solar (VSLR). For every Netflix (NFLX), there's a GoPro (GPRO) and an Outerwall (OUTR). For every Facebook (FB), there's a Twitter (TWTR) and a Yelp (YELP). Many, if not most, oil and natural gas and pipeline stocks are just trying to avoid bankruptcy, and there are stocks down 70%-90% or more throughout the energy sector. Meanwhile, the broader indices are within 5% or so of their all-time highs. (Facebook and Twitter are part of TheStreet's Action Alerts PLUS portfolio.)
The average money manager is also down big this year, both in the hedge fund and the active managed mutual fund worlds.
In the near term, there's likely got to be some reconciliation between the few winning stocks/the broader indices and the average stock that's been cut in half or worse this year. Such a reconciliation probably won't be all of one or none of the other. Rather, the average stock is likely to outperform the broader indices in the next few weeks, but some of the biggest individual stock winners will continue to outperform also.
Meanwhile, the bears and shorts are getting increasingly cocky and braggadocious as the high-beta shorts on the average stock have been quite profitable.
All that, plus the fact that we still have two weeks left in this year in which the money managers of the world will likely be chasing performance trying to make up for their pitiful year, means the path of least resistance for this stock market is higher for the near term.
I'm not trying to game the near-term market moves, and in fact I've raised some cash over the last few weeks as I've reduced the number of long positions I have. I continue to own the most revolutionary companies on the planet as I avoid cyclical stocks like oil, natural gas, steel and other commodity sectors.