The indices often do a poor job of reflecting what is really going on in the market, but the extent and persistence of the recent misrepresentation are at extreme levels. As the S&P 500 continues to reach new all-time highs on poor breadth, the list of stocks that are hitting new 12-month lows and those that are in deep corrections continues to grow.
Last week there was a brief attempt to close the gap between the indices and the majority of stocks, but it barely lasted a day, and by Thursday the action had reverted to the same pattern of narrow index-driven strength. It continued on Monday, and there is now an interesting setup as we head into a big night of earnings with reports due from Apple (AAPL) , Microsoft (MSFT) , Google (GOOGL) .
With the indices near highs and expectations for good numbers at elevated levels, the conditions for some "sell the news" action is good, but it seems almost too obvious to actually work. We will see how this plays out, but right now, the big-caps and the indices are the safe havens, and that is where the money is flowing. Things like valuation and fundamentals just don't matter for smaller stocks or the wrong sectors such as biotechnology or cannabis.
What we need more than anything is for the indices to start reflecting what is really happening in the market. It is only when there is better correlated action or some reversion of this recent rotation that we can see healthier action. The disconnect between the indices and the bulk of stocks can continue much longer than seems reasonable, but it will eventually correct. We just need to stay patient and let this play out.
This is the opposite of a stock pickers' market right now. Buying stocks based on charts or fundamentals doesn't work very well unless they happen to be one of the few favored big-caps. Unfortunately, many of those names are technically extended and don't offer easy entry points.
This is a very tough trading market. The best thing to do is embrace that fact and not fight it. The good news is that conditions will change, and the big earnings reports Tuesday night are likely to serve as a catalyst.