The DJIA, the S&P 500 and other indices are used as a shorthand way to measure the overall health of the market. Most of the time there is a correlation between the indices and the general state of the market. There are other times, however, when the indices fail to tell the story of what is really going on. We are in one of those periods right now.
After bouncing back Wednesday, following the impeachment drama, the S&P is basically back at the same level it was at on Sept. 5. The indices had spiked up that day on positive news about China trade. There have been a few stabs to the upside since then and the gap was nearly filled in the last couple days but mainly there has been much churning and little outstanding strength.
Market pundits have been understandably focused on a slew of major events lately, including central bank action, economic news, a spike in oil, and the impeachment political drama. Every day we are seeing new theories about how those big-picture concerns are going to impact movement in the indices but there is very little talk about what is happening in individual stocks.
If we focus on individual stock-picking rather than the indices the market looks very different. There has been a significant breakdown in the high-momentum stocks that have led the market for most of the past few years. The easiest way to see this is in the chart of the Innovator IBD 50 ETF (FFTY) , which is a grouping of the top momentum stocks. The list contains names such as Veeva Systems (VEEV) , Lululemon (LULU) and StoneCo (STNE) . The holdings are adjusted frequently with lagging names dropped and new names added so it performs differently than other indices that are not adjusted in the same way.
The FFTY hit a high in July and is now struggling to hold above its 200-day simple moving average. It is substantially weaker than all the major indices. Some technicians might even argue that FFTY has a head-and-shoulder top formation developing.
The point here is that momentum and speculative names are telling a very different story about this market. Small-caps are also performing poorly and micro-caps (iShares Micro-Cap ETF (IWC) ) have been in a downtrend since September 2018.
If you are trading indices or holding index funds, this might not matter much. There are many traders that spend their efforts navigating the ups and downs in the indices each day but if you are stock-picker trying to develop a solid portfolio of stocks this is not a friendly market. Technical setups are hard to find and the lack of pockets of momentum is a struggle.
There isn't anything that unusual about this action. Sometimes the market will undergo corrections that occur mainly under the surface as various sectors are impacted. That is what we are seeing to a great degree. It can cause much more stress because the media is focused on the indices and we start to think that maybe it is our inability that is making the market so tough.
This simply is not a market that is friendly to stock-picking right now. It is undergoing a correction under the surface and there isn't anything we can do about it other than let it play out. Maybe the indices will catch up to the downside or maybe they won't. That is what most pundits are focused on but it doesn't change the fact that there just isn't much good action on the long side right now.
