The market headlines Thursday were about strength in the major indices as big-cap leaders Apple (AAPL) , Amazon (AMZN) , Nvidia (NVDA) and Adobe (ADBE) moved sharply higher. It looked like more of the same momentum that has been driving the indices to new highs for most of the year, but under the surface, the action was highly unusual.
There were two things notable about the action. The first is that while the indices looked very strong, market breadth was very poor, with less than half of all stocks finishing in positive territory on Thursday. Most of the time, there is some correlation between index strength and breadth, but that was not the case at all on Thursday.
The second notable aspect of Thursday's action was the large number of stocks hitting new 12-month lows. The Nasdaq even set a record for the most stocks at new 12-month lows while the index was hitting a new 12-month high. There were more than 500 stocks hitting new 12-month lows while only 280 were hitting new 12-month highs. Those are not the sort of readings that generally occur in a strong market uptrend.
There is no great mystery as to what is occurring. Money is piling into a small group of big-cap stocks while the rest of the market struggles. This is likely fueled by algorithms, buybacks and allocations, but it creates an unusual two-tiered market environment. On the one hand, we have very extended big-caps and indices that are causing people such as Bill Ackman to proclaim a market bubble. On the other hand, we have thousands of stocks with poor relative strength and attractive valuations that can't seem to generate momentum.
The Russell 2000 did breakout to a new high about two weeks ago, but it has fizzled, and speculative trading in electric vehicles and cryptocurrencies has slowed quickly. Money needs a place to go, and the easy thing to do is to park it in Apple and other big-caps that have attractive charts.
The big issue for traders to contemplate is how this action resolves itself. It is not sustainable, but it tends to persist for longer than many believe is possible. I suspect there is still a good chance that there will be some rotation back into small-caps as we finish the year. This is the best time seasonally for small-caps, and the gulf between big-caps and secondary stocks is reaching extreme levels.
We have a little softness in the early going, but I'll be watching to see how this rotational action develops. There are quite a few individual stocks that are unfairly punished, but that doesn't mean they are good buys right now.