For months now the indices have done a poor job of reflecting what really has been going on in the market. A small group of big-cap names has driven the indices to new highs while many smaller stocks have been under intense pressure and are struggling with bear market action. It has been an ongoing divergence for months, and it hit a dramatic level on Monday
On Tuesday, both the Dow Jones Industrial Average and S&P 500 reversed after a slow start and finished the day near their highs and at new 12-month highs. That sounds like a solid day for the overall market, but if we dig a little deeper it was far from positive.
More than twice as many stocks declined than advanced. New 12-month lows were more than 340. According to Frank Zorrilla, there were 83 stocks up more than 4%, but more than 600 declined at least 4% on Monday. A total of 1,581 stocks finished the day higher than they opened, but 2,288 were lower than they opened.
To say that the DJIA and S&P 500 did not reflect the true state of the market action would be a gross understatement. We can find a long list of stats that further will illustrate how poorly stocks are doing versus the indices, but if you have been actively trading then you are painfully aware of how difficult stock picking has become recently.
The more important issue to contemplate is how this disconnect between the indices and the majority of stocks is resolved.
One of the big problems is that the business media seem oblivious to what is going on. The pundits and commentators keep talking about extended indices hitting new all-time highs. That talk impacts market sentiment and keeps it more bullish than it would be if the indices actually reflected reality. If the S&P 500 was trading similar to something like the ARK Innovation EFT (ARKK) then we would be talking about the miserable bear market and there would be endless predictions of bottoms rather than tops.
The main thing this market needs is for the indices to better reflect the actual action. The problem traders see is that they believe that if the indices are correct then they will drag down everything else, including the stocks that already are down 30% or more. Can secondary stocks rally when the indices are under pressure? It can happen, but it can make for some challenging trading.
Another problem we face is that we are in the dog days of summer and many market players are standing aside and waiting for the action to pick up after Labor Day. There isn't any great desire to bottom-fish badly beaten-up growth names and speculative small-caps. Sectors such as cannabis and small-cap biotechnology are seeing no support, although many names are at significant lows and have been in a downtrend for months.
My game plan simply is to be patient and not be in a big rush to put capital to work. The one great certainty of the market is that there are cycles and this crazy cycle of divergence eventually will shift, but we need to wait for it and be ready to act when there is some hard evidence of a shift. Currently, there is nothing to indicate that this market disconnect is about to end.
We have a negative start on hand here on Tuesday with the indices indicated lower, which actually may be a positive.