One of the great difficulties of navigating the market in 2021 is that indexes have done a remarkably poor job of indicating what is really going on in the broader market. While the S&P 500 and Nasdaq 100 have been consistently hitting new highs during the year, the majority of individual stocks have been far less consistent, and many have been in bear markets for months.
That the indexes misrepresent overall market action is quite easy to see when you look at the weighting of the major indexes. Microsoft (MSFT) , Apple (AAPL) , Amazon (AMZN) , Tesla (TSLA) , Google (GOOGL) , Facebook (FB) and Nvidia (NVDA) make up 26.4% of the S&P 500, which is extremely high, but they are around 50% of the Nasdaq 100 (QQQ) , which must be at historic highs.
By comparison, back at the peak of the internet bubble, the four high-momentum big-caps were Cisco (CSCO) , Intel (INTC) , Microsoft (MSFT) , and Oracle (ORCL) , and they made up just 15% of the S&P 500.
What is most important about this information is that it makes it clear that we have to look at different sectors and groups within the market to really have a clear understanding of what is going on. The indexes are simply a reflection of a very small group of giant technology companies. They are a very separate asset class from the overall market.
A couple of things that the indexes have been hiding recently are poor action in growth stocks and better action in small-caps. Growth stocks are generally seen as correlating well with the Nasdaq 100, but if you look through many of the favored names, there is some extremely poor action. A good illustration is the ETFs operated by ARK Invest. None of them are close to the highs hit back in February, even though Tesla is a major holding of Ark Innnovation ETF (ARKK) . The ARK Genomic Revolution ETF (ARKG) has been in a steady downtrend and is testing its lowest level of the year. That is quite a disconnect with QQQ, which is near all-time highs.
The Russell 2000 ETF (IWM) also looks very different than the major indexes. It broke out of a 10-month-long base in early November and had been slowly pulling back over the last couple of weeks. Technically, this looks like healthy consolidation that will set up another push higher, but we will see how this develops.
Much of the press that covers the market only sees the greatly distorted indexes. There is little understanding of how much variation there is in the performance of stocks. This focus has an impact on sentiment. If we were to ask a casual market observer about the state of the market, they very likely would say it is wildly extended and maybe even in a bubble. That may be true of the handful of stocks that drive the indexes, but it is not true as to most stocks.
For these reasons, my message has been to stay focused on stock picking and not the indexes. The indexes will have some influence on what the market does, but the best opportunities are hidden under the surface.
We have a positive open on the way again, with NVDA helping to drive the indexes. There has been corrective action lately in growth stocks, small-caps, and cryptos, but it is hidden by the indexes.