The market has enjoyed some of its strongest action in months and looks like it is in good shape to provide trading opportunities for the rest of the year. But there is a giant shadow hanging over things that has been in place for most of 2021.
That shadow is the huge disparity between a few big-cap names that drive the indexes and the vast majority of individual stocks.
So far, in 2021, the Nasdaq is up about 17%. That sounds like a pretty robust bull market, and there is constant talk in the business media about bubbles and how this action is not sustainable.
However, what happens if you remove just five stocks -- Apple (AAPL) , Microsoft (MSFT) , Amazon (AMZN) , Tesla (TSLA) , and Alphabet (GOOGL) ? The bull market turns into a bear market.
The Nasdaq is down 22% for the year without those five giants.
One of the consequences of this action is that the more these five stocks outperform the rest of the market, the greater their influence on the indexes. The Nasdaq is a capitalization-weighted index where the biggest stocks are given the greatest weight.
What is even more remarkable about this corruption of the Nasdaq indexes is that there is so little recognition of the issue. It is not a topic that is discussed to any great degree. The indexes are assumed to be representative of overall market health when the reality is that they are misrepresenting it.
It is interesting to ponder what the reporting about the market would sound like if the Nasdaq actually reflected the bear market that exists outside of just five stocks. Sentiment would likely undergo a dramatic change, and there would be an endless discussion about how and when the bear market might end.
The Nasdaq misrepresentation presents an extremely difficult issue for those that are trying to navigate the market. How does this eventually correct?
The general consensus is that the entire market will have to correct -- even those stocks that are already in a bear market. Parallels are drawn to the 2000 crash when names such as Cisco (CSCO) and Qualcomm (QCOM) lead everything lower.
Conditions are quite different now than in 2000, but this disparity in performance is going to stay the focus and present a very difficult issue.
The market has had a fast and furious bounce this week and is in need of a rest. There is some early softness Thursday as the focus shifts to Friday's CPI report.
