From the desk of Steve Strazza @Sstrazza and Grant Hawkridge @granthawkridge
Using the S&P 500 as your investment proxy, you’re probably happy with your returns so far this year.
That's even with the 5% pullback we finally saw last week -- the first 5% pullback for the S&P 500 in 2021, and it took 229 trading days.
But the averages aren’t telling the whole story. Some stocks are going up, but most are not. We've been pounding the table about this for months already, and it's been the main theme during the first three quarters of the year.
Unless you’ve been living under a rock, you already know the current environment is an absolute mess, as the weight of the evidence continues to hang in the balance.
In this post, we’ll show you why the S&P 500 is not the stock market and the stock market is not the S&P 500.
When we analyze equities as a “market of stocks” rather than “a stock market,” it becomes clear that we're in the thick of a correction that started as early as Q1.
Here at All Star Charts, we like to call this a stealth correction!
Breadth in the Nasdaq Composite peaked on February 9.
Four months later, NYSE breadth peaked on June 11.
We can go through a laundry list of markets that stopped going up around the same time internals peaked -- Emerging Markets, Small-Caps, Micro-Caps, and Transports are some of the most important.
We even saw the S&P ADR Index peak on June 15. This index is made up of stocks from across the globe that are listed on US exchanges.
We already have seen significant corrective action in many indexes. But when we look at what the average individual stock has done, the damage has been far worse.
Don’t believe us?
Here's a chart of the Nasdaq showing the percentage of stocks that are more than 20% and 50% below their 52-week highs:
As of today, the majority of Nasdaq stocks are more than 20% below their highs. In other words, half the index is in what many (not us) consider “bear market territory.”
What’s even more notable is that a quarter of the components are more than 50% below their highs!
These are massive drawdowns.
If you still don’t think stocks have corrected this year, here’s one last stat...
91% of the S&P 500 and 98% of the Russell 2000 have experienced 10% corrections from their year-to-date highs.
While Large-Cap strength has masked this pervasive weakness, these figures support the fact we’ve been in a messy market since February.
Here are the same indicators as above, this time for the NYSE:
While not as bad as the Nasdaq, it tells a similar story.
A third of NYSE components are currently more than 20% below their highs.
The data clearly show there’s been a correction beneath the surface in 2021. Some would even say most stocks have been in a bear market.
But this doesn’t mean the market is likely to fall further.
If anything, it’s the opposite. Since equities have already corrected, maybe it’s time for the primary trend to resume higher?
At the end of the day, the market will do what the market wants. All we can do is react accordingly.
And, lately, it’s been repairing a lot of this damage beneath the surface, even as the major averages have come under pressure.
That's all we have this week!
As always, please let us know what you think and/or reach out with any questions!
Premium Members, be sure to check out this week’s Breadth Report below...
