Wall Street’s Bad Breadth Bears
I know bad breadth when I smell it!
Nearly two decades ago I was a research analyst and trader for a private investment advisory firm, and one of the many hats I wore was to write the monthly client newsletter.
In said letter, I warned our investment clients as early as the fall of 1999 that something just wasn’t right with the market.
The advance-decline line peaked months before and was making a beeline lower. Yet the S&P and especially the Nasdaq were both shooting to new highs.
Now, that’s my firsthand experience with bad market breadth: a classic negative divergence that clearly warned of the bear market carnage to come in 2000.
Whatever potential pitfalls the stock market faces today — and there are plenty to choose from — bad breadth is NOT one of them.
Of course, you wouldn’t know it from listening to the lame-stream financial media. They seem to be in full-blown “Chicken Little” mode these days.
I heard the latest sky-is-falling story a few days ago when CNBC reported that just three stocks — count ’em, only three — have accounted for over 70% of the stock market’s gains this year.
The three in question are, of course, among the vaunted FAANG stocks.
Specifically, Amazon (NASDAQ: AMZN), Netflix (NASDAQ: NFLX) and Microsoft (NASDAQ; MSFT) are together responsible for 71% of the S&P 500 Index returns year to date.
By the numbers, AMZN alone accounts for 35% of the S&P’s gain, NFLX gets credit for 21% of the return, while MSFT contributed another 15% of the index gain.
The implication is that poor market breadth, when just a handful of high-profile companies are propping up the entire stock market, must mean the end is near.
The bull market is living on borrowed time and it’s destined to end badly.
Any moment now investors will wise up and stocks will come crashing down.
Well, maybe, but probably not. Here’s why…
As you can see above, the number of advancing stocks compared with declining shares on the NYSE is clearly making new highs, even though the Dow and S&P 500 aren’t.
That’s a bullish sign that tells me most of the 1,900 stocks in this broad market index are moving higher, not just a few high-profile stocks.
Second, other measures of broad market breadth are similarly bullish. Take the Nasdaq Composite, with over 3,000 stocks in the index. It recently hit a new all-time high, and it wasn’t thanks only to AMZN and MSFT. Those two stocks account for only 6.5% of this index.
Now take a look at the Russell 2000. It notched a new all-time high on Tuesday of this week.
And guess what?
AMZN, NFLX and MSFT aren’t even included in this stock index… none of the FAANGs is!
Bottom line: The stock market hasn’t gained much this year. The S&P 500 is only up about 4% year to date.
Technology is by far the best-performing sector. Why?
Because that’s where the strongest and most consistent earnings growth can be found.
AMZN, NFLX and MSFT are huge heavyweights in the index, and they’ve performed very well, thanks to fast-growing profits.
It’s no surprise these leading tech stocks have accounted for the majority of the S&P’s feeble gains year to date.
And it’s not a sign of the Apocalypse for the market.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch
Editor’s note: On Friday July 20, my colleague Ray Blanco’s releasing the results of his most important investigation, ever.
It could end up scoring you over $10 million in gains. Ray calls it the “World’s Fastest Fortune.”
And all will be revealed one week from today…