We Have an Index-Pushed, Not a Inventory-Pushed, Market

I’ve discovered it useful to categorise the market in certainly one of two methods. The market tends to be both index-driven or stock-picking pushed. When you attempt to decide shares in an index-driven market, then you’ll doubtless produce suboptimal returns, and in case you concentrate on buying and selling the indexes in a stock-picking market, then you’ll miss out on the very best alternatives.

The motion now’s index-driven. Breadth is horrible, with round 2,400 shares advancing and about 5,400 declining. Though the S&P 500, Nasdaq, and Nasdaq 100 are hitting new all-time highs, there are solely 320 shares at highs. The motion is pushed primarily by a small group of big-cap names and the FATMAAN shares particularly.

This kind of motion has nothing to do with selecting shares primarily based on fundamentals and technical motion. All that issues is {that a} inventory is massive and liquid and makes up a big share of the indexes. Cash flows into these shares not as a result of the shares are higher values, however as a result of they’re working and are a secure haven.

Sometimes, weak markets and corrections are index-driven. Shares all fall in tandem and with out regard to their particular person deserves. Bull markets are more likely to be pushed by inventory selecting. We had an important inventory selecting market this yr up till mid-February. Since then, we now have had fixed rotations and motion that’s pushed by sectors and indices reasonably than shares.

This kind of motion presents a tough dilemma. The massive caps and indexes and changing into technically prolonged, however after they appropriate, will patrons rotate into all these secondary shares which might be lagging? That always will not be the case, however it’s arduous to think about aggressive shopping for of small caps when the FATMAAN names undergo a corrective course of. It does occur, and we have to keep vigilant, nevertheless it makes for very tough buying and selling.

One other side of this motion that makes it tough is that the parents within the enterprise media appear oblivious to it. For them, the indexes are the market. If the Dow Jones is up, then the market is nice, even when twice as many shares are falling reasonably than rising.

That is an index-driven market, and in case you are attempting to choose shares, you’ll have a tough time.

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