Only three stocks have ever seen their market valuation swell above $3 trillion.
Last week, Nvidia became the third stock to join that club.
Since it’s also the second largest stock in the S&P 500, that pushed the index to a new record high.
In fact, Nvidia alone is responsible for just over half of the S&P 500’s gain on the year.
That shows you the gains are becoming ever more concentrated in the S&P 500’s top holdings.
Meanwhile, a growing share of stocks are struggling to hold onto one critical level.
It’s a similar condition that’s developed before some of the biggest sell-offs in recent years.That includes 2020’s 34% plunge into a bear market.
Let me show you that metric I’m talking about, and why it has spelled bad news for investors before…
Struggling to Keep Up
When the S&P 500 is making record highs, you should pay attention to how many stocks are part of the uptrend.
A healthy bull market should be supported by a broad number of stocks moving higher.
But when the gains start narrowing to just a handful of stocks, that’s a warning sign to be on the lookout for a sell-off.
There’s a simple way to track participation. You can do that by measuring how many stocks in the S&P 500 are trading above their own 50-day moving average (MA).
The 50-day MA is a way to look at how many stocks are trading in an uptrend. And when this figure starts slipping while the S&P 500 is making new highs, you better be on the lookout for a sell-off.
Let me show you an example in the chart below.
Source: Barchart
In January 2020, as the S&P 500 was making a new high, 82% of the stocks in the index were trading above their 50-day MA (point 1).
When the S&P 500 marched to another new high one month later, only 63% of stocks were above their 50-day MA (point 2).
From there, the S&P 500 went on to plunge 34% over the next month as fewer stocks supported the uptrend.
But what’s happening today is even worse than that episode…
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Bull Market Red Flag
The recent pullback in the number of S&P 500 stocks trading above their 50-day MA is the worst I’ve seen in quite some time. It’s even worse than what developed ahead of 2020’s plunge.
Take a look at the chart below that plots the percent trading above their 50-day MA going back a year.
Source: Barchart
Last year had a 10% correction that ended in late October. Then there was a surge in S&P 500 stocks above their 50-day MA to over 90% (point 1).
But look at what’s happening since then. At the end of March, the S&P 500 moved out to new record highs (point 2). But we keep seeing a larger drop in the percentage of holdings trading above their 50-day MA.
Nvidia hit a $3 trillion market value last week, which drove the S&P 500 to a fresh high. But on that day, there were only 49% of stocks in the index trading above their 50-day MA (point 3).
So less than half of stocks were in uptrends.That’s a much sharper deterioration than what we saw before 2020’s 34% decline.
Now, I’m not trying to scare you out of the market…
But you should prepare to take advantage of volatility in the stock market. Because volatility creates opportunity.
After all, some of my best years came during the worst bear markets. Like when I made $95 million in profits for my clients during the 2008–09 crisis… while the S&P 500 cratered 37%.
So have a trading plan to protect your portfolio if stocks start pulling back. Having the right strategy can even put you ahead.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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