Managing Editor’s Note: Jason Bodner was a senior executive and partner on Wall Street during previous stock regime changes. He saw up close which types of stocks soar. In fact, he helped cause some of the biggest moves.
Now he’s reverse-engineered a way for everyday folks to get ahead of these big moves, too. Using his approach, you could have seen gains as high as 86%, 213%, 367%, and even 911% in a matter of weeks and months.
That’s why our colleague, Jeff Brown, is about to sit down with him on Wednesday, May 20, at 8 p.m. ET to share all about the regime change they see coming right around the corner.
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The S&P 500 is pushing to record highs in a historic way.
Since the lows on March 30, the index has gained 18%. The rally ranks as one of the strongest gains ever seen over a six-week stretch.
But there’s just one problem…
The number of stocks driving the advance is dwindling. Since April, only five stocks account for half of the S&P’s gain. And a growing number of stocks are experiencing outright declines and setting fresh lows.
In other words, a select few stocks are doing the heavy lifting. That shows the foundation of the rally is crumbling.
And one shifting narrative could spark a reversal…
Breadth is a way of measuring participation in the prevailing trend.
There are a number of ways to measure breadth, such as monitoring how many stocks are making new 52-week highs.
You can also track the number of advancing stocks relative to declining ones on any given day. Or you can compare the volume in advancers versus decliners.
We can also look at how many stocks in an index are trading above key moving averages.
However you look at it, the average stock is lagging the S&P 500’s march to new highs recently. In fact, there’s a growing number of new 52-week lows in the index.
At one point last week, over 9% of the S&P’s underlying constituents were making new lows as the index rose to a record. It was the largest number of new 52-week lows ever seen when the S&P was hitting a new high.
There’s internal damage being done, but it’s hidden if you’re just looking on the surface.
Other metrics show something similar. The percentage of stocks across major exchanges trading above their 20-day moving average stands at just 43%. That means over half the stocks in the market are trading in short-term downtrends.
The deterioration in breadth needs to be watched carefully. A new narrative is driving the average stock… which could put the rally on borrowed time.
Excitement over AI is helping prop up the market, along with positive earnings revisions among companies affected by AI spending.
The stocks helping drive recent gains remind me of the internet bubble in the late 1990s. Since the end of March, Intel has soared 165%, Micron jumped 129%, and Cisco has gained 53%.
Meanwhile, the average stock reflects a harsh reality facing the stock market.
A pair of inflation reports last week showed that prices are rising faster than they have in years. For April, consumer inflation was reported at 3.8% compared to last year, while producer inflation surged by 6.0%.
That’s quickly shifting the narrative for interest rates. The odds now show a rate hike coming in the next six months.
Rate hikes often lead to severe pain in the stock market. Higher rates make it more expensive for companies to borrow capital. Plus, investors tend to put more money into higher-yielding bonds rather than the stock market.
The last time we saw a series of rate hikes in 2022, the S&P 500 fell as much as 25%.
So while the broader indexes reach new highs riding on a few AI stocks, the average stock is offering us a warning.
The AI trade could soon “catch down” to the rest of the market and send the indexes tumbling.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
