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S&P 500, Amazon: Forget Correlation, Think Rotation With Stocks

Real Money contributor James 'Rev Shark' DePorre says that the big market challenge is rotational, and there's a disconnect that is too wide to ignore.

At first glance, the stock market seems to be performing. After all, the Nasdaq continues to be robust and the SPDR S&P 500 ETF Trust  (SPY) - Get SPDR S&P 500 ETF Trust Report, which tracks the S&P 500, is up about 15% for the year.

From a bird’s eye view, it’s all good, right?

Not so fast, notes James “Rev Shark” Deporre, in Real Money. While broader market trends continue to be encouraging, a “primary market challenge” all year is rotational in nature, he said.

Read, on Real Money, The Indices Continue to Distort What Is Really Happening in the Market: The primary issue for traders now is whether the stocks that have been hit hardest can bounce back.

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There has been a series of corrections, but they occur only in portions of the market at various times, he says. While the Nasdaq has recently reached new highs, only about a third of all stocks are above their 40-day simple moving averages and less than 60% are over their 200-day simple moving averages, he notes, adding that this illustrates how stocks have not moved in a correlated manner, rather than in a correction where there is broad selling and a decline in the indices. 

DePorre writes of a disconnect between the major stock market indices and the high number of stocks underperforming that has not only made a mess of market sentiment, it also hinders the normally healthy corrective action that fuels market stability and “safe” support levels. That disconnect is getting too wide to ignore, he notes.

"How can the market effectively correct when Amazon  (AMZN) - Get, Inc. Report and the Nasdaq 100 keep hitting new highs, but 40% of individual stocks are in a bear market?"

Such a scenario creates an uphill climb for investors who see soaring market index performance, but see their own stocks stick in neutral. With investors already wary of rising inflation and shifting interest rates, market conditions represent a “muddled mess” to investors looking to tap into accurate market sentiment, DePorre stated.

It would be healthier if the indices corrected more, DePorre says, but the market doesn't seem interested in what traders like me would like to see. We will have to continue to deal with this rotational action, and that means a disconnect between the indices and the action in the majority of stocks.