There's a problem hiding in plain sight, as the large stock indices are covering up a major correction.
“Even though the S&P 500 is down about 4% from recent all-time high levels, it is not reflecting what is going on in this market,” wrote James “Rev Shark” Deporre in Real Money recently. “I've been discussing this disconnect for months, but it has only gotten worse. There are dozens of stats that show how far many stocks have fallen, but it is not reflected in the indexes that have been held aloft by Apple (AAPL) - Get Apple Inc. Report and a few other big-cap names such as Pfizer (PFE) - Get Pfizer Inc. Report.”
In the last four years, there have been two major market corrections. “One was the Covid correction that hit in February 2020,” Deporre said. “That was obviously news-driven and was quite unique in the history of the market.”
The other major correction was in late 2018. “That was triggered, in part, by the unwinding of the "short volatility" trade,” Rev Shark noted. “It was driven partially by structural matters, but also by technical conditions. That correction is similar in many ways to what is happening now but with one major difference -- it is not reflected in the indexes.”
One of the main reasons the indexes have been so misleading is that just a couple of big names have held up. “Apple is the largest market cap stock in the market and has more influence than any other single name,” Deporre added.
What has prevented many stocks from finding a bottom is that the indexes have failed to correct. Market players aren't comfortable buying badly battered stocks if the indexes are going to fall sharply and it doesn't matter how oversold something might be.
“This is unlike any market environment I have navigated previously, and it is not clear to me how this huge disparity will resolve itself,” Rev Shark said. “There are many stocks that have dropped substantially that I would like to buy, but can they gain traction if the indexes struggle?”
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