The last several days I have commented about the lack of market breadth. Yesterday Bloomberg reported the last time so few companies in the Russell 3000 pushed this gauge to an intraday high was March 24, 2000, two weeks after an all-time high was reached.
In fact today fewer than 55% of its components are trading above their 200 day average with the “typical stock” down over 20%. Most of the carnage has occurred since June 30.
I think the reasons for the bifurcation are simple. Historically the averages decline 5% to 20% before a midterm election. This cycle is really no different except for the massive liquidity provided by the Federal Reserve.
Gargantuan levels of funds are gravitating from one ultra-liquid sector to another, bidding the sector higher like hording locusts. Once the shares are bid higher, this large pool of money aggressively abandons this sector for yet another. The smaller capitalized shares are all but abandoned.
The large cap indices are around annual highs, highs led by massive sector rotation with most money managers attempting to chase returns and performance by following these funds desperately trying to avoid today’s stealth bear market.
If the markets follow the 2000 pattern, the next several months can be ugly for ultra-high capitalized equities that comprise the majority of the indices value.
However there are some significant differences between today and 2000.
Most obviously are valuations, earning momentum, overall lack of leverage, no confidence and gargantuan levels of cash.
And then there is the election. It is now widely accepted Washington leadership is absent; divisional politics at its worst.
What happens if there is the proverbial November surprise where unifying leadership unfolds?
I can argue today’s stealth bear market will be viewed only as noise.
However in the meantime, many are starting to become concerned about the absence of performance, a concern amplified by the lack of a meaningful correction defined as a drop of 10% has not occurred in three years.
What will happen today?
Last night the foreign markets were down. London was down 1.45%, Paris down 1.95% and Frankfurt down 1.45%. Japan was down 0.71% and Hang Seng down 0.49%
The Dow should open moderately lower as the Administration is cracking down on tax inversions, a crackdown that in my view will lower the competiveness of the US. I have a novel solution. Instead of passing regulations via demagogy and divisional sound bite politics why not have bona fide tax reform? The 10-year is up 3/32 to yield 2.54%.