Morning Few: Exposing the Illusion of a Bull Market and the Pitfalls of Market Concentration

Is the current bull market too good to be true? Join me as I unpack the deceptive nature of this market rally . I dive into startling data from the Russell 3000 index, showing that a staggering 70.4% of its stocks are trading below their 2021 highs, even as the S&P 500 hits new peaks. I draw eerie parallels to the dot-com bubble of 1999, where a few select stocks soared while many others lagged behind, raising serious questions about the sustainability of today's market. The concentrated gains and lack of broader market participation are red flags that investors cannot afford to ignore.

In the second chapter, I turn my attention to investment strategies tailored for these uncertain times. I discuss the pitfalls of relying on market cap weighted averages and advocate for equal-weighted approaches, particularly for small-cap stocks. By examining the lessons from the 2000-2002 market period, I highlight the inherent risks of a market driven by a handful of dominant players. With historical insights underscoring the market's volatility, I urge listeners to remain cautious and mindful of market breadth and underlying fundamentals. This episode is packed with valuable perspectives for navigating a potentially unstable market environment.

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

Transcript

Speaker 1: 0:01

It's time, with Michael Guyette of the Lead Lag Report, for your Morning Cube. It is zooming day after day 20 plus 20 plus 15 plus 13 plus 25, and the number of unchanged is increasing. What does this mean? It means that more stocks are hesitating to move to the market. So this is a phony. The momentum is not there. Monday, june 10, 2024. Welcome to another edition of Morning Few. These daily clips I put out with things that are on my mind. My name is Michael Guyad.

Speaker 1: 0:50

Today, I want to talk about whether or not this is a phony market because I have been for lack of a better way of saying it skeptical, really, since March of last year January of 2023,. I made the argument that it would be a melt-up year, but that towards the end of the year, there will be a credit event. Conditions favored it. I still believe the conditions did favor it at the end of October, but obviously the event didn't take place. But I still think there's something very unusual about the way the market has been behaving and I think more and more people are starting to realize the place from which my skepticism is coming from. In terms of this, in quotes bull market, and it's not based on opinion. It's based on data. I said on X the other day, this is the most deceptive market in history. That clip that I showed at the start was from my father in the mid-1980s, basically talking about breadth and momentum, and, as you can tell, my father was a very animated guy, which means that you can probably tell where I get my energy from and passion for markets. This has been a very deceptive in quotes bull market, because most things are not participating beneath the surface. I have called this before a concentration bubble and largely a bear market for everything else.

Speaker 1: 2:22

So there's the S&P 500, and then there's the Russell 3000 index. The Russell 3000 index includes large caps, mid caps and small caps. It's market cap weighted but obviously includes many more stocks than the S&P 500. If you look underneath the hood of the Russell 3000 index, you find something really interesting. Right now, as we speak, 70.4% of the stocks in the Russell 3000 index are trading below their respective 2021 highs. 70.4% of stocks right now are below where they were trading out in 2021. Some people will say, well, that should make sense. There were so many of these stocks, like Roku and Peloton, that were trading at insane multiples post-COVID. Okay, fine, that's for a small percentage, not 70%, while the headline averages are hovering around all-time highs driven by a select number of stocks. That number, by the way, is a lot worse when you actually look at those stocks relative to inflation. So the S&P 500 made new inflation-adjusted highs. The Russell 2000 Index did not. 78.5%. Nearly 80% of stocks in the Russell 3000 Index are trading below their after-inflation highs of 2021. I get it.

Speaker 1: 4:12

Folks Like I have been, you can say, off in this cycle. I have been thrown off by the dynamic of treasuries, by credit spreads being at all time lows following the fastest rate hike cycle in history in what has been purely a duration crisis, not a credit one. But the whole market is off because it's not a market anymore. You know how. I know that Because I go back to what I said earlier Because of data. Now this one comes from seems to be a great follow. By the way.

Speaker 1: 4:51

Global Market Observe, the global market investor here, sent me this post and I reposted it on X at Lead Lag Report. Is the US stock market in a bubble? This is from what he's saying. Only about 30% of the S&P 500 stocks have outperformed the index to date, slightly higher than in 2023. This is also the lowest level since the dot-com bubble of 1999 when a similar performance had occurred. Incredible statistic. And then he tagged me and you can see on the very bottom, these are the percentage of stocks that are outperforming the S&P 500. Here's where we are today from last year and where we are now year to date. Here's 1998 to 1999. You know the bubble, or at least the tail end of the bubble before the tech wreck of 2000.

Speaker 1: 5:46

Now look, I get it. The valuations are clearly not the same, like was happening with many of these companies in the dot-com media, but the concentration and lack of participation is very similar. I don't think you can totally disregard that is very similar. I don't think you can totally disregard that. And yeah, you know what? Maybe the broad averages do keep on pushing higher, but for how much longer can that disconnect, that divergence, play out? How much longer can we say that this is a in quotes bull market when the vast majority of stocks beneath the surface are still deep in their drawdowns? It's not me trying to be a bear for the sake of being a bear. I look at the divergences and the thing with divergences is you don't know when they resolve, but you know that it's a condition you have to be very mindful of Because when they resolve, if they resolve in a negative way, it can be very aggressive.

Speaker 1: 6:41

I've made this point before Typically the general's fault, the soldiers. The soldiers are the vast majority of stocks, the real stock market. I know most people are indexed to the S&P 500, to the NASDAQ. I know a lot of people have been crushing it, trading some of these AI names, nvidia in particular. But I'm going to say it again when a rising tide does not lift old boats, everybody drowns. This has been the opposite of what you typically see in a real bull market.

Speaker 1: 7:13

Here's another incredible thing to look at. This is from my org account, atleadlaglive. Please, folks, do me a favor and make sure you follow that account Since, as I keep mentioning, my atle Lag Report account for the moment is private. Just to restore sanity to the comments, if you look at the percentage of stocks trading above their respective two-to-day moving average their respective two-to-day moving averages, right now it's at 42.21% and notice that since 2023, it never really got past in a sustained way 50%. Most stocks are still below their 200-day moving averages, as the headline averages are pushing higher because it's being driven by a select number of stocks. Right, we haven't had a really strong broad participation bull market for a year and a half plus now Actually, more than that, because when you factor, obviously, the 2022 bear market, I don't know why this is controversial.

Speaker 1: 8:24

Folks, I don't know how much more I have to make it clear that I'm not a perma-bear. I'm looking at these things and you know what? Yeah, I was clearly early in a lot of things I've been saying, but the dynamics are still playing out and now people are starting to wake up to it. Being early is wrong, Okay, fine, but I don't know the mile marker. I might crash my car. I know the conditions that favor it.

Speaker 1: 8:49

I believe these divergences get resolved with a tail event. I believe they get resolved with an extreme because typically that's how it works. It may not play out that way, but to totally disregard what's happening beneath the surface just because it looks like a bull market for a style of waiting, market cap waiting I just think that's a mistake. It's not something that you can take an action on in terms of going to cash or shorting. I've been very public about the idea that I think it makes the most sense now to consider more equal weighted approaches, because I suspect that the market cap weighted averages can go down while those equal weighting areas maybe go down less, like what happened from 2000 to 2002, especially for small caps, which make up a lot of the equal weighting type of approach.

Speaker 1: 9:55

But just be mindful of the idea that this is not a real market if it's being driven by a select number of stocks in an outsized way, while most things are not only trading below their 200-day moving average, but most stocks factually are still way below their 2021 respective peaks. So, going back to my father's point from the mid-1980s in that clip I started with at the beginning of this video of this morning, few more and more stocks are hesitating. It means this market is a phony. The momentum is not there. At some point the market will care about that. Your guess is as good as mine as to when. Thanks for watching.