Why the NASDAQ’s solo ascent this year is a problem

August 18, 2015by Hoy Grimm0

Through August 18th. The NASDAQ is up 7 1/4% while the other three major domestic indexes (DJI, S&P 500 and Russell 2000 small cap) are stuck in a range of -1.6% to +2%.

This comparison illustrates that after a 6 year long rally, the list of winners is beginning to shorten. The implications are important to understand especially since our domestic market hasn’t seen a 10% correction since 2011. Bulls prefer stock market moves that are all inclusive. A rising tide should lift all boats. When that isn’t happening it’s an indication that investors are becoming more selective in what positions they hold, sell or add to. The margin for error shrinks and corporate mistakes (poor earnings, high valuations product or service issues) are punished more severely. 

When a broad rally begins to narrow the fundamental empirical business statistics become more important than price trends and momentum. We’ve seen this play out in real time as quarterly earnings were released. This renewed focus on fundamentals also leads corporate leaders to resort to any (legal) measures possible to reproduce good numbers. Despite their efforts reported earnings for the second quarter are down 1% and more telling (because it cant be fudged as easily) revenue dropped more than 3% (factset).

The narrowing breadth of winners comes at a time when overseas, the Chinese market can’t find it’s footing. Domestically the Fed has promised to raise rates at their September meeting at the same time that politicians will be reconvening to once again take up the debate over raising the debt ceiling (US Treasury Secretary Jack Lew sent a letter to congress last month begging for help on the matter).

The next few months will be filled with enough drama to agitate bulls and bears which will be a good environment to have some cash on hand for bargain hunting.

Hoy Grimm

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