MSFT & GOOG Mask Underlying Weakness, This Is How Bull Markets Top
While Wednesday might have seemed like just an ordinary day with the S&P -0.51% and the NASDAQ flat, it was anything but. While the indexes were seemingly placid, beneath the surface most stocks got hit.
Strong earnings from Microsoft (MSFT) and Google (GOOG / GOOGL) carried the market for the first part of the day but the indexes rolled over hard in the last hour and half of the session to close at the lows of the day. Breadth on the NYSE + NASDAQ was terrible with 2,322 Advancers to 5,553 Decliners. That is, for every two stocks advancing, five declined.
This can be seen by contrasting the performance of the mega caps – the 100 largest stocks in the S&P 500 – with the equal weight S&P and the Russell 2000. The former – as measured by the OEF ETF – were down only 3 basis points on the day while the latter were down 133 basis points – as measured by the RSP ETF – and 190 basis points, respectively. Essentially everything got hit hard except for the very biggest stocks in the market. Because the major indexes are market cap weighted, their performance masked the carnage beneath the surface.
This is very important because this is how bull markets top. As I explained in “The Stealth Bear Market And The Nature Of Bull Market Tops” (10/8), most stocks top and roll over before the indexes. In the last stage of the bull market, the indexes are carried by the leading stocks while the rest have already fallen by the wayside. When the leaders finally top so do the indexes and the bull market is over. And that is exactly what we are seeing right now and in microcosm yesterday!
That’s why earnings reports this afternoon from Apple (AAPL) and Amazon (AMZN) are so important. If they are well received, perhaps those two stocks can carry the market Friday (and beyond) much like MSFT and GOOG / GOOGL did yesterday. If they are not well received, the market will have no legs left to stand on.