With the S&P 500 hitting fresh record highs day after day (apart from last week), everything must be great, right? Wrong! As we have noted previously, the leadership in this market is becoming more and more narrowly focused as stunningly 47% of Nasdaq Composite stocks are down at least 20% from their highs with the average stock in the index in a bear market (down 24%). The same is true for the Russell 2000, with over 40% of stocks in bear market and an average drop from recent highs of 22%. By contrast only 31 names in the S&P 500 have seen drops of 20% or more this year. It appears, just as there has been an up-in-quality rotation in credit markets, so stock investors appear to have rotated into momentum winners, chasing returns in an ever-more narrow group of extreme beta stocks.
While rallies in Apple Inc. and Microsoft Corp. have lifted the Nasdaq Composite up 9.4 percent this year, 47 percent of the measure’s stocks are in bear markets, data compiled by Bloomberg show. FireEye Inc. (FEYE), an online security company, sandwich seller Potbelly Corp. and World Wrestling Entertainment Inc. have tumbled more than 50 percent from their 52-week highs.
“A lot of stocks have actually made significant declines,” David James, director of research at Alpha, Ohio-based James Investment Research Inc., which oversees more than $5 billion, said by phone on Sept. 9. “Most people see the record highs on the S&P 500 and that makes them feel like, ‘Oh, the market is doing just fine,’’ without recognizing that most stocks really are not participating to that degree.”