Are We in a Stealth Bear Market?

Last week, we saw stocks get hit fairly hard after some lackluster earnings reports from the likes of IBM (IBM), United Technologies (UTX) and Verizon (VZ), to name just a few.

Yet the decline in the S&P 500 last week of some 2.21% was actually worse than that number suggests.

This is likely why a new catchphrase is playing over Wall Street these days, and that is "stealth bear market." A stealth bear market, as opposed to a regular bear, takes place largely undetected by Main Street investors’ radar screens.

But it’s easy to see it when it happens. All we need do is look at the number of stocks that gained last week vs. the number of stocks that fell.

For example, on the NYSE last week, there were 645 stocks that advanced while some 2,610 declined. That number was slightly less-pronounced in the Nasdaq Composite, where 269 stocks advanced while 2,327 stocks declined.

When the vast majority of stocks (about a 4-to-1 ratio on the NYSE) are trending lower, that’s a strong sign that a stealth bear market is under way.

Another metric that speaks to this stealth bear market is the number of stocks making new 52-week highs vs. the number making new 52-week lows.

On the NYSE, there were 245 stocks that made new highs. That’s not bad, but when you consider that 626 stocks made new lows last week, it looks very weak.

The story was similar on the Nasdaq, as 287 stocks made new highs while 403 made new lows.

These numbers strongly suggest that money is being concentrated more and more into fewer and fewer stocks …

And this could be a signal that the multi-year bull market is, at the very least, getting really tired.

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Another very significant bit of evidence arguing in favor of the stealth bear market comes to us courtesy of a much-talked-about article published Sunday in the Wall Street Journal.

The piece, "The Only Six Stocks That Matter," basically argues that the upside we have seen so far this year in the major U.S. stock indexes is due to a handful of big names that essentially carry the market’s weight.

According to the WSJ:

Six firms — Amazon.com, Google, Apple, Facebook, Netflix and Gilead Sciences — now account for more than half of the $664 billion in value added this year to the Nasdaq Composite Index, according to data compiled by brokerage firm JonesTrading. Amazon, Google, Apple, Facebook, Gilead and Walt Disney Co. account for more than all of the $199 billion in market-capitalization gains in the S&P 500.

This simple data alone should make you stop and think about this market in a different light.

The reason : When money flows into a concentrated basket of stocks, the potential for a pullback in the entire market is heightened.

Why?

Well, if just one of these stocks slips even in the slightest fashion, Wall Street’s fast-money traders might just decide that the "jig is up," and that it’s time to run to the sidelines.

When that happens, very few portfolios will be spared from damage.

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In addition to the aforementioned data on the six stocks (plus Disney) that the WSJ claims are the only ones that actually matter, the article also points out some comparison data on the performance of the averages over the past couple of years.

I was particularly interested in what percentage of those gains were due to the top three performers.

In 2013, the Nasdaq soared 38%, with the top three stocks contributing 17% of the gains, according to JonesTrading. The S&P 500 gained 30% that year, with the top three stocks contributing 8% … The Nasdaq rose 13% in 2014, with the top three gainers accounting for 32% of the gains. The S&P was up 11%, with the top three gainers contributing 16% … This year, with the Nasdaq up 7.4%, the top three — Amazon, Google and Apple — have accounted for 37% of that gain. Amazon has surged 71%, adding $104 billion in market value. Google has gained 23%, adding $79 billion, and Apple is up 13%, adding $63 billion.

These numbers are virtually irrefutable, and as such we ignore them at our own peril.

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So, does this hyper-concentration mean stocks are on the verge of a change from stealth bear market to well-known, unequivocal bear market?

No.

In fact, we could see the market winners begin to broaden out, and that would largely quiet the chatter about a stealth bear market.

Still, the growing concentration of money into the tiny cadre of market elites is something to keep a close watch on.

After all, if any one of these stocks sneezes, just about everyone’s portfolio could catch a nasty cold.

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The market may be in stealth bear market territory. But keep in mind that a small handful of stocks are in a stealth bull market … and most didn’t make to the "top six" list.

Sure, AAPL is up 79.2% since I first recommended it in the Afternoon Edition. And plenty of the other stocks we talked about today offered subscribers some nice trading gains throughout the Uncommon Wisdom Daily newsletter universe.

But if you’ve got some powder dry that you want to put to work, you want to stay away from names that appear to be overbought.

There may be gains ahead, yes, but even bigger gains may be possible elsewhere.

And if it’s a company that’s practically printing cash, chances are that I’m watching it very closely in my Cash Flow Kings newsletter. Did you know that you can join risk-free today?

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Are you worried about the growing concentration of investor capital into these big six stocks? With so many losers outpacing winners, can the market keep pushing higher?

Send me your thoughts and let me know by leaving a comment on our website or by sending me an e-mail.

***

U.S. stocks traded sharply higher Tuesday, as the major averages broke a five-day losing streak.

Elsewhere in the market today:

• Consumer confidence fell to a 10-month low, with the Conference board saying that the consumer confidence index dropped to 90.9 from 99.8 in June. • United Parcel Service (UPS) shares surged more than 5%, after the package-delivery giant beat second-quarter profit expectations. The company’s results are often considered a bellwether for the entire economy. • Oil futures were higher, to end a recent streak of losses fueled by a supply glut and slowing global demand. The September contract moved up 1.2% to $47.98. • Gold futures fell slightly Tuesday, as a report showed slowing Q2 demand for the yellow metal. The August contract moved down 0.2% to $1,096, after gaining nearly $11 Monday.

Good Luck and Happy Investing,

Brad Hoppmann

Publisher

Uncommon Wisdom Daily