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Bad breath bad but improving

Last week the markets rallied as I expected but many investors were pointing out that this rally is fake, bear market bounce, and that only a few big tech companies participate in this rally and thus the market is in fact doomed. And they may be somewhat correct but only in one fact – the market is propped by a few big techs only and the rest lags. The best way to view this is to look at the market’s breath (the ratio between advancing and declining stocks). As the chart below shows, the market was rallying last week moving higher but market breath is actually going down indicating that most of the stock are declining and only a few are going up.

market breath deteriorating

And that same experience could be happening to your portfolio, too. The market is up 30% this year but your portfolio lags. Mine does. My market indicator shows the index to be up 15.88% while my portfolio is up 8.66% only. Why is that? I do everything I can, and I hope that “everything I can” is the right thing to do. I invest in high quality stocks, reinvest the dividends and on top of that, I sell covered calls and options to generate further income. Yet my portfolio lags. Why?

portfolio vs SPX

The answer is simple, my stocks do not participate in the rally, and I do not own all the darlings that push this market up. Yes, I do own some shares of Microsoft, Apple, and Google, but not enough to prop my portfolio in the same way they prop the index. We can see this when we look at equal weighted SPX index and compare it with SPX:

equal weighted market
cap weighted market

And yes, we must admit that the equal weighted index is going nowhere while SPX (the bottom picture) is reaching a new high in the same period. And that can be concerning. A lot!
But how concerning is it? Well, the problem is that many investors that claim to be long term investors are sitting in cash and waiting for a better tomorrow instead of being invested. The amount of bearishness is still extremely high, higher than it was in 2008-2009. But it is changing although that change is subtle and not as obvious as one would think. But all we need is perspective. If we step out and look at the breadth from a longer perspective, we start seeing some improvement:

SPX breath

As we can see from the chart above, the market breadth is actually making new all time high! Of course, it still may all change. Bad news from the FED, bad CPI report next week, or raging inflation can change it all right away. But it hasn’t changed yet. In fact, it is telling me that more and more of the laggards are coming to participate in the market and as more of them do so, more people will realize that sitting on the sidelines was stupid and these same people will once again become the so called “long-term investors” (until the next bear market).
This dominance of a handful stocks leading this new bull market may end soon as we start seeing the rally slowly spreading into the industrial, aerospace, financial, energy, and material sectors. This can help this rally even more as broader market starts participating and more investors will feel the FOMO and make this bull more sustainable.


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