Why the stock market’s ‘solitary walk’ is worrisome


While I believe the market averages will be higher in the spring, in my opinion there is a continuing deterioration of the market’s internal strength at work despite the recent highs in the major stock indexes.

This condition is being created by the growing lack of participation in the rally of many smaller and mid-sized stocks.

Old time market commentators used to liken this type of advance to one where the troops were not following the generals.

 

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Generals and troops

The “generals” are the large-cap companies such as General Electric (GE) and IBM that dominate the Dow Industrial Average and the S&P 500 Index.

The market weighting of such blue chips is so strong that as they move higher, they lift the entire index even if a majority of stocks are stalled or moving lower.

This condition, once known as “the solitary walk” creates the illusion of higher markets, even though fewer and fewer stocks are participating.

Due to market seasonality, I  believe the short term outlook is for higher markets. On an intermediate term basis, 2015 may be the year when we get a significant market correction in my opinion.

 

Correction ahead?

The “solitary walk” usually precedes sharp corrections, some of which result in the 20% drop most market observers consider to be bear markets.

These selloffs are usually triggered by some negative news event.

With the change in Congress, the ongoing Middle East conflicts, currency wars and European economic weakness, there are plenty to of potential triggers out there.

That said, in my opinion the long-term secular bull market is still on track and may have many years left to run.

 

Weak sentiment

We draw some conviction in the secular bull market from the Yale Market Confidence Indices.  While institutional confidence for higher markets in the year ahead is about average, public confidence in the stock market is very low.

Market tops occur when everyone, especially the public investor, believes prices can only go higher.

These indices show public belief in this market has been trending lower for 14 years and is now lower than after the dot.com crash in 2000 or the 2008 meltdown.

It should take many years to reverse that level of skepticism and thus I believe the long term secular trend of this bull market has many years to run.

Photo credit: Afoncubierta via Flickr Creative Commons

Disclaimer:All investments involve risk and various investment strategies will not always be profitable. Past performance does not guarantee future results.

 

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CJ Brott
CJ Brott
We are a registered investment adviser firm based in Texas. CJ Brott founded our firm in 1984. Since 1980 he has been lecturing regularly on financial topics at Southern Methodist University. He is a sought-after public speaker and has been interviewed by various national and local financial publications. We benefit from CJ’s many industry contacts when making investment decisions.