Market Pulse

What the Financial Media Is Not Telling Us (or Does Not Know)

Feb 29

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2/29/2016 3:32 PM  RssIcon

Last week the S&P 500 large cap index gained 1.58%, the S&P 400 midcap index rallied 2.65%, and the S&P 600 smallcap index added 2.76%. As a result, the broad S&P 1500 advanced 1.69%. The “400” and “600” have now had their best two-week rally since October 2014 while the “500” had its strongest two week run since February 2015.

Nonetheless, the “500” is still 8.57% below its 52-week closing high even as the “400” and “600” are 13.50% and 14.11% below their respective 52-week benchmarks. Conventional wisdom has it that the latter two indexes are in “correction territory” while the “500” has rallied out of “correction territory.”

Unfortunately those numbers and labels hardly describe the damage that has been done and likely still needs to be repaired.

A review of the individual stocks in these indexes reveals much larger declines. Most readers are probably aware that we are big fans of the daily cumulative advance-decline line. It is essentially an unweighted index where an up or down day counts the same for each stock regardless of whether that stock has the largest market cap or the smallest. By contrast, the S&P 500, 400, and 600 indexes are all weighted by capitalization – that is why they even exist in the first place. So a one-point gain in the biggest stock is much more important than a similar gain by the smallest stock. Size really matters to the performance of the S&P (and other weighted) indexes.

So … it may come as a surprise to most that, despite the rally of the past two weeks, the average stock in the S&P 500 is still down 19.58% from its high – almost in so-called “bear market territory.” The average stock in the S&P 400 is down 22.59% and the typical stock in the S&P 600 is 28.25% lower; both are ensconced in “bear market territory.” Thus, the average stock in the broad S&P1500 is down 23.85% from its high; this is in line with the equal-weighted Value Line Geometric Index, which is 19.82% below last April’s high (at the low earlier this month, the Value Line index had lost as much as 26.53%).

We are hearing increased calls that the correction is over and that a new bull market has begun. We think not. Our sense is that, without a proper base, lower lows are still to come. Much damage needs to be repaired.

Value Line Geometric Index (Weekly)

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