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Stealth Bull?


The name is Hoofy, James Hoofy


Last week Professor Fari Hamzei on the Buzz & Banter mentioned "Stealth Bull Market." What does that mean? Without putting words in Professor Hamzei's mouth, to me a stealth bull market is what is occurring even as I write this as the average stock outperforms the broad indices beneath the surface.

This is the opposite of what occurred in 1998-1999 as the broad, cap-weighted indices, especially the S&P 500 and NDX, outperformed the average stock, moving to new highs throughout 1999 even as the bullish percent indicators, which measure the buy and sell signals for all stocks in democratic fashion (one-stock, one vote), deteriorated and moved lower.

While everyone is most familiar with the NDX performance in 1999, it may come as a surprise that the SPX made new highs in January, March, Apri, July and December of that year. Meanwhile, the NYSE Bullish Percent opened 1999 in January at 54% and by December of 1999 had fallen below 20%. It recovered in December to make a lower high and close out the year near 50%, a classic case of average stocks dramatically underperfoming the major indices.

On a longer-term basis, the bullish percent indicators for both the NYSE and Nasdaq peaked in January 2004 and have been making lower highs ever since. But that does not change the fact that both of these indicators are positive for now, meaning we are operating in a context where underlying demand (at least in certain areas) is overtaking supply; and even as the sell off in the broad indices accelerated this past week, we saw very little deterioration in these indicators.

One way to see this is to look at the Equal-weighted S&P 500 Index (SPXEWI) versus the Cap-weighted SPX. While the cap-weighted SPX could not even make it back to the March highs before deteriorating last week, the SPXEWI not only made it back to the March highs, but exceeded them. The charts below show this divergence.

S&P 500 Index (Charts courtesy Dorsey, Wright & Associates).

S&P 500 Equal-Weighted Index (SPXEWI)

The question remains, is this divergence positive or negative? As long as the supply and demand indicators I follow continue to suggest a positive context, I have no choice but to rate this divergence as positive for the average stock, and negative for the broad indices. To me this is illustrative of a "stealth bull market" in stocks. And that is why index-focused investors and ETF traders may be finding it so difficult to navigate this market. Specificity is key, and in a world where generalists dominate, performance is hard to come by.

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No positions in stocks mentioned.

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