The Stock Market Is Suffering From Bad Breadth

One of the interesting aspects of the brief selloff in stocks in late November was that breadth deteriorated markedly. The broad indexes were only down a few percentage points, but there were more than a thousand stocks making 52-week lows on a daily basis. And, of course, the stocks that went up were the same ones that seem to always go up: Apple Inc., Microsoft Corp., Nvidia Corp. and a few others.

This presents challenges and difficulties to a range of players on Wall Street. In the analyst community (of which I am a part), how can someone honestly and objectively recommend Apple? It is poised to gain at least 30% for a third straight year and its market value is on the edge of $3 trillion. Analysts, no matter where they sit on Wall Street, are incentivized to find rare opportunities and unloved stocks that are typically ignored. I have a newsletter, and if I wrote to my subscribers that after hours of thought, research and deliberation that my best idea was Apple, I would be a laughingstock. After all, everyone already owns it, either directly or indirectly through something like an exchange-traded fund or similar investment vehicles.

The problem for money managers is that when the returns of the market are being driven by a handful of stocks, they must own those stocks or risk underperforming the market, which creates continuous demand for those stocks that are leading the market higher no matter what their prices. And it was clear during the small correction late last month that so-called market neutral players had been using Apple, Microsoft and Nvidia as a hedge, because as the market declined, those stocks actually rose, as hedges were unwound.