The sizable divergence between the performance of individual stocks and the major indexes could signal a coming bear market, according to Schwab Chief Investment Strategist Liz Ann Sonders and Senior Investment Strategist Kevin Gordon.
If the market continues to experience more weakness in individual stocks while a relative few companies fuel strength in the indexes, "it will start to eerily mimic" the dynamic in 2021 that preceded the 2022 bear market, the two strategists said in a blog post on Monday.
As the S&P 500 has made several new highs this year, there has been a breakdown in the percent of members trading above their 50-day moving average, they wrote.
"That was the case in the second half of 2021 which, with the benefit of hindsight, correctly signaled that the market would no longer be able to hold up at the index level — thus leading to the bear market in 2022," Sonders and Gordon said.
"The dramatic outperformance of a small handful of stocks at the very upper end of the market capitalization spectrum has greatly flattered index-level performance among cap-weighted indexes. On the other hand, there has been a tremendous amount of churn and rotational corrections occurring under the surface," they wrote.
Sonders also discussed this trend in a recent interview with ThinkAdvisor.
The S&P 500 has gone nearly 18 months without a 2% daily decline, Sonders and Gordon noted in their blog. Generally, by the time such a streak lasts this long, the index has "started to sputter a bit," they said, citing data from SentimenTrader.
