The Market Is Far Worse Than It Looks

One of the most annoying things about the current market action is that despite the very poor action in a great many stocks, the major indexes are still not in technical bear markets.

It isn’t clear where the definition comes from, but the generally accepted definition of a bear market is a drop of 20% or more from recent highs. It was likely developed by journalists who were looking for a convenient shorthand to use for writing stock market headlines.

Although many areas of the market have been in downtrends since February 2021, the S&P 500 and Dow Jones Industrial Average aren’t even down 10% from the highs they hit in December 2021. The Nasdaq has done much worse and is approaching a drop of 18% from its highs in November 2021 but still has not reached the magic threshold.

By comparison, if we look at all stocks in the market that are midcaps or bigger, there are around 2,072 stocks. By my count, 1,033 of them, or almost exactly 50%, are down 20% or more from their highs, and around 12% have been cut in half. The performance in small-caps and small-cap growth names, in particular, are far worse.

I’ve been making this point for a very long time, but the indexes just don’t reflect what is really going on in this market, and by failing to reflect how bad it has been they keep sentiment more bullish than it should be and prevent the sort of washout that may bring us to a good support level.

Certain areas of this market, such as high-multiple growth, biotechnology, cannabis, gambling and even semiconductors, are very deep into the bear market territory but are still struggling while waiting for the indexes to play catch-up to the downside.

There is no mystery about what is plaguing this market. The Fed is behind the curve and is now rushing to raise interest rates in order to battle inflation. There is concern that this is going to trigger a sharp economic slowdown, especially because we are already dealing with the war in Ukraine and supply chain issues.

The best way to deal with this market is to embrace the thinking that is a bear market and to forget the chatter about the indexes. By the time the senior indexes finally hit the technical definition of a bear market, the stocks that have already been crushed will be ready to run back up.

We have a shaky start on Friday morning, and market players are going to continue to be nervous about whether the onslaught of Fed interest rate hikes has been fully discounted.