The market is once again being dominated by a few large companies. The rally since March of 2020 had broad participation but that has waned. This is always a warning sign. The market can turn this around, but the current trend is less and less participation in this rally. We have seen the S&P 500 hit new highs while small and mid-sized companies have not confirmed the new highs for the S&P 500. The small company index hit its high in March and started a descent. Inflation and the tight labor market may be impacting smaller companies more than larger ones. For this bull market to continue we need participation from a much greater percentage of stocks.
It appears that the newer market investors from the subreddit social networks have been active traders. Please see the picture below. The volume on the Nasdaq stock exchange (for tech and growth companies) has almost doubled since the start of the pandemic.
Greater participation by the public generally happens at market tops. This time the new investors were armed with a lot of cash from their curtailed pandemic spending and government stimulus. It is great to have more traders out there to bid up our investments! I especially welcome the average citizen, not more Wall Street algorithms. However, the new investors from last March, have not experienced a real market that goes down as well as up. It will be interesting to see how they react when we experience a real market correction.
Margin debt is higher than it has ever been. That is a sure sign of too much market exuberance, a bubble, that you always see at market tops. Below is a graph from Hussman Strategic Advisors .
The market is very overvalued as we noted in our recent market value update . The venerable Jeremy Grantham is very worried about this bubble, “this is serious”. This coupled with slowing momentum/participation in the rally is cause for concern. These things can work themselves out but be ready to play defense if warranted. If you are young and do not need your money for decades you can ride it out. If you are getting closer to your goal it is Important to Avoid Large Losses .
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