Only 5 stocks make the difference between a bull market and a bear market

The market has seen one of its strongest stocks in months and it looks like it is in good shape to provide trading opportunities for the rest of the year. But there is a giant shadow hanging over things that have been in place for most of 2021.

That shadow is the huge disparity between a few large-cap names that run the indices and the vast majority of individual stocks.

So far, in 2021, the Nasdaq is up about 17%. It looks like a pretty robust bull market, and the business media are constantly talking about bubbles and how this action is unsustainable.

However, what if you delete just five stocks: Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Tesla (TSLA), and Alphabet (GOOGL)? The bull market turns into a bear market.

The Nasdaq is down 22% for the year without these five giants.

One of the consequences of this action is that the more these five stocks outperform the rest of the market, the greater their influence on the indices. The Nasdaq is a capitalization-weighted index in which the largest stocks are given the greatest weight.

What’s even more remarkable about this corruption of the Nasdaq indices is that there is so little recognition of the problem. It is not a subject that we talk about a lot. Indices are supposed to be representative of the overall health of the market when in reality they distort it.

It’s interesting to wonder what the market reports would look like if the Nasdaq actually reflected the bear market that exists outside of just five stocks. Sentiment would likely undergo a drastic shift, and there would be endless discussion about how and when the bear market might end.

The Nasdaq’s misrepresentation presents an extremely difficult problem for those trying to navigate the market. How does that end up correcting?

The general consensus is that the entire market will need to correct, even stocks that are already in a bear market. Parallels are drawn with the crash of 2000 when names like Cisco (CSCO) and Qualcomm (QCOM) lead all lower.

Conditions are now very different from those of 2000, but this disparity in performance will remain the focal point and present a very difficult problem.

The market has seen a rapid and furious rebound this week and needs some rest. There is some softness in early Thursday as attention shifts to Friday’s CPI report.

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