The stock market is very strange right now.
You may be loving life if you’re in a handful of specific stocks, but the truth is most stocks have sucked wind this year.
If you look at just the indexes, you see a market that is up big. And that’s true.
But you can’t judge a book by its cover, and those of us who dig deeper into the data see trading not normally associated with strong bull markets.
Don’t worry. I’m not saying, implying, or even hinting that we’re in a bear market… or about to be in one. In fact, I see some typical summer volatility ahead and then big gains into the end of the year as election uncertainty passes and interest rates fall.
I am saying that it matters more than ever which stocks you are in.
Let me explain what’s going on and how you can find those rare stocks generating the biggest profits.
Lowest In 25 Years
Let’s start with the S&P 500 index. The most widely followed benchmark for the market has gained 17% so far this year, which is nearly double the average full-year return.
But that’s as misleading as any other time I can remember in my two decades of investing and managing Big Money trades.
That’s because only a few of the 500 stocks in the index are responsible for its powerful move.
At one point in June, Nvidia (NVDA) accounted for 33% of the S&P 500’s gain. That’s staggering.
A favorite saying around our office is, “It’s not a stock market, but a market of stocks.” That’s especially evident right now.
The “market” is strong, but the majority of stocks are not.
My business partner and fellow TradeSmith analyst Luke Downey also dug into the data and put together an excellent chart that clearly shows this uneven performance.
It shows the S&P 500 this year three ways: 1) The top 50 largest stocks by market cap (green); 2) The S&P 500 weighted by market cap (blue); and 3) the index with all 500 stocks weighted equally (orange).
Hard to believe those three lines are the same index, isn’t it?
The 50 largest stocks were up 22.5%, easily outpacing the market-cap weighted 15.8% return, and more than four times the equally weighted gain of 5.2%.
Another surprising and sobering data point: Nearly 60% of stocks in the index – or 300 out of the 500 – are below their 50-day moving averages. That’s a widely used technical indicator, and stocks below their 50-day are considered weak.
The degree to which stocks rise and fall with each other is called market correlation. Correlation is the lowest in 25 years right now.
To make matters worse, Bank of America research showed that most of the S&P 500 has been in an earnings recession since January. More specifically, 493 of the S&P 500 – basically all but the Magnificent 7 – haven’t grown earnings since the fourth quarter.
That’s shocking. And it’s another reason the market looks like a rising tide, but an awful lot of boats clearly have leaks that prevent them from lifting with it.
A Double Shot of Good News
It also reminds us how important and how hard it is to find those extremely rare outperformers.
A groundbreaking study by Dr. Hendrik Bessembinder at Arizona State University proved that only 4% of stocks account for all of the gains in the S&P 500 above Treasury bonds since the 1920s.
In other words, you have a 96% chance of not beating the market.
Why bother with odds stacked against you like that? Especially now when most stocks are lagging.
Because if you don’t invest in stocks, you have little to no chance of achieving your financial goals. And because you can find those 4 percenters.
I have some good news for you.
First, the second-quarter earnings season (which is just beginning) should end that stealth earnings recession. Those 493 stocks not the fabled Magnificent 7 – Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla – are forecast to grow earnings 6%, 7%, and 13% over the second, third, and fourth quarters.
That growth should be mostly in Technology and Communications companies, but progress is progress. It should help lift more stocks ultimately.
And second, investing in those rare 4% of stocks that outperform help you make money even when market breadth is unusually low.
They also stand to outperform as breadth improves. Since the biggest stocks are pulling the indexes higher, it stands to reason that smaller stocks will play catchup as strength broadens. Smaller stocks historically outperform over time anyway, but we are on the verge of what looks to be an unusually big rally.
Now is the time to get your shopping list together, and it should include stocks with the three factors that best predict future profits:
- Superior fundamentals (a growing business)
- Strong technicals (price action)
- Institutional buying (Big Money inflows)
I buy only those kinds of stocks for myself, and I recommend only those kinds of stocks in my research services. Quantum Edge Pro in particular focuses on the smaller stocks that look especially set for big gains.
And that comes after already big gains. Our current Quantum Edge Pro stocks are up nearly 23% this year, easily beating the S&P 500 – and that’s when smaller companies have underperformed. The portfolio also includes the top AI stock that no one knew about last year. Super Micro Computer (SMCI) has soared more than 220% so far in 2024.
We are winning on 79% of our current stocks, and our winners far outpace our few losers.
This the power of a quantitative approach. A proven stock-picking system that helps successfully identify those rare gems that produce almost all of the gains.
Finding those stocks is more important than ever. If you’d like to leverage the power of my system and receive my handpicked stock recommendations, click here to learn more about a Quantum Edge Pro membership. You’ll also receive immediate access to our full portfolio, including my very latest recommendation just released two days ago.
Have a great weekend!
Talk soon,
Jason Bodner
Editor, Jason Bodner’s Power Trends
