Nvidia is Hiding Cracks in the Stock Market

Michael Kramer |

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It has become a tale of two markets: those indexes with Nvidia (NVDA) and those without. The indexes with Nvidia give a false sense of belief that the equity markets are strong. For investors who do not assess the risk correctly, it could be a costly mistake down the road. While some might have you believe that market breadth is broadening, it not only hasn't, but it has been narrowing. The advance-decline line for the S&P 500 peaked in the middle of May and has been trending lower since, while the S&P 500 has gone on to make a new high. The number of stocks making new highs versus new lows on the NYSE is also falling. This peaked in mid-March and has been trending lower since. The cumulative number of stocks on the NASDAQ making new highs minus new lows has typically trended in the same direction as the price action over the past 40 years. But that has not been the case for more than a year now, with net new highs continuing to fall even though the NASDAQ has seen a massive rally. The data since the middle of May shows that Nvidia has wholly overwhelmed the market. The Bloomberg 500, which can be used as a proxy for the S&P 500, has advanced by 2.46% and shows that since May 17, Nvidia has accounted for 81.1% of the gains in the Bloomberg 500 and that 156 stocks have moved up while 345 have moved lower. Apple (AAPL) is the second-biggest gainer, adding 29.9%. This means that the Bloomberg 500 would be lower without Nvidia and Apple. Over that same time, the S&P 500 rose by 2.54%, with 153 stocks advancing and 351 stocks declining. The narrowing of the breadth has been a theme for not weeks but months. The narrative started with the Magnificent 7 in the summer months of 2023, which turned into a group of just three by the start of 2024. But now, it seems to be one left to carry the market while breadth deteriorates and the more balanced equal weight indexes trend lower. The S&P 500 Equal Weight ETF (RSP) has fallen four weeks in a row, which amounts to a decline of about 3%, which is not much on its own, but compared to the market cap weighted S&P 500 ETF (SPY), which has advanced more than 2.5% over the same time. RSP hasn't been able to surpass its highs last seen in March and has moved sideways more or less over that time. That could be said of the Dow Jones Industrials and Transports and the Russell 2000. This isn't to say that the market is due for a violent move lower, but once Nvidia sees a turn in momentum, the true nature of the market will likely take over.