The split between the have and have-nots on Wall Street are keeping the stock market from regaining some much-needed ballast.
That’s the takeaway from James “Rev Shark” Deporre, who notes that large-cap indexes have been immune to market declines up until now, but that may be changing if early week returns tell an accurate story.
“Sentiment among many market participants has been poor for a long time, but it has not become extreme enough to produce the sort of capitulation that leads to a market bottom,” Deporre said in Real Money. “The primary reason for this is that the senior indexes and some key big-cap names have hardly been corrected. It’s tough for growth stocks, small-caps, biotechnology, and many secondary stocks to find a bottom when the folks in the media are still talking about stocks "hovering near highs."
On Tuesday, the mood turned even more gloomy, which was due in part to Apple (AAPL) and the major indexes reversing downward after a positive start. “The general consensus among many market participants is that all the stocks are down-trending and correcting since February won't be able to find a bottom until the indexes, and some big-caps suffer a meaningful correction,” Rev Shark added.
What traders are seeing now is a scenario unlike anything else in recent memory.
“This is unlike any environment I've ever experienced before due to the very wide gulf between the majority of stocks that are wallowing in an ugly bear market and the indexes and some large-caps like Apple that are attracting a flow of liquidity and are being boosted by buy-backs and 401(k) allocations,” Deporre noted.
Investors may think the only way for this to end is for the big-caps and indexes to go through a very ugly breakdown and catch up to the downside of the rest of the market. That may not work, however.
“Few people seem to believe that there will be a reverse rotation out of large-caps and into all the other things that have been demolished,” Rev Shark said. “When the generals start to fall, it is likely to keep overall sentiment very poor.”
Currently, Deporre sees no choice but to stay patient, protect capital, and wait for conditions to shift. “I'm not sure how conditions might shift, but the current trend suggests that it is not the time to anticipate a market bottom,” he added.
