While the S&P 500 is still within shouting distance of its all-time high, other indices and smaller capitalization companies have been declining beneath the surface of the market falling by as much as 20 per cent or more.

Does that portend that large cap stocks must eventually follow? We don’t have the answer yet, but it’s something worth considering.

Here’s some commentary, courtesy of CNBC, from strategists and a look at some of the deterioration we’ve already seen in the stock market.

by Bob Pisani, CNBC.com

The land mines for the market are growing.

Seasonal weakness is combining with uncertainty over the COVID-19 delta variant’s impact on consumer behaviour, rising labor and material costs pushing prices higher as well as poor economic data out of China.

While the S&P 500 is still about 1% from its record high, those land mines are taking their toll on large sectors of the market.

“For the last several months, most stocks have declined more frequently than they have advanced–evidence of a weakening market condition,” CFRA chief investment strategist Sam Stovall said in a recent note to clients.

Other strategists have noticed this divergence as well.

“As the equity market reaches new highs, the divergence in the advance-decline line suggests we may be approaching a top,” Guggenheim global chief investment officer Scott Minerd said in a recent tweet.

“In the past, such divergence has indicated the market is vulnerable to a sell-off.”

The 20% decline club is getting larger

About 15% of S&P 500 stocks are more than 20% below 52-week highs, but much larger swaths of the mid-cap and small-cap universe are down 20% or more.

The latter groups are less tech-focused and more susceptible to an economic slowdown:

Slow motion deterioration
(percentage of stocks that are 20% or more below their 52-week highs)

  • S&P 500            15%
  • S&P Midcap      30%
  • S&P Small Cap 48%

The COVID-related weakness is affecting sectors associated with the reopening, such as industrials and retail.

“This phase of the pandemic poses downside risks to the economic recovery, including to inflation components that are more sensitive to the disruption in services demand,” Barclays economist Blerina Uruci wrote in a recent note to clients.

(% off 52-week highs)

  • American Airlines    26%
  • FedEx                     20%
  • Dupont                    20%
  • PPG                        18%
  • Caterpillar               17%
  • Stanley Black & Decker 17%
  • Lockheed Martin    14%
  • 3M                         12%

(% off 52-week highs)

  • Nordstrom             41%
  • Gap                       36%
  • Abercrombie         24%
  • Kohl’s                   19%
  • Ross Stores         16%

The China slowdown, particularly the decline in retail sales due to COVID issues, is dramatically affecting luxury retailers, many of which are based in Europe.

Luxury Retailers
(% off 52-week highs)

  • Kering                    21%
  • Tapestry                 20%
  • Richemont             17%
  • Movado                 15%
  • LVMH                     14%

Supply chain and labor problems are affecting the ability of some homebuilders to fully deliver on orders.

Home builders
(% off 52-week highs)

  • Pulte                      26%
  • KB Home               21%
  • DR Horton             17%
  • Lennar                   11%

Concerns about controls on drug prices from the Biden administration has also impacted Big Pharma in the past few weeks.

Big Pharma
(% off 52-wk. highs)

  • Eli Lilly                 14%
  • Bristol-Myers Squibb  11%
  • Merck                  11%
  • Johnson & Johnson  8%

A breakout or breakdown?

Most strategists, including JPMorgan’s Dubravko Lakos-Bujas, remain bullish on the market. However, even Lakos-Bujas admits that it is very difficult to read the economic tea leaves.

“Given the unique nature and impact of the pandemic, the current cycle is more difficult to analyze compared to historical cycles,” he said in a recent note to clients.


“This cycle is essentially an overlay of two intertwined cycles — a Covid cycle and a regular business cycle (incl. labor, capex, inventory).”

Why do so many analysts and strategists remain bullish? It’s all based on the theory that the delta variant will prove to be a diminishing force and that earnings will not materially decline.

“As the delta variant eases, we expect these concerns to fade, leading to a much stronger 4Q21 holiday season (unlike last year’s holiday season disappointment) and a pick-up in cross-border activity from still depressed levels,” Lakos-Bujas said.

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