We Got Real Trouble

I'm not sure how many people on this site have read "Reminiscences Of A Stock Operator", but it's frequently heralded as one of the best trading / investing books of all time by people all over financial media. I read it a while ago, and while I think it's a good book, really only one of the main concepts presented stuck with me; the idea of market breadth. During one of the spectacular market rallies in the book, our fearless protagonist is long stock. However, one by one, the stocks he's long begin to trade sideways after they run up. He begins to sell them and then short them as the market continues to charge higher, until the market stops rallying and begins a precipitous plunge. The higher the market went, the fewer and fewer stocks were rallying and those that were previously leaders began to taper off into sideways trading. It was the leading indicator that the rally was losing steam.

While this is an anecdote and a narrative, I believe that we are in a similar scenario. More and more market leading stocks have begun to trade sideways over the past several weeks following a huge rally, and fewer and fewer stocks are acting as a buttress to the stock market. The markets made all time highs this week in the least convincing manner ever, poking the all important technical level twice on low volume. More and more large cap leaders are beginning to trade sideways, and the only 4 stocks supporting the market are AMD, NVDA, TSLA and AAPL. Everything else seems to be in a zone of indecision.

On top of that, we are at this all time highs point in the midst of essentially the worst "fundamental" or "real economy" backdrops in the last century. I know a lot has been said about this, but this kind of a situation isn't good for a huge majority of businesses. Look at the difference between the QQQ's and the IWM.

While I don't believe that a crash is right around the corner, I have become EXTREMELY cautious in my outlook. the market could continue rallying, but until we see further breadth in the rally, I'll be pretty scared. Breadth is important, and the market can't survive as the AAPL and TSLA show forever. At some point we will bump into a point where the buyers run out of steam, and the breadth is indicating that could be very soon.

TLDR; Market breadth is declining and the market is being held up by 4 stocks. Careful with your longs.

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Hey guys, Just wanted to update this idea from when I wrote it over the weekend. Since hitting all time highs in a more convincing fashion on monday / tuesday market breadth has returned to a certain degree as other names are beginning to rally again. I'm still cautious, but less so than over the weekend.