The concept of a “new bull market” brings with it an aura of renewed optimism for investors. When we hear the phrase “stocks make new highs,” it’s often a signal that consumer confidence is returning, businesses are growing, and the economy is on an upswing. However, to fully understand the implications of such a market trend, we need to go beyond what’s to the right of the equal sign. We have to look left.
I’ve continuously made the argument that you can only know if you were in a real bull market AFTER you’ve taken out the prior high. Otherwise, if you’re still in the drawdown, you don’t know with certainty if it’s a bull market or a bear market rally.
The S&P 500 is at new highs. So too is the Nasdaq. By my own definition, those indices are in a bull market. But when we dig deeper, we see that the majority of stocks are trading below their 2021 highs.
Are We in a Bull or Bear Market?
The Russell 3000 is often touted as a comprehensive barometer for the U.S. stock market, encompassing a wide spectrum of companies with varying market capitalizations. Given that it is cap-weighted, the index gives more influence to larger companies, which can sometimes mask the underlying movements of smaller stocks.
And that’s the point. Yes, we could be in a bull market, but most stocks are actually still in a deep drawdown.
Perhaps this is a good thing. This could be the buy list. I don’t disagree at all — it’s why I keep saying small-cap stocks hold the key. This isn’t a matter of semantics to me. Secular bull markets don’t act like this at the start of a new trend. They act like this toward the end. Secular bull markets don’t start at Federal Reserve pivots. Secular bear markets do. We are in what I believe is a “concentration” bubble driven by an AI narrative that is NOT permeating across all stocks.
Whether it’s a bull or bear market is irrelevant from a trader’s perspective. To me this is about perspective and risk management more than anything else. An AI narrative that only sends a small sub-section of “the stock market” to new all-time highs isn’t a real narrative. It’s a moment in time. It’s a bubble. And it either ends with broadening of breadth where all these laggards run like hell (bullish), or large-cap stocks come crashing down (bearish).
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
