This isn’t a bull market — it’s a ‘duck’ market. Here’s why.

A wild duck spreads its wings in a pool of water on a frozen lake in Bucharest, Romania, on a frigid morning in 2006. A duck, rather than a bull, might not be the best animal to capture the essence of the American stock market. current, according to a team of Charles Schwab analysts. - AFP/Getty Images

At first glance, US stock indices like the S&P 500 lately seem to be moving in only one direction: up. The same cannot be said for the actions of its individual members.

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A team of strategists at Charles Schwab & Co. highlighted this dichotomy between the relatively calm performance of major stock indexes and the more chaotic moves seen by their constituents, in a report released earlier this week.

Their findings offer insight into what makes this bull market unique compared to bull runs of the past and why some remain skeptical of the market's rise.

They found that while the S&P 500 has barely moved from its all-time highs in 2024, the average stocks included in the index have been much more volatile.

Since the beginning of the year, the S&P 500 SPX has seen a maximum decline of 2% through Wednesday, compared to 9% for the average component of the index. Such a wide dispersion between index-level volatility and individual stock volatility is quite unusual, said Kevin Gordon, senior investment strategist at Schwab, who authored the report along with his colleague Liz Ann Sonders.

"This behavior is not typical of a bull market," Gordon said during a phone interview with MarketWatch. "But at the same time, this is not a typical cycle."

In fact, according to Sonders, a bull might not be the best animal to capture the essence of today's market.

"The reality is that the stock market is acting more like a duck than a bull: calm on the surface but paddling like a devil underneath," he said in the report.

This discrepancy is even greater for the Nasdaq Composite COMP: the technology index has seen a maximum decline of just 3% this year, while the average Nasdaq stock has fallen 23% from its peak to its trough.

This also applies if performance is measured since October 12, 2022, the day the bull market began. Since then, the S&P 500 has risen 43% through Wednesday's close with a maximum drop of 10%. Meanwhile, the average stock index has seen a 26% decline, as the chart below shows.

Similar patterns can be seen for the small-cap Russell 2000 RUT and the Dow Jones Industrial Average DJIA.



The difference between index-level volatility and individual stock volatility is indicative of what has become an unbalanced market, Gordon said, where a handful of stocks mask the relatively weak performance of many of the index's components.

About half of the S&P 500's issues are trading below their January 2022 levels, while about 10% of the index's individual stocks have outperformed over the past year, a historically low percentage at this time in a bull market.

"Typically, after more than a year of a bull market, you see a much higher percentage of companies that have surpassed their previous highs," Gordon said.

Fortunately for investors who prefer index-tracking funds, the dramatic outperformance of a handful of the largest U.S.-listed stocks has more than offset weakness elsewhere. A group of seven mega-cap stocks known as the Magnificent Seven fueled most of the S&P 500's 24% gain in 2023, according to FactSet data.

Although several members of this group have lagged since early 2024, explosive earnings from Nvidia Corp. NVDA and Meta Platforms Inc. META have helped offset, as the Schwab team illustrates in the chart below.

The Magnificent Seven comprises Nvidia, Microsoft Corp. MSFT, Apple Inc. AAPL, Inc. AMZN, Meta, Alphabet Inc. GOOGL and Tesla Inc. TSLA.



While market breadth (i.e. the number of individual stocks participating in the rally) has improved recently, it hasn't happened in a straight line. The chart below shows that the proportion of stocks trading above their long-term average has increased since the beginning of the year, but remains below December cycle highs.



Gordon considers this an adequate indicator of participation. The proportion of stocks trading above their 200-day moving average has also proven to be a reliable indicator of trouble ahead in the past.

For example, participation began to decline in late 2021, a few months before the S&P 500 peaked in early January 2022. A similar dynamic played out before COVID-19 disrupted markets in March 2020.

Right now, the amplitude seems to be slowly improving. If this continues, the volatility gap between the indices and their members should narrow. Gordon and Sonders believe this is essential for the rally to continue.

Investors received good news on this front on Thursday when the equal-weighted version of the S&P 500 XX:SP500EW finally surpassed its previous all-time high from Jan. 4, 2022, according to Dow Jones Market Data.

The fact that the equal-weighted index has outperformed its market-cap-weighted sibling since early March is another encouraging sign of an improvement in breadth, as is the fact that it has nearly kept pace with its market-cap-weighted sibling. capitalization since the last stage of the bull market began in late October.

One of the most pressing questions for stock investors now is whether this trend can continue, they said.

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