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A Red Flag for the Rally?

In spite of the rally in stocks so far this year, some analysts and advisers believe it may not last, citing an often-overlooked market indicator.

While the S&P 500-stock index ended last week down just 0.17%, only 186 of its 500 stocks saw gains, while 309 declined. Typically, when the index is flat for the week, you’d expect a more even split between winners and losers, says Paul Nolte, the managing director of Dearborn Partners. “The averages masked some underlying weakness, and I think that’s part of the reason that we got a decline on Friday,” Nolte says.

The market also looks weaker than the S&P 500’s performance would suggest when you include a broader range of stocks, says Tom Samuels, a managing partner at Palantir Capital. Last week, the S&P 500 was flat, but the Russell 2000, an index of smaller stocks, fell a little over 2%. In other words, a handful of large companies are holding up the S&P 500, while “the rank and file” are struggling, Samuels says. “It’s like finding termites, there’s a little bit of rot in there,” Samuels says.

Of course, if the market’s losers do end up dragging down the major indexes, it may only be a temporary dip, Nolte says. “At this point I don’t think it’s much more than a correction in the markets, after having the nice run that we had since December,” he says. Investors should be looking to buy stocks they like after they’ve seen slight losses, he says.

But experts say it’s also a good time for investors to reevaluate any indivudal stocks in their portfolios. Last week aside, the market has been rising pretty steadily this year, and “if your individual holdings stopped keeping pace, you may need to take a good look at that,” Samuels says. Stocks that haven’t kept up with this year’s rally may also be the first to fall if the market does start falling, he says.


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