Stock market highs hiding 'bloodbath' within

Published Thu, Jul 30 201511:43 AM EDTUpdated Thu, Jul 30 20151:25 PM EDT

The S & P 500 came within a whisker of a record high only 10 days ago. It remains within 2 percent of the all-time high reached in the middle of May. But the index is not telling the whole story. Underneath the surface some serious problems are lurking. "The S & P is disguising the bloodbath going on within," wrote Roberto Friedlander of Brean Capital in a note Thursday morning. "So while the S & P is within a few percent of its 52-week high most of its members have already corrected i.e., dropped by more than 10 percent from their highs. ... This divergence screams of a short-term peak." More than half of the companies in the S & P 500 are off 10 percent from their respective 52-week highs, according to the Brean chart below. Source: Brean Capital By comparing the lower panel to the S & P 500 price chart in the first panel, one can see that when more and more stocks began to correct—as is happening now, the whole market eventually follows. With 252 members in correction territory, it's the most since July 2000, just after the top in the tech bubble. Read More Street: Buy steady stocks for a skittish market This deteriorating internal condition of the market is getting a lot of chatter on trading floors these days. Jack Ablin, chief investment officer at BMO Private Bank, wrote this to clients Thursday morning: "The truth is that the stock market is trading just below all-time highs because a few companies like Amazon and Google are racing higher. They are more the exception than the rule. To wit, only 35 percent of NYSE-listed stocks are trading above their respective 200-day moving average. The NYSE advance-decline line, representing the difference between those stocks moving higher versus those losing ground, is at its lowest level since 2010, reiterating narrowing 'breadth,' a bearish portent." Ablin is looking at a chart of the S & P 500 versus the S & P 500 Equal Weight Index. The latter values every company the same and not by market value. "This suggests that although the stock market looks like it is chopping sideways, many stocks that are not household names have been rolling over," wrote Ablin. "If we reduce our stock holdings this year, it will likely be because these weak 'internals' finally show up and nip the few remaining leaders, busting the momentum story." To be sure, some traders and analysts are blaming this bifurcation on the crush in commodities and its effect on energy and materials stocks in the S & P 500. Health-care, banking and consumer stocks "are all holding up relatively well," wrote technical analyst Ryan Detrick . "Energy and materials are just about 10 percent of the S & P 500. These two have the majority of the weakness we keep hearing about. They could be skewing things." Still, when energy stocks were helping boost the whole market in the middle of the last decade as oil surged above $100 a barrel, we didn't say those highs didn't count. Plus, the charts above do seem to have a good track record of calling market tops. Said Brean's Friedlander, the market right now "is like the red Ferrari that is hiding a Pinto engine under the hood." Read More July slaughter sends commodities to 13-year low

Traders work on the floor of the New York Stock Exchange.

Lucas Jackson | Reuters

The S&P 500 came within a whisker of a record high only 10 days ago.

It remains within 2 percent of the all-time high reached in the middle of May.

But the index is not telling the whole story. Underneath the surface some serious problems are lurking.

"The S&P is disguising the bloodbath going on within," wrote Roberto Friedlander of Brean Capital in a note Thursday morning. "So while the S&P is within a few percent of its 52-week high most of its members have already corrected i.e., dropped by more than 10 percent from their highs. ... This divergence screams of a short-term peak."

More than half of the companies in the S&P 500 are off 10 percent from their respective 52-week highs, according to the Brean chart below.