Investing

Smell-O-Vision: Netflix and the Market’s Bad Breadth

By John Del Vecchio  |  July 18, 2018

Nowadays, when you turn on your TV shows or login to Netflix, you’re greeted with an embarrassment of riches.

There are more TV and movies out there than you can watch in a lifetime — and that’s just the stuff that’s on air right now. I don’t know about you, but when someone asks me to check out a particular show, I think, “I don’t have 100 hours of my life to fork over.”

Choice is good, even if it means temporary paralysis in the face of so much choice.

One thing that isn’t changing is market breadth. I keep returning to this topic because it’s an important gauge for the market’s stability (or lack thereof).

Think of market breadth as the number of individual stocks that advance alongside the S&P 500 and other major indexes.

When the market is at new highs, “good breadth” means lots of individual stocks are hitting new highs at the same time. Thousands of stocks should be hitting new highs on days when the indexes are doing the same. That’s a healthy market.

Bad breadth is the inverse.

Recently, BlackRock CEO Larry Fink said, “If you strip out a handful of outperforming tech stocks, the lack of breadth in the equity markets is troubling.”

To wit: Amazon, Netflix, Microsoft, and Apple are responsible for 83% of the S&P 500’s gain in 2018.

“We are at a pivotal point,” Fink concluded.

Although the list of public companies may stretch as long as your channel guide, only a few are carrying the weight.

That’s not so bad with cable TV. You likely spend most of your screen time on just a few channels. But for markets, it’s bad.

And for Netflix, which headed into earnings season with healthy optimism, it’s really bad.

The streaming giant whiffed on subscriber estimates for the first time in five quarters. Only 5.15 million new subscribers came aboard, almost a million fewer signups than projected.

Fewer users means lower revenue and earnings per share.

The stock dropped more than 14% at one point during Monday’s trading session. The Dow and the S&P opened lower on Tuesday.

Ouch.

Netflix will probably be OK in the long run, but it’s not a good sign that something as simple as a missed subscriber estimate could ripple across the markets.

You can’t change the channel on bad market breadth.

It’s like a layer of static you can’t shake no matter how much you twist the antennae (or bang on the cable box).

John Del Vecchio

Author of Rule of 72: How to Compound Your Money and Uncover Hidden Stock Profits and What’s Behind The Numbers: A Guide To Exposing Financial Chicanery And Avoiding Huge Losses In Your Portfolio, John is a forensic accountant at heart. Standing on the shoulders of the great David Tice, James O’Shaughnessy and Dr.Full Bio