The market works in such a way that it fools most of the people most of the time. So, always take what online articles and opinion pieces (including this one) have to say about the state of affairs in the world of equities with a grain of salt.
Still, I find little reason to get excited about the current ‘RINO‘ rally of the popular indices NASDAQ and S&P500, which are almost exclusively driven by a handful of Big Tech blue-chip stocks (only 5 mega-cap tech companies determine 44% of the movement of the NASDAQ-100, and the top 2% of the S&P500 determine 32% of the index movement). The market is driven up by uninspiring cyclicals, the above-mentioned tech mega-caps, a few illiquid blow-off-type AI hype stocks, and a lot of FOMO in collapsed leaders of the 2020/21 bull market, all while price-volume action in the very few leading stocks that are interesting give me little desire to want to risk money in this environment.
There is some improvement over time of course, as the various Dow indices (industrials, transports) appear to be in the process of confirming the rally. It might be a bit early to draw conclusions from this fledgling development, but still.
Overall though, the negatives outweigh the positives to a large degree.
I find it hard to grasp that a major market top in 2021, after witnessing an extreme of exuberance (meme stocks, anyone?) reminiscent of the 2000 market top, should only be succeeded by a meek 35% pullback on NASDAQ, no panic pukes of any kind, and a Groundhog Day-style revival of all the previous large-cap growth stocks that have been leading this long-term bull market for many years, rallying in tandem while the rest of the market zig-zags and chops. Suffice it to say that there is no precedent in history for a major market top showing such characteristics, although I’m sure the “this time it’s different” crowd is well on their way lecturing people on social media.
Complacency though has not really left the markets to this day since 2021, despite the pullback. The VIX, put/call ratios and other sentiment metrics hover near sometimes multi-year Lows, measures of market concentration are steepening and market leadership is narrowing.
Retailers (the Robinhood-type crowd) have doubled their options activity this quarter, with their call option volumes surpassing that of professionals this month, and AI crap rallies re-igniting iteratively.
All the while, a recent Bloomberg survey showed once again that fund managers are heavily overweight tech stocks, joining each other for the award of the most crowded trade, following down the rabbit hole of the sentiment catalyzer of AI.
AI has become the new buzzword to attract speculative buying of stocks exposed to the in fact not-so-new technology, as companies compete for money to flow into their stocks. Mentions of ‘AI’ have exploded in corporate earnings calls, for example Microsoft has dropped it a whopping 50 times in its April call.
Though of course AI will change the IT industry more and more over the years, the current panic-buying of AI-exposed mega-caps might be ill-timed, as the forward earnings expectations that makes market participants pile into Big Tech at the moment might take much longer to materialize than they’re willing to sit in them … not to say that they might have been discounted a long time ago.
That is if the market is truly responding to fundamental expectations, which is by no means certain.
The question is, could this rally be a case of Emperor’s New Clothes? If we all believe hard enough that it’s justified, can we all make money in this rally, gaslighting each other more and more in the hopes of winning according to the greater fool theory?
Money managers have currently about 93% of their money in the market, and euphoria is high. The problem is that when few money is left to buy, volume is drying up, and the rally might start sputtering. I’m seeing a lot of low-volume moves in stocks where volume should be, reflective of a lot of retailer-driven moves. Liquidity is likely to dry up more with continued central bank QT (US and Europe), the Treasury using new debt to fill their purse, and the dog days of summer coming up, all while we’re entering the height of earnings season and its associated watersheds.
In the end, the top of this rally could still be far off. Though there are some signs that bear covering appears to be nearing its end, the still somewhat prevailing bearishness among many fund managers may yet give more firepower to drive the ultra-concentrated popular index rally higher.
As well, earnings season-related liquidity moments and sentiment boosts gained from exceeding over-cautious corporate guidance from the last 2 quarters can easily catapult the S&P500 into all-time Highs (only about 5% away now). Heck, we could rally another 2 years from here.
But does it really matter? The only relevant question is: “Can your strategy make money in this environment …?”
