Hello friends,
The popular indices (SP500, NASDAQ) have kept rallying into new price Highs, though almost exlusively owing to NVDA’s blowout earnings report Wednesday (amc). The AI mania keeps rolling happily on (3.54x as many bullish advisors as bearish ones) though also bleeding stock participation consistently, with many leaders showing signs of reluctance, stalling or even selling on balance.
Last week I indicated that we might be due for a rally confirmation of the popular index rallies that have kept the market on its toes throughout 2023 by the mid- & small-cap segments, which would be a big plus for its health. Still, neither of those areas has made higher Highs above their 2023 Highs, leaving most broad market averages stuck in a long & choppy sideways trading range far below their 2021 Highs (e.g. the Russell 2000 mid- & small-caps below). Higher Highs above the December peg are within earshopt, however strong volatility has manifested of late, and so far the rally remains stuck.
Mega-caps become crowded and extended, air pockets appear
NVDA has been singled out as the main driver of the index rallies for now, and rallies predicated almost exclusively on a narrow set of blue-chips make for precarious rallies. This high selectivity of this market advance is appreciable in other places as well – money is and has been rotating into a thinner and thinner set of AI plays and industrials (e.g. construction stocks such as reflected by a choppy rally on the NYSE Composite), while buying power is startign to dwindle from many leading stocks, leading to an array of air pockets.
In parallel with DUOL’s pullback and SMCI’s climax top, a lot of better (not necessarily greath though) leaders have started whipsawing … some less, some more so. Take a look at FN, PANW (imploded -30%), CRWD, PSTG.
Bottom line
Note that overall, trading character of leading stocks in this market environment has been erratic throughout. It most certainly has not improved, and risk of buying/holding leading stocks and ending up in one or other of such air pockets is high. Low-risk entry points are scarce to absent, volatility is growing.
Though tradeable to some degree if low-risk entry points can be spotted, this market is not what can be referred to as an easy-profit environment, and speculating in the strongest leading stocks of the market is mostly not worth the risk. I will keep monitoring for great opportunities, but for the moment I will get my money from other assets and corners of the financial universe.
So long,
TGS