Though we’ve seen a certain degree of broadening out in the market rally since the US elections, lately I can’t help but spot some growing signs of exuberance appearing.
For one, the bull/bear ratio of advisors (the most important B/B ratio) is hovering near 4 again – much more extreme than in 2021’s meme stock craze.
Next, short-term or long-term market tops typically come hand in hand with money being pressure-pumped into microcap stocks with limited or unproven business models – think of the notorious Pets.com during the late 90’s tech top. Numerous high turnover-of-float stocks (some as high as 60%!), some of them recently penny stocks with often minimal market capitalization are making staggering advances over the last few weeks – for example SOUN, QUBT, ACHR, RGTI, ASTS, QBTS, AAOI, KC, or ARQQ. I can find quite a bunch of such racers at the moment.
Additionally, speculation in IPOs is strong again – RBRK, RDDT, AS, CAVA, just to name a few.
Pair the above with a general choppiness in higher-quality leaders, and a growing divergence of equal- vs cap-weighted indices (e.g. SP500, Nasdaq-100, NYSE vs Nasdaq Composites) and we see a thinning market where money concentrates more and more in obvious and crowded Big Tech blue-chips or low-quality microcaps staging parabolic moves.
Risk of at least a short- to medium-term top forming are growing – this is however not a reason to stop trading right now. These environments can carry on for months, so listen to your stocks and your stops.
