6 Steps for Navigating an Extended Market With Major Underlying Weakness
The real issue for investors is the gap between the indexes and the average stock. Here’s how to handle it.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
Stocks pushed to new record highs on Wednesday, with the S&P 500 up 0.58% and the Nasdaq up 1.2%, but, once again, the gains were far less broad than the headline numbers suggest. Before we get to what is happening under the surface, the main event is Trump in China.
Trump and Xi in Beijing
President Trump and President Xi met for more than two hours on Thursday in the first session of their two-day summit, and so far, the meeting has produced some nice optics but little substance. The U.S. is focused on trade and the Iran war, while the Chinese side puts Taiwan at the center, with Xi calling it the most important issue in the relationship and warning that mishandling it could lead to conflict.
The trade talk was vague and agreeable, focusing on balanced, positive outcomes, but offered nothing specific for the market to react to. A state banquet follows tonight, and the two leaders meet again Friday before Trump returns to Washington.
For now, this is a non-event for trading. The market is looking for a catalyst, and there isn’t anything to react to so far. We might see something on trade or rare earths, but the more likely outcome is that this trip ends with platitudes that don’t move prices.
Breadth and Inflation
The real issue for investors to navigate is the gap between the indexes and the average stock. On Wednesday, roughly two-thirds of the S&P 500 finished lower even as the index closed at a record, with technology doing almost all of the lifting.
Nvidia (NVDA) rose more than 2%, Micron Technology (MU) gained more than 4%, and the VanEck Semiconductor ETF (SMH) added 2%, while retail, banking, and other groups sold off. Narrow leadership of this kind can persist far longer than the bears expect, but it leaves the indexes vulnerable, because when the handful of leaders finally rests, there is nothing underneath to hold things up.
Inflation is an additional issue that may trigger a resolution of this tiered action. The data this week ran hot on both ends. April CPI came in at 3.8%, above the 3.7% forecast and the highest reading since May 2023, and the producer side was worse, with monthly PPI up 1.4% against a 0.4% estimate and the core rate up 1% against 0.3%.
The 10-year yield firmed to around 4.46%, close to its highest level since last June, and the market is no longer even considering a rate cut. Futures now put the odds of a quarter-point hike in December above 30%. Rising yields driven by sticky inflation are a stagflation warning, and that is a headwind that will outlast any single catalyst, including whatever comes out of China or Iran.
Cisco Earnings
Cisco Systems (CSCO) is the standout name of the morning, and the story has a poetic quality. Cisco was the emblem of the 1999 to 2000 technology bubble and the poster child for its collapse, and now, a quarter century later, it has reported record quarterly revenue of $15.8 billion, up 12% from a year ago, and non-GAAP earnings of $1.06 a share against expectations near $1.04.
The stock jumped 17% in extended trading. Management stated that demand is broad and at record levels, and it announced that it will cut fewer than 4,000 jobs this quarter, less than 5% of its workforce, to redirect spending toward artificial intelligence.
The move in Cisco is worth watching for more than its own sake. When an old-guard technology name that has been dead money for years suddenly gaps higher on AI demand, it can mark a point of maximum enthusiasm. It would be poetic if a big move in Cisco helped trigger a short-term top, given the role the same stock played the last time the technology group ran this hot. That is not a prediction, but it is the kind of sell-the-news setup that deserves some attention.
The Game Plan
I’m not making any predictions or forecasts. That is the job for entertainers in the business media. All we need to recognize at this point is that the trend is still up, so there is no reason to turn defensive simply because the indexes are stretched.
It is useless to keep harping on how irrational this action might be. The goal is to stay engaged with the flow while managing risk. Here are six steps for navigating this action if you are so inclined.
1. Don’t play the top-calling game. Stay with the momentum, but be prepared to take some partial profits and to reduce position sizes as things become extended. Use some trailing stops or do some selling into big gaps. The goal is to reduce risk as things become extended, but to leave some money in play to see how far things can run.
2. Don’t chase entry points. If you want to jump on a speeding train, make sure you manage the trade carefully and are ready to bail out if momentum turns. Buying super momentum is not necessarily high risk if you manage the trade carefully, but the likelihood of enhanced volatility is much higher.
3. Raise cash to increase flexibility. If there isn’t any correction, then you can wait for consolidation, and if there is a pullback, you can wait for lower prices. Cash is the absolute best hedge you can hold in a market that is this extended.
4. Watch for upcoming catalysts and potential sell-the-news events. The biggest warning sign of a short-term top is an intraday turn and a weak close. A series of weak closes is a sign that a reversal is taking hold and that the character of the market action is shifting. It will take more than one weak day to shift the trend.
5. Prepare a shopping list of names with good values and developing charts. Be ready to put money to work when rotational action or a pullback finally hits. Identify stocks that are likely to show relative strength as market excesses are shaken out.
6. Don’t rush to deploy capital, make partial buys, and wait for favorable chart development. Move incrementally and don’t worry too much about precise timing. You won’t be able to call exact turning points, so don’t bother trying.
Retail sales for April are due this morning, and Applied Materials (AMAT) reports. Watch the price action and focus on reacting rather than anticipating.
At the time of publication, Rev Shark had no positions in any securities mentioned.
