A Feast or Famine Market, Bordering on Gluttony
Pockets of frothy action, covering up broad weakness, leave investors in a ‘tricky spot.’
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Oil is heading back to the $100 level on Wednesday morning after the U.S. and Iran traded heavy fire overnight. The Trump administration insists that the ceasefire is still in place and negotiations are progressing but investors are concerned about how much longer this will drag out and the longer-term ramifications.
The Organization for Economic Co-operation and Development (OECD) is warning that worldwide economic growth is already slowing to 2.8% this year from 3.4% in 2025, and it could drop to 2.1% this year and 1.8% in 2027 if the disruption drags on another six months or so. That sounds dire but it is not being reflected in the indexes.
AI Offsets the Weakness
U.S. markets have done a fantastic job of ignoring this economic headwind for one major reason: Artificial Intelligence. The AI boom has more than offset any and all weakness in the broader market. That has been amply reflected in the internal action of the market where breadth has been lagging and around half of all stocks are below their 200-day simple moving average.
The narrow action is self-fulfilling as more money chases fewer stocks with powerful momentum. Relative strength begets more relative strength and that is why things become overbought and extended to quickly.
Investor’s Business Daily calls it a “tricky spot” Wednesday morning, with the vast majority of top-rated growth stocks out of position and well extended past proper buy points. There are some exceptions but they don’t last long as aggressive traders are quick to jump on board any breakout. Chasing strength has been an effective strategy and traders tend to keep doing what works until it stops working.
Ugliness Beneath the Surface
The mainstream business media is focused on the frothy action in the AI sector, but if we dig a bit deeper, there is some ugliness underneath.
Bitcoin and the broader cryptocurrency sector, tracked by the iShares Bitcoin Trust (IBIT), have broken down and are struggling to hold technical support.
On Tuesday, the biotechnology sector, measured by the iShares Biotechnology ETF (IBB), suffered a 3% loss as investors dumped the group amid several blowups.
Play It Tight
Aggressive traders continue to chase the semiconductor sector, as the VanEck Semiconductor ETF (SMH) gapped to a new high again on Wednesday morning. If you are a momentum trader that focuses on relative strength, there is little choice but to stick with this group, but if you are looking for some good technical setups that aren’t extended, you won’t find them here.
It is a tough market to navigate, either feast or famine, and if you are feasting, it is bordering on gluttony. My best advice is to play it tight and don’t be afraid to take some profits as continued strength develops. The goal is to make sure you keep accounts as close to highs as possible.
There are several major catalysts out there that can trigger an aggressive pullback but traders who keep anticipating a turn are helping to keep the momentum going. Protect those gains if you have them.
At the time of publication, Rev Shark had no positions in any securities mentioned.
