The Apple Dilemma Can Help Explain the Market's Bullishness
The lopsidedness of stocks is obvious, but many investors don’t care, so let's see what to watch now.
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Many investors are focused on the record-level of market narrowness, but there is still a significant amount of market bullishness. The S&P 500 and Nasdaq 100 stocks QQQ are hitting record highs on an almost daily basis and are showing few signs of slowing. There is talk that artificial intelligence is still in the very early stages of development, as illustrated by Apple AAPL, and the best advice of many advisers is to stick with ‘"quality" big-cap names.
In the short term, there is no reason that a lopsided market can’t become even more lopsided. In fact, the more that a small group of big-cap names outperform, the greater the likelihood they will attract more buyers and continue to outperform. That is how momentum works.
What helps to make this dynamic work is that there is no real concern about valuation. Apple has made substantial moves in the past week, but near-term earnings estimates have actually decreased, according to data from Yahoo Finance. Investors are eyeing the longer-term payoff of AI and appear to fear that they will be left out if they don’t buy now.
Ironically, the better the relative performance in the expensive large-cap stocks is, the more the investments are viewed as safe havens. Why worry about valuation when no one else does? There is safety when you stick with the crowd, even if the crowd may not be that rational.
In some ways, this is similar to the internet bubble in 1999-2000, when there was a similar level of lopsided market action. A small group of internet stocks were valued based on crazy metrics like page views and things that were viewed as indications of future profitability. It never happened, and the market eventually recognized the folly of valuing stocks on the basis of things other than real earnings and cash flow.
The problem for investors now is that they have no way to determine how much longer these market conditions will continue. There is growing awareness of how lopsided the action is, but the business media and many market strategists don’t acknowledge it and only look at the senior indexes.
My approach here is to closely watch the price action and look for a shift in the pattern of late-day rallies. The S&P 500 has closed near the highs of the day on nine of the 11 sessions. When that pattern and breadth start to shift, it should start to gain some traction.
At the time of publication, Rev Shark had no positions in any securities mentioned.
