As the Market Grows Dangerously Lopsided, What Will Tip It?
Even the bulls know this can't last forever, but the bears don't want to get burned again. Let's see what could play out in the short term.
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The S&P 500 and Nasdaq 100 QQQ were higher on Tuesday for the sixth-straight day and hit new all-time highs once again. The action continues to be extremely lopsided, with big-cap technology names leverage to artificial intelligence and semiconductors outperforming everything else.
The disparity in performance is at historic levels, and most investors are aware of it, but it doesn’t matter. In fact, the relative strength of the big-cap names has attracted more buyers as they appear to be a safe haven while the majority of other stocks struggle.
Even the bulls understand that this action can’t be sustained forever, especially with technical conditions so extended. There is a pack of bears that are waiting to pounce on a market turn, but they have been burned so many times trying to time a top that they are now waiting for some clear weakness before they make their move.
The primary question right now is, what will be the catalyst for a market turn?
Fed Chair Jerome Powell spoke before Congress on Tuesday and will speak again on Wednesday. He didn’t say anything new or surprising, but he did acknowledge that the labor market is exhibiting some weakness, and that has increased the odds of a rate cut in September.
The market has been anticipating rate cuts for well over a year now, and that has helped to drive a steady uptrend, but will the actual cut be a "sell the news" event? The market wants a dovish Fed, but a dovish Fed will mostly be the product of a weaker economy, and that carries a number of market negatives.
There is the consumer price index and consumer sentiment news coming up this week that will influence the likelihood of a Fed cut, but weaker inflation may not be a big market positive at this point if there are concerns about the economy building.
The other big event that could shape the market is the start of earnings season. Expectations are extremely high as the indexes hit new highs on an almost daily basis. Hopes for AI have been the primary driver for the big-cap names, but AI is still not producing any real earnings for companies outside the semiconductor industry. If names like Microsoft MSFT and Meta META do not have substantial beats and raised guidance, their momentum will fizzle fast.
I’m watching for intraday reversals and weak closes to signal that the technical action is shifting. Until that happens, I’m not going to fight the index momentum.
At the time of publication, DePorre had no position in any security mentioned.
