Bessent Bump Ignites Another Rally But Is the Market Now Too Hot to Handle?
With the trading action becoming very overbought and frothy, here's how to handle it.
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The market continued to run higher Monday following news that Trump is nominating Scott Bessent as Treasury Secretary. Bessent proposes a 3-3-3 plan that involves cutting the budget deficit to 3% of gross domestic product (GDP) by 2028, boosting GDP growth by 3% through deregulation and pro-growth policies, and increasing U.S. energy production by 3 million barrels of oil per day. This is widely viewed as a good approach to controlling inflation and growing the economy.
Bonds jumped on the Bessent news, and interest rates dropped sharply. This provided additional fuel for the already hot stock market, but the action is becoming very overbought and frothy. Some of the more speculative sectors, such as Bitcoin, are seeing increased volatility and profit-taking, while the small-cap sector continues to outperform, with the Russell 2000 gaining another 1.5% on Monday with breadth running very strong with 7,100 gaines to 2,350 decliners.
The Magnificent Seven struggled again and lost 0.3%, with Nvidia NVDA stumbling over 4%. For a long time, this group was a safe haven, but now there are better returns in the more speculative names, and traders are chasing that action.
There was a long list of smaller-cap stocks moving up more than 10%, but can they keep this going as we enter peak speculative trading around the Thanksgiving holiday? So many stocks are already extended. There are more than 1,800 stocks sitting at 12-month highs, and many of them do not offer very attractive entry points. Typically, markets like this attract very aggressive dip buyers, but there haven’t been many dips so far.
The bears are yammering about contrary indicators since the action is so good, but trying to time a market top in that way is a very difficult task.
Respect the strong uptrend and don’t try to fight it, but make sure you are zealous about protecting gains.
Have a good evening. I’ll see you Tuesday.
At the time of publication, Rev Shark was long NVDA.
