Can Rotational Action Carry the Market Higher for the Rest of the Year?
There are signs of speculation excess in Bitcoin-related names, the Magnificent Seven is struggling, and money is flowing into smaller stocks.
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After digesting the Nvidia NVDA earnings report, the market performed very strongly on Thursday. However, the most notable aspect of the action was the rotational action out of big-cap technology and into the rest of the market.
Nvidia was able to withstand a "sell the news" reaction on a very good report, but Google’s GOOGL antitrust issues more than offset NVDA’s small gains, and the Magnificent Seven MAGS lost 1.1% while the S&P 500 moved up 0.5% and small-caps IWM jumped 1.5%.
The primary market question now is whether this rotational action will continue or whether investors will come back to the Mag 7 like they have done so many times in the last couple of years. These big-cap names may be expensive and are struggling to make their huge AI investments profitable, but they have consistently been viewed as safe havens and places to park money when other areas of the market struggle. Nvidia has replaced Apple AAPL as the safest place to put cash and will likely have very strong support in the months ahead.
The biggest shift in the market since the election is an increase in speculative action. This has been led by Bitcoin, but Bitcoin-related plays such as MicroStrategy MSTR and Coinbase COIN have become extremely frothy and have valuations that have become disconnected from Bitcoin.
There was some corrective action in this group Thursday, but Bitcoin continues to trend steadily higher and is on the verge of breaching the psychologically important level of $100,000. There has hardly been a dip in Bitcoin since the election, and I would not underestimate the potential for this trend to continue.
Many smaller stocks have also had a good run, but the charts are messy, and entry points are increasingly difficult. While the big unfilled post-election gap on many charts is a problem, it appears that positive seasonality may render it unimportant at this point.
For now, economic optimism is causing a strong headwind. Concerns about an uptick in inflation and slowing growth in Europe and China are having little impact on the U.S. The strong dollar and weak bonds have not been a significant problem, but the potential for the Fed to forego a rate cut at its meeting in December could derail the enthusiasm of market players.
For now, the price action and speculative fervor favor aggressive traders. However, there are signs of excess, and volatility is rising.
We have weaker action early Friday morning, with the Mag 7 leading to the downside.
At the time of publication, Rev Shark was long NVDA.
