Conditions Are Building for a Change in Market Character

The market action on Monday was positive, with all the major indexes except the DJIA gaining ground. Breadth was only about 5,150 gainers to 4,050 decliners, but over 800 names hit new 12-month highs. Small-cap action was better, and there was some rotation out of Microsoft MSFT, Amazon AMZN, and Meta META and into secondary names.

It was mildly positive but uncertain action as market players start looking ahead to  inflation news on Thursday and the start of earnings season on Friday.

While bulls remain optimistic about the strength of the Magnificent Seven names, many market strategists don’t believe that the disparity in performance can continue for much longer. There has never been more market concentration in the top few names than there is now. The key question is, what is going to trigger a correction in these mega-caps?

There is likely to be a major change in market character if economic worries start to shift away from inflation and concerns about a slowing economy start to build. It is widely believed that a rate cut will take place in September, but that is due in part to the fact that there is now a clear slowing in the labor market.

We’ll see how the market reacts to CPI on Thursday and PPI on Friday. Soft readings will not necessarily be positive if they are viewed as a symptom of economic slowing.

The macroeconomic picture is a bit murky, but the main market dynamic that I’m focused on is rotation into small stocks. The Russell 2000 IWM performed well, and the biotechnology index rose by more than 1%. That illustrates that there is some speculative trading, which occurred on a day when the Magnificent Seven stocks had a relatively smaller gain.

Strong markets stay sticky to the upside, and we are seeing that now. However, conditions for a shift in character continue to build.

Have a good evening. I’ll see you Tuesday.

At the time of publication, Rev Shark had no positions in any securities mentioned.