Is It Time for a Significant Shift in Market Action?
A number of little things are starting to add up for a potential change. Be ready to trade it.
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The one great certainty of the market is cycles. Nothing lasts forever. Every cycle eventually comes to an end, and a new one starts. If we can identify these cycles at an early point, then we can profit nicely by following whatever new trend emerges.
Identifying a significant shift in market character is very difficult, however. There is an inclination to believe that the themes that have worked best will continue to work, and most of the time, they persist much longer than seems reasonable. Momentum almost always goes higher or lower than we think it will, and attempts to call turns just turn into fuel for a short squeeze.
The market currently has several themes that have lasted for quite a while. The most important ones are the Magnificent Seven and the semiconductor theme, which is driven by AI. Apple AAPL has been a latecomer to this theme, but it blasted higher on the news that it has been driving many stocks for over a year now.
A related theme has been the narrowness of the market and underperformance of the vast majority of stocks. The disparity in performance between a small group of large-cap technology names and everything else has grown even more extremely recently. The last time it was even close to these levels was during the internet bubble in 1999-2000.
As I discussed here on Thursday morning, what has been the most notable about the market action is that the delay in Fed rate cuts has not had a negative impact on the market. Hawkishness hasn’t mattered because market participants have been confident that the economy would not see any significant slowing.
There are some growing signs of economic slowing now, especially in jobs, and the Fed has pretty much penciled in one certain rate cut this year. Still, with the disparity in performance between classes of stock, the risk of a major shift in market conditions is also at an extreme.
I don’t try to make grand predictions about the market or the economy, but I do try to react very quickly when conditions shift and I see more signs that a shift is developing. We still need more evidence of a change in market character, but there are a number of little things that are starting to add up.
If a shift in the market does occur, the big issue will be how does it manifest itself. It is unlikely that everything just suddenly collapses together. There is likely to be rotational action, and there will be reversion to the mean. We will have to see if money starts to flow into lagging sectors or just stays on the sidelines while waiting for better opportunities.
I’m not bearish or negative about the market. I am just preparing mentally for a new cycle to start to develop. Conditions are good for a shift, and we need to be ready to trade it.
At the time of publication, Rev Shark had no positions in any securities mentioned.
