Is the Market Topping or Just Resting?
With many of the best-performing stocks weakened, and speculative action increasingly frothy, is this cause for alarm or just what we need right now?
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For several days now, the stock market action has been deteriorating. The pullback in the major indexes has been mild, and the weakness has been covered up to some degree by a rotation back into the Magnificent Seven MAGS names and out of the Russell 2000 IWM. However, under the surface, many of the best-performing stocks have weakened after a powerful run, and the speculative action in secondary stocks is increasingly frothy and volatile.
Forty-eight of the 50 growth and momentum stocks in the IBD50 were down on Monday, with AppLovin APP leading the charge. Oracle ORCL is down sharply on Tuesday following its earnings report. Bitcoin struggled but is bouncing back.
There is good reason to be increasingly cautious, but the primary issue we need to contemplate is whether this is the start of a major top and a correction or just some healthy profit-taking and resetting before a year-end rally takes hold.
The answer to that question will depend a great deal on the Fed and whether economic optimism holds up as we see more data. On Wednesday, the CPI report will be the last big piece of economic news in front of the Fed's interest rate decision next week. If CPI is hot, then the odds of a quarter-point cut will fall, and there will be increased concern about cuts in 2025.
So far, market players have been very optimistic about both economic growth and cooling inflation, but the Goldilocks' economic narrative won't be easy to maintain. High economic growth carries an increased risk of inflation.
The good news is that corrective action at this point is exactly what the market needs for another leg higher to end the year. The mood has become too exuberant in places and there has been speculative excess in Bitcoin and some individual growth stocks as well.
The bears' best arguments are excessive bullish sentiment and overvaluation in big-cap technology stocks. Both of those issues can be corrected fairly easily and would help create conditions to "climb a wall of worry" to end the year.
While some caution is warranted at this point, it is not time to be overly negative. The market needs to struggle for a bit to set up for better action once the Fed interest rate decision is out of the way.
We have mild action early on Tuesday morning.
At the time of publication, Rev Shark had no positions in any securities mentioned.
