Magnificent Seven Hits All-Time High but it’s Not What it Seems
It was an upbeat day driven by poor positioning and too much negativity.
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Investors had good reasons to worry about the market on Monday, which is probably why we saw such positive action. Investors were braced for the fallout from a hawkish Fed and negative seasonality, but weaker oil and better bond action triggered a positive open, and they spent the rest of the day trying to reposition. It also helped that some of the doom and gloom about AI lifted, which pushed the chips and the Magnificent Seven into the lead.
At the closing bell the Nasdaq 100 (QQQ) jumped 2.8% and the Magnificent Seven (MAGS) was up 3.5% but the Russell 2000 (IWM) lagged at 0.6%, which was reflected in breadth of just 54% positive.
This sort of action is what happens when everyone is leaning the wrong way. When a market is full of people positioned for bad news, the absence of bad news forces buying, because the folks who braced for the worst are suddenly worried about missing out. A positive surprise does the most damage to the bears when the bears are dominating the market.
New High Is Not What It Looks Like
An interesting example of how strength in an index or a sector can be deceptive is the Magnificent Seven ETF (MAGS). It closed at a new all-time high, but not one of its seven components did.
That is a blend effect, not broad leadership. Different names carried different pieces of the load, and the basket added up to a new high even though no single stock made one. Meta Platforms (META) is still shy of its August high even after an 11% move. Apple (AAPL) and Nvidia (NVDA) are fairly close to their all-time highs but the rest have more work to do. A healthy advance has the leaders making new highs together. This one has an ETF making a new high while its parts lag behind it.
That is the same disconnect between the index and many individual stocks I feel like I have been writing about forever. It is now showing up inside the Magnificent Seven itself. The headline says new high. The components say the leadership is thinner than the headline suggests.
Broad Market Confirms it
Underneath the strength, the numbers were not those of a bull market. There were 83 new highs against 210 new lows, and 55% of all stocks are below their 200-day moving average. On a day the indices rallied and a marquee ETF made a new high, more than half the market is in a long-term downtrend and the new lows outnumbered the new highs better than two to one.
That is not a typical bull market, and it is why I am reading Monday as emotionally driven repositioning rather than a shift in trend. A day driven by cooperative oil and bonds and a lift in AI sentiment is a positioning event. It can run further than it seems like it should, because being wrong-footed forces buying, but it does not change the fact that the majority of stocks are still in downtrends.
Game Plan
It was an encouraging day and I am not going to dismiss it, but a rally led by a handful of big caps while the broad market sits below its 200-day is not the all clear.
What I want to see is what was missing on Monday: better relative strength in more stocks, with more than a few names making new highs and holding them. Breadth improving, the new-high list expanding, the average stock climbing back above its long-term trend. Until that happens, this is a repositioning bounce off an oversold, hawkish Fed setup, and I will treat it that way.
It will be interesting to see if this poor positioning leads to more upside or if the power of negative seasonality takes hold.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
