Market Narrowness Signals a Coming Shift
It's widely recognized that the market is unsustainably narrow, but this can continue for much longer than seems reasonable.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
The half-day trading session in front of a holiday often has a positive bias. Market players tend to be in a good mood, and there is more interest in speculative trading. It doesn’t hurt that the S&P500 and Nasdaq (COMPQX) are hitting new all-time highs, and this is the main story in the business media.
Despite the talk about new highs for the indices, the action remains historically narrow. The gulf in performance between a small group of mostly AI-related big caps and the rest of the market is at levels last seen during the internet bubble in 1999 and 2000.
The one huge difference between the internet bubble, which occurred more than 20 years ago, and the current AI frenzy is that participation is much more limited. During the internet bubble, there was huge speculative interest in small-caps, most of which had very poor fundamentals. There has been almost no small-cap AI participation in the current market phase, which is what makes this market unlike anything we have seen previously.
There is widespread recognition of the narrowness of the market action, but the big unknown is how this will eventually resolve itself. It is an unsustainable action, but it can continue for much longer than seems reasonable. There are many pundits who believe that the Magnificent Seven will continue to outperform the rest of the market in the second half of the year.
The primary question I’ve been pondering is whether there will be some rotation into the secondary and smaller stocks that have been lagging for years. Many of them have solid fundamentals and technical support, but there is only limited interest before they start to lag once again. A good illustration of the frustration of these stocks is the S&P Biotech ETF XBI, which dropped 1.8% on Tuesday while the S&P500 hit new all-time highs. The biotech ETF is still more than 40% below its 2021 high.
Second-quarter earnings are coming up quickly, and with the indices at highs, there will be a greater danger of a "sell the news" reaction. No one cares too much about that today, but on Friday, we will have jobs news, and then next week, we will have more normal trading.
My primary game plan is to carefully monitor my favorite names and try to catch some rotational action in the weeks ahead. So far, that has been difficult, but the narrowness of the market suggests that a shift in character cannot be too far in the future.
At the time of publication, DePorre had no positions in any securities mentioned.
