Market's New Highs and Narrow Strength Could Be Sign of Danger

The Iran situation deteriorated during the week and oil jumped sharply, but it was still a solid week for the indexes, with the S&P 500 (SPY) gaining more than 1% and closing at fresh record highs.

Mag 7 Reaction

The most notable action was the response of five of the names in the Magnificent Seven to earnings. Despite the high risk of "sell the news" action, Alphabet Inc. (GOOGL) , Amazon.com Inc. (AMZN) and Apple Inc. (AAPL) saw strong positive reactions, while Meta Platforms Inc. (META) and Microsoft Corporation (MSFT) lagged. Worries about capital spending and return on investment had little impact, and the overall takeaway is that the AI theme has a long way to go.

Breadth Question

Earnings sparked some frothy action in a number of technology names, but the bears were grumbling about poor market breadth. There were some surprising divergences during the week, with stocks hitting new lows while the indexes gained. It wasn't as bad on Friday. Around 270 stocks hit new 12-month highs while 71 hit new lows. That is still very light for a market with indices at highs.

Overall market breadth turned positive on Friday afternoon, but within the S&P 500 only about 188 of 502 names were positive. On the other hand, in the Nasdaq 100 (QQQ) , 63 of 102 names were in the green.

Is poor breadth with the indexes at new highs a warning? It depends on what you are looking at. It suggests that the indexes are extended on narrow strength in some mega-cap names, but on the other hand, it also illustrates that there are a lot of stocks that are not technically extended and may still offer good charts.

If your focus is the indexes, then it is pretty easy to see why they would be vulnerable. If your focus is on stock picking, then you have to feel pretty good about all the charts that are not extended and may even have strong downside support.

Small Caps on Deck

Next week we have many more earnings reports, and we will start to see more news from the volatile small caps. Small-cap earnings season always produces some blowups as well as some new leaders, but it can be dangerous to trade. I’ll be looking for a fresh crop of new opportunities.

My Game Plan

My best advice right now is not to focus too much on the indexes. The opportunities in this market are in individual stocks, and the indexes are just hiding what is actually happening.

Have a great weekend. I'll see you on Monday.

At the time of publication, DePorre was long GOOGL.