Market's Recent Behavior Is Warning That a Top Is Near
Here's what's happening now with 'junk,' Tesla and Palantir and why it's meaningful. Plus, the best indication to look for that we may be at a turning point.
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The S&P 500 SPY, Nasdaq 100 QQQ, and DJIA DIA are all trading close to flat on Monday morning. The Magnificent Seven MAGS has a small decline, and Bitcoin IBIT is down around 3%. However, what is most notable about the trading action is that breadth is running from about 5,800 gainers to 3,350 decliners, and the Russell 2000 IWM is up about 0.5%
If we dig a bit deeper, there is a surprisingly large number of small stocks trading up more than 10% when the indexes are moribund, and the QQQ is rapidly losing momentum.
This surge in small-cap and "junk" stock speculation is typical late-stage action. Aggressive traders that have very high-risk tolerance are chasing small stocks with the best relative strength. It has been working well recently, and when something works well, then you can bet on traders to continue to do the same things until it stops working.
I see more than 15 stocks trading up more than 20%, and there are too many to count, which are up more than 10%. There are over 500 stocks at new 12-month highs, which isn’t a big number, but most of them are not what you would call "quality names."
The problem for market players is that this sort of speculative excess can continue for a while and is very hard to time. The best indication that we may be at a turning point is when there is an intraday surge and then a poor close. This illustrates that traders are taking their profits and that latecomers will be bagholders.
The reversal in Bitcoin adds weight to the argument that we are at a short-term speculative top as well. Many of the biggest winners recently, such as Rocket Lab USA RKLB, Tesla TSLA and Palantir PLTR, are reversing after hitting highs.
We’ll see how we close, but the selling in the Nasdaq 100 is picking up steam, and there are almost no stocks at intraday highs an hour into the trading day. It looks like a small-cap speculative blowoff is forming.
That doesn’t mean that this is a significant market top, but it indicates that some patience is needed for profit-taking and consolidation to take place.
At the time of publication, Rev Shark was long RKLB and IBIT.
