Poor Breadth Combined With Pockets of Froth Makes for a Dangerous Market

There was a very unusual mix of market action this past week. We had some very frothy strength in individual stocks and Bitcoin, but the Russell 2000 lost ground and the S&P 500 suffered negative breadth each day. This was likely the first time ever that the S&P 500 has ever experienced such poor breadth while hovering so close to all-time highs.

The Magnificent Seven MAGS names charged ahead as money rotated out of smaller stocks, but there were also significant pockets of strength in individual stocks despite the mediocre breadth. The movement was so strong in many places that there was growing concern that a blowoff top was forming. Even the bulls are aware of the extreme valuations in many places, but the primary view is that overbought and extended stocks can become even more overbought and extended.

Economic and election optimism continue to be the primary driving forces. Fed Chair Jerome Powell was interviewed this past week and expressed very positive views about the economy and the downward path of inflation. After solid jobs news on Friday, the likelihood of a quarter-point rate cut increased even further.

Bitcoin benefited from several positive catalysts, such as a friendly SEC nominee and several other crypto-friendly appointees. It blew through the psychologically important $100,000 level and quickly found support when the breakout failed.

This isn’t much news flow expected until the FOMC meeting on December 18, but there will continue to be much speculation and debate about what the new Trump Administration will do when it takes office on January 20.

The poor market breadth combined with pockets of very frothy action is a dangerous development, but late-stage markets like this can deliver some big gains before they turn down.

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

At the time of publication, Rev Shark had no positions in any securities mentioned.