Risk of a Reversal in This Lopsided Market Is the Highest It's Been All Year
What will be the trigger a long-awaited rotation? Here's what the market faces right now.
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It was more of the same during the light-volume post-Independence Day trading session on Friday. Big-cap technology stocks outperformed, with the Nasdaq 100 QQQ moving up more than 1% and closing at a new all-time high. Meanwhile, overall breadth was close to even, and the Russell 2000 lagged with a decline of 0.4%
The disparity between the performance of the 10 largest stocks in the market and everything else is hitting record levels. In the second quarter of 2024, the S&P 500 was up 4.28%, with just five stocks responsible for more than half of the gain. During the same period, the Russell 2000 was down 4.27%.
It feels like I’ve been discussing this lopsided action forever, but it is now becoming so stretched that the likelihood of a sharp reversal is increasing. The question is, what will be the trigger for rotational action that results in a healthier market?
On Friday morning, the June payroll numbers were higher than expected, but downward revisions over the last two months more than offset that gain. In addition, the unemployment rate ticked up to 4.1% from 4%. There is a clear slowing in the jobs market, but so far, the market still views that as positive because it is hoping for the Fed to cut rates as quickly as possible. If the economy keeps slowing, the Fed will cut rates, but will that be the tipping point for this lopsided action?
Second-quarter earnings will be hitting in the next few weeks. Given the huge run in the big-cap technology names, expectations are extremely high, and conditions for some sell-the-news action are very good. Currently, there is no fear of overvaluation of the mega-caps, but if there aren’t solid beats and substantial estimated increases, it will be hard for these stocks to maintain their current multiples.
When we return to work next week, seasonality will start to cool off as we await earnings. Market conditions have become very extreme this week, and the risk of reversals is the highest it has been all year.
Have a great weekend. I’ll see you on Monday.
At the time fo publication, Rev Shark had no positions in any securities mentioned.
