S&P 500 Raises Concern After Breaking 100-Year Streak

It was another solid day of gains for the market, with breadth running about 60% positive. New 12-month highs were over 360 names, and the word "overbought" is also trending near a new high. The technology sector continues to lead, with both the Magnificent Seven and the Nasdaq 100 (QQQ) gaining more than 2%. To make an even more emphatic point, the close is at the highs of the day.

What Is Driving the Move

The primary driving force for this action is a combination of optimism that the Iran situation may be resolved soon; rapid growth in the AI sector, particularly in semiconductors; and poor positioning. This is largely retail-driven strength, as the "smart money" institutional investors have convinced themselves that this action is unjustified and unsustainable.

This is exactly the type of situation that produces sticky upside. Underinvested institutions eventually have to chase performance, and every dip becomes a buying opportunity rather than a chance to reduce. The bears keep waiting for the action to confirm their thesis, and instead they get more strength that they cannot explain.

The macro side cooperated on Wednesday as well. Bonds (TLT) held their early gains as interest rates eased on the Iran progress. Oil stayed soft, with (WTI) near $104. The combination of falling oil and falling rates is the best setup for multiple expansion you can ask for, and it removes the stagflation worry that has been weighing on sentiment for a month.

The Equal Weight Story

One of the most interesting observations about this market that I am not seeing discussed much is that, while the S&P 500 and other key indexes are deep into new highs, the equal-weight S&P 500 (RSP) is just now testing the highs it hit back in February.

Jason Goepfert flagged a related data point on Wednesday afternoon. Wednesday was the second consecutive day the S&P 500 closes at a record high with more than 4% of its stocks hitting 52-week lows. According to his data, that combination has only happened once before in 100 years, and that was in 1929. Goepfert tends to flag these observations as cautionary signals, and the historical comparison points are usually setups that preceded trouble. That is certainly worth noting.

However, the same data point supports the other side of the argument. If the headline indexes are at all-time highs while a meaningful number of the S&P 500 components are at 52-week lows, then there are still stocks that have not participated and still have attractive valuations relative to where they have traded. The equal-weight S&P 500 testing February highs while the cap-weighted version is in fresh record territory tells the same story. The average stock has not even broken out yet while some of the bigger-cap names are quite extended.

The media and many pundits are breathless with outrage over the parabolic action in some areas of the market, while the average stock has barely moved. That is the opposite of what the narrow-leadership bears are claiming. If RSP follows through above its February high and the names at 52-week lows start to base, the leadership broadens, and it doesn't narrow. That would be a healthy progression, not a top. The risk Goepfert is pointing out is real and worth respecting, but the opportunity created by the same setup is compelling and worth noting.

Palantir Technologies Inc. (PLTR) is a useful example. Once one of the key leaders of the AI sector, the stock has been correcting since February and gave back another 6% on Tuesday after a clean beat and raise. It is sitting near the lows of its recent range while the rest of the AI complex hits new highs. While it is not at a new 52-week low, there are many other names with similar poor performance.

Not all of those names are broken. There are questions about valuation and some are simply working off excess after running too far too fast, but it will be interesting to see if we get some rotation out of the recent leaders and into laggards like Palantir.

Where the Opportunities Are

This confirms what I have been saying about how the best opportunities in this market are in smaller stocks. Many of these names are not extended and still have attractive valuations.

Investors are becoming more aggressive in finding these small stocks. The list of names that were up more than 10% is too long to count, and there were about 15 or so names with jumps of 30% or more. The momentum in the small-cap earnings reports has been the standout action of the past few sessions, and the calendar tonight is heavy with names that can move 20% in either direction on the print.

When the action is this hot, the danger of big volatility swings is high. If you are being aggressive, you have to be cognizant of risk and make sure you keep position sizes a little smaller than you might if we were at an earlier stage. Earnings reports magnify that risk. Holding full positions into a print right now is asking for trouble even when the numbers come in clean, because the bar for what gets rewarded keeps moving higher.

My Game Plan

My best advice is to focus on managing your individual stock picks and to be careful about holding into earnings reports. I have had some good luck with my small caps on earnings and have a dozen or so coming up. I am rooting for some sell-the-news action in some cases so that I can buy the dips.

Have a good evening. I'll see you tomorrow.

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