Stock Strength Becomes Historically Narrow Amid AI Rampage

Wednesday was another day of narrow strength, with the S&P 500 and the Invesco QQQ Trust (QQQ) hitting new all-time highs while market breadth was negative. Only about 180 of the 501 stocks in the S&P 500 were positive while the index gained 0.7%. New 12-month lows easily surpassed new highs by a score of around 300 to 200.

This phenomenon has been going on for a while. The Invesco S&P 500 Equal Weight ETF (RSP) is flat since April 20, the S&P 500 is up about 5%, the Magnificent 7 is up about 7%, and the VanEck Semiconductor ETF (SMH) is up about 23%.

Most Extreme Narrow Market on Record

Narrow markets are nothing new. We experienced it for a long time as the mega-cap technology names lifted the indices while everything else lagged, but what is different this time is the number of stocks that are declining while a small group is hitting new highs. The divergence is so extreme that there is no clear historical precedent.

Hot PPI Could Not Slow the Chip Rampage

Another interesting factor on Wednesday was that the hot PPI number did not slow the AI rampage. There was a minor response at the open, and then it was off to the races.

The irony of this market is that while there is talk about bubbles and euphoric chasing, the reality is that the vast majority of market participants are struggling to keep up and are frustrated because the stocks that they hold that are good values aren't participating. The only way to make money in this market is to be in the most extended and expensive AI-related stocks. Even in AI, there is a feast-and-famine theme, as names like Microsoft Corp. (MSFT) and Meta Platforms Inc. (META) struggle.

How Do You Trade This Market?

So, what do you do? How do you approach this market? Do you give in to FOMO and chase names like Micron Technology Inc. (MU) and Akamai Technologies Inc. (AKAM) , or maybe Ford Motor Co. (F) , which is now a data center play?

That is a high-risk approach, but it is what is working. The alternative is to do what I am doing, which is raising cash into strength and then patiently awaiting some rotational action. The chips may not collapse, but at some point, they will consolidate, and that money will rotate into something else that is less extended. That is what I am preparing for, since I have no interest in chasing extended names at this point.

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

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