The Vicious Circle of Nvidia and the Mega-Caps
Here's why the more they rise, the more it favors the bulls.
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Trading slowed in front of the Juneteenth holiday on Wednesday, but the S&P 500 managed its seventh straight day of gains and another new all-time closing high. There wasn’t a big rally in the last hour of trading this time, but breadth improved to around 5,400 gainers to 3,900 decliners, and the Russell 2000 IWM and DJ-30 managed small gains while the Nasdaq 100 QQQ was flat.
Nvidia NVDA hit another new high, but the other Magnificent Seven names took a rest. There is some speculation that because of the big move in Nvidia, it will have an even larger weight in the indexes at the end of the month, which means the index funds will need to buy even more. It is a vicious circle that favors the bulls. The more the mega-caps rise, the more weight they have in the indexes and the more the index funds will have to buy.
Retail sales numbers were weaker than expected, which helped to boost bonds as a safe-haven trade. The weak retail sales also helped equities as it made potential rate cuts more likely, but there is some growing concern that a slow economy may not be a big positive for stocks even if rates do come down.
The battle between lower inflation and economic slowing is very likely to be a key theme as we move into second-quarter earnings in less than a month. Conventional wisdom has been that the economy is strong enough to handle a delay in rate cuts, but there are some warning signs in the jobs market and consumer spending.
Frustration among market participants is extremely high right now due to the narrowness and poor action in the majority of stocks. It would make it easier if the indexes actually reflected more of the weakness instead of hiding it and causing substantial underperformance by most investors.
The market is closed on Wednesday, but we’ll be back on Thursday with some economic data and more speculation about whether a slowing economy is good or bad for equities.
Enjoy the day off. I’ll see you on Thursday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
