Preparing for Opportunities in a Shifting Market
Regardless of whether this was just a one-day aberration or the start of something significant, here's what investors need to keep an eye on.
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For a while now, the market has had a consistent pattern: big-cap technology leadership, narrow breadth, and late-day rallies that take the Nasdaq 100 QQQ and S&P 500 SPY to new all-time highs.
That pattern finally shifted on Thursday as leading names such as Nvidia NVDA and the semiconductor sector SMH hit new highs intraday and then reversed and closed at the lows. The DJIA finally outperformed, with Walmart WMT hitting a new high. However, the Russell 2000 IWM continued its struggles and remained under its 50-day simple moving average.
The issue now is whether this was just a one-day aberration or the start of a significant shift in the market action.
It is too early to jump to any conclusion, but the bearish view is that market tops tend to occur when the biggest growth stocks, such as Broadcom AVGO, Microsoft MSFT, and Nvidia are the primary leaders, and breadth is poor. The top-five stocks in the S&P 500 have an average return of more than 40% this year, while the average return for the other 495 is 5%.
The narrowness of the market doesn’t receive much media coverage, but it is not a big secret how poorly small-caps and other sectors have been doing for a while. The challenge for traders is figuring out how a shift in the market occurs. Do the big-cap technology leaders start to struggle and drag down the entire market? Is this a major rotation into the Russell and the DJIA, or is there some combination of rotation and correction that will drive the action?
As a trader, I would love to see rotational action into secondary stocks with solid fundamentals and good growth. It would be very refreshing to see a greater focus on individual stock picking rather than piling into the same old AI favorites. While the AI theme is still being promoted very heavily, there are growing concerns about valuation.
One of the things I have seen little mention of is that Apple AAPL has made a huge move off its April lows, but according to Yahoo Finance, its EPS estimate for the fiscal ending September 2024 has fallen to $6.14 from $6.56 ninety days ago, and for FYE September 2025 it has fallen to $6.77 from $7.16. The argument is that AI will pay longer, but the valuation metrics are very problematic in the shorter term.
There are still a few weeks before second-quarter earnings start to hit, which may hasten rotational action, but we are faced with a very difficult market environment right now as the very narrow strength is now coming under pressure.
My main focus is to look for quality names with good valuations that are dropping to support in front of what should be good earnings. There is a lot of poor action right now, so it is important to make sure you keep some dry powder if corrective action goes deeper.
At the time of publictaion, Rev Shark had no positions in any securities mentioned.
