After a broad rally last Friday with small-caps leading the way, the bulls hoped better market conditions were developing. Unfortunately, the market quickly reverted to the narrow strength that has been its most notable characteristic for months. The Nasdaq 100 was the market leader once again despite a sharp intraday reversal in Apple AAPL on its Worldwide Developers Conference.
On Tuesday morning, the market is back to where it was last week, with a small group of technology and AI-related names looking extended and toppy while the vast majority of the market still struggles with poor technical conditions.
For a while now, market players have been struggling with the problem of how the gap in performance between big-cap technology and the rest of the market would close. There were a few spikes of outperformance by the Russell 2000 and Dow Jones Industrial Average versus the Nasdaq 100 that hinted the gap might start to close, but it has failed to gain traction. Secondary stocks cannot generate sustained strength, and investors keep putting more money into Alphabet (GOOGL) , Netflix (NFLX) , Amazon (AMZN) and a few other names that are leveraged to artificial intelligence.
The debt ceiling issue helped to keep this lopsided action going, but now that it is resolved some of the liquidity that has helped big-caps is likely to dissipate. Many bears have been anticipating a sell-the-news reaction, but we have not seen that develop yet.
More attention is now shifting to the Fed and the economy. The Fed's interest rate announcement is next week and it is widely expected that there will be a pause in hikes. There also has been increased hope that the economy is not slowing as quickly as feared. The economic bears are still growling about the problems that the market faces, but that argument is not gaining traction and has been overshadowed by the action in AI.
Unfortunately, the market is not offering much opportunity right now. The big-cap tech names are extended and need some consolidation and rest, while the vast majority of stocks are still looking quite poor on a technical basis. While support levels have been building and the number of new lows is declining, there is no sustained momentum outside big-cap tech names. The bulls insist the narrow market is not a big problem, but the leaders are not leading, and that is the thrust of the problem.
There are plenty of investors who would like to put more cash to work, but the only things that are really working now are not offering prudent entry points. There is little choice but to stay patient and watch for market conditions to continue to evolve.
We have a flat start on Tuesday morning as Apple continues to see some selling pressure.
