The big story of the market recently is that a small group of big-cap technology stocks, mostly related to artificial intelligence, are driving the indexes higher. The great bulk of the market is languishing and not participating in this euphoric action.
Five large-cap technology stocks make up 60% of the large-cap technology sector. These stocks are up 53% year to date. By comparison, the Russell 2000 Small Cap index is up 1.3% year to date and the Dow Jones Industrial Average is up 1.17%.
Unsurprisingly, this very robust action in a small part of the market is causing great excitement. How could this be a bear market when these critical stocks act so well? The indexes they dominate look technically robust, and that can't be denied.
One of the consequences of this action is that it creates broad underperformance. If someone is not heavily weighted in the small group of technology superstars, then it is likely that they are underperforming. There is no way to keep pace with this action with a diversified portfolio.
The natural inclination of many market participants is to join the party. The narrative is that the development and commercialization of AI is still at a very early stage. This is the biggest development in the computer age since the Internet, so jump in now. Even if the charts are extended and your entry points are poor, you don't want to miss out on this theme.
Perhaps that is good advice. Some exposure to artificial intelligence is sensible, but is it necessary to chase the current frantic action? That depends on your investing style, but it is not prudent to chase charts that are too extended if you are sensitive to technical conditions. Good entry points will develop, but they may be at higher prices.
If you are afraid of being left out, take a small initial position in a favorite name and start watching it more closely. Learn the stock's personality and then start looking for additional entries as market conditions develop.
Another problem this market creates is that few good alternatives exist to these extended stocks. Technical conditions for much of the rest of the market are poor. The indexes hide this fact, but if you look at groups such as oil, banking, retail and biotechnology, the charts are not compelling. However, the strong index action creates the feeling of being left out, and there will be a strong urge to buy less-than-ideal stocks to deal with that feeling.
The view of many bulls is that the market will continue to trend higher right into some Fed rate cuts later this year, which will keep the uptrend running. There is no real fear that economic conditions will deteriorate and drive the market down or that other issues such as the debt ceiling or persistent inflation will cause problems.
That optimistic view is possible, but the greater likelihood is that we will run into increased volatility or technical problems. We will see better entry points and positive chart development when that happens.
The fear of missing out is extreme right now, and chasing strength may even work in the short term, but the great thing about the market is that if you are patient, there will always be another opportunity.
We have modest positive action in the premarket here on Friday. There is no significant economic news, but the debt ceiling issue will continue to drive market sentiment. The market anticipates a favorable resolution, but risks are higher and the news is already well discounted.
