The big market question recently has been how the extremely narrow market would eventually resolve itself. This sort of lopsided action can not continue forever. Big-cap technology names that are mostly leveraged to artificial intelligence have been running away to the upside while much of the rest of the market has struggled. Will the market broaden out? Will big caps collapse, or will there be a combination of things to close the gap?
The answer today was that the market would broaden, and the big-cap technology names would underperform. The Nasdaq 100 (QQQ) , which is home to the big-cap technology names, managed to gain 0.8%, but it was soundly trounced by the Dow Jones, which gained 2.1%, and the Russell 2000, which jumped an impressive 3.6%. Even the stodgy S&P 500 managed to gain 1.4%. Breadth was stellar at around 6,350 gainers to 1,700 decliners. We also saw over 335 new 12-month highs, which are still very low but that is a function of how poor the market has been recently.
The question now is whether this reversal and broadening will continue. Real relief appeared to set in as buyers could finally jump on something other than the same small handful of names. It is nice to engage in some real stock picking, instead of chasing well-known names that everyone else is chasing.
The strength today was triggered in part by the end of the debt ceiling crisis and by the view that the Fed is not likely to raise interest rates on June 14. The employment news was stronger than expected, but there were some mixed aspects to it, and the Fed has already indicated that it is willing to take a wait-and-see attitude as its prior hikes are starting to be felt to a greater degree.
There still are some very significant economic challenges, and one issue that we need to watch is whether increased bond issuance by the Treasury Department soaks up some of the liquidity that is driving stocks.
The bears have been predicting a sell-the-news reaction to the debt ceiling deal, but they ended up being squeezed once again. We have some fear of missing out and poor positioning out there, but it is a bit frothy, and the risk of profit-taking is real.
Have a great weekend. I'll see you on Monday.
