Investors have been complaining for weeks about a narrow market that has been led by a handful of big-cap technology stocks with exposure to artificial intelligence. Earlier this week, it looked like there might be some slowing in this lopsided action, but Nvidia (NVDA) stunned the market with guidance far above anything that even the most bullish analyst anticipated.
Nvidia supplies about 80% of the graphic processing units that are used in the development of AI applications. It has more direct exposure to AI than just about any other stock and is being valued as if it has a near monopoly in AI-related GPUs. At this point, valuation doesn't matter much. If you want exposure to AI, then there are a few other choices.
It is not unusual to have a few big-cap names drive the indexes while most other stocks are struggling. I've been citing the poor breadth as an example, and there was another fine example today. With the Nasdaq 100/Invesco (QQQ) gaining an impressive 2.6%, breadth was miserable, with about two stocks declining for each one that advanced. Over the last three months, the performance spread between the S&P500 and the S&P500 equal weight is the widest since December 1999.
There was broad weakness in health care, biotechnology, energy, retail, consumer defense, and financials, but that was more than offset by strength in technology and semiconductor.
The situation probably would have been even worse, but there was a steady stream of rumors about a potential debt-ceiling deal and even a mention of a potential vote on Tuesday.
The bulls are growing very tired of hearing about this narrow market. They are focused on the indexes and this small group of big-cap movers, so stop complaining and get with the program. The bears cannot shake off their distrust of this two-tiered market and are convinced it will eventually end batter. They are unwilling to chase this wild strength, but the technical action in everything else is terrible.
There is no historical precedent for this action. Typically when there is a technology that is as innovative as AI, there are hundreds of stocks competing in the emerging industry, but in this case, there is only a very small group that benefits from AI to an unusual degree, and they are well-known big caps. There are essentially no small-cap AI plays which is highly unusual given the expectations for AI growth.
This action can't continue forever, but it certainly can continue longer than seems reasonable.
Have a good evening. I'll see you tomorrow.
