The day before a three-day weekend often has a positive bias. Investors are in a good mood, and the action tends to be driven more by speculative retail traders. We had a good example of this Friday in front of the Memorial Day holiday.
The blow-out report by Nvidia (NVDA) on Thursday created peculiar action that left many traders poorly positioned for strength on Friday. Despite the huge move by NVDA, which drove the Nasdaq 100/Invesco (QQQ) up 2.4%, breadth was negative, and there was some very poor action in stocks outside AI and semiconductors.
Early in the day on Friday, it looked like the narrow market action would continue, but holiday traders went to work and produced a very broad and robust rally. Volume wasn't great, but breadth approached three-to-one positive.
Another contributing factor is growing hope that a debt ceiling deal may be announced before the market reopens on Tuesday morning. Negotiations are ongoing, and there is sure to be a strong market response once the deal is announced. Many investors are expecting a sell-the-news reaction. One concern is that once the debt ceiling is raised, the Treasury Department will quickly issue large amounts of new debt and that debt will soak up the liquidity that has been driving big-cap stocks.
The action on Friday felt more like a regular bull market, but this has been an extremely odd market with the narrowness of the AI action in select big-caps. It is unusual to have a major theme like AI that has so little participation from small caps.
One major consequence of this action is that it is creating significant underperformance. There is no way to keep pace with the indexes unless you are fully invested in just a few key names. Everyone else is lagging, and there is likely a great amount of performance anxiety that helped fuel the strength.
Once the debt ceiling news hits, the market will go on to the next stage of action, and it is sure to cause more consternation for the market.
Have a great holiday. I will see you on Tuesday.