Following the better-than-expected guidance from Nvidia (NVDA) , the Nasdaq 100 is trading up about 1.75%, and the S&P 500 is up about 0.4%. It looks like pretty good action, but if we dig just a little deeper, the picture changes quite a bit.
Overall breadth is approaching two losers for each decliner. On the Nasdaq 100, which is heavy technology stocks, breadth is 34 gainers to 68 decliners. The Dow Jones, which has a little boost from a 2.6% move in Microsoft (MSFT) , is trading down about 0.34% and breaking below its 200-day simple moving average for the second time this year. Small caps are lagging badly, with a loss of more than 1%.
This is the same old pattern once again, with a small group of big-cap names covering up very poor action in the majority of the market.
The current AI "bubble" has been compared to the internet bubble in 1999-2000. Both are transformative technologies, but they are totally different in how they play out in the market. The internet bubble drove hundreds, if not thousands, of stocks higher. There were many small-cap names that capitalized on the technology and were given crazy valuations based on page views and other metrics.
In the current AI bubble, there are almost no small caps attracting interest. There are a handful of names that are seeing some speculative trading, but it is almost totally a big-cap phenomenon. AI will impact business in many ways, but it isn't creating a lot of new businesses. It is more of a productivity tool rather than a new industry.
Artificial Intelligence is the most significant technology development since the internet, but there is a surprisingly small number of stocks that are seeing any change in valuation based on the adoption of the technology. It is difficult to value the impact. Perhaps it is incorrect to even call what we're seeing with AI a bubble, as the market isn't using crazy valuation metrics.
There is much celebration over NVDA and the future of AI today, but it appears to be a company-specific event rather than recognition of a new industry.
Struggles with narrow strength are not helped by the continued debt-ceiling problems. The June 1 deadline is coming fast, and even if a deal is done today, it will still be a race to draft it and pass it before then.
In my view, the indexes have little to do with whether the market is strong. A stock market is one that offers good stock-picking opportunities, and that is the problem with the current environment. There just isn't much to buy right now. Even chasing AI strength is a tough trade today.
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