Once again, the primary market story this week was the narrowness of the market, with a small group of big-cap names driving the Nasdaq 100/Invesco fund (QQQ) to its highest close since April 2022. Early in the week, it looked like there might be some reversal in the action when small caps outperformed, but it didn't last long as the big-cap names blasted higher on Wednesday and Thursday.
Breadth was poor all week and finished on Friday with about 3,300 gainers to 4,750 losers. New highs have been hitting the highest levels in a while, with over 250 names.
There are a couple of reasons why the big-cap names keep running. The first is that they are about the only way to really play the Artificial Intelligence theme. You have to own Microsoft (MSFT) , Nvidia (NVDA) , and just a couple of others to really have exposure to the sector. This technology is still in the very early innings, and that is why there is more willingness to chase them even though valuations are high.
Another reason this group is strong is related to the first -- they are viewed as a safe haven from the debt ceiling issue. There are likely to hold up better than other stocks that may see panic selling if no deal is made or it drags out. These stocks are also viewed as a place to park cash, although that is a questionable belief.
There is an argument that a deal on the debt ceiling may help to cause a rotation out of some of these extended big caps and into the broader market. If a deal is done, then the big caps will some of their status as a safe haven, and money may rotate into more speculative names.
The debt ceiling issue is going to be the primary focus next week, but the market will also continue to wrestle with the issues of inflation, employment, and slowing growth. Fed Fund Futures were quite volatile this week as expectations for a June hike shifted up and down the last few days. The Fed is still talking hawkishly about inflation, but there are some clear indications that the economy is slowing.
The bulls like the technical conditions of the indexes, but the bears keep pointing out how misleading the action has been. What is needed is broader strength, but there are still plenty of obstacles out there.
Have a great weekend. I'll see you on Monday.