The primary story of the market so far in 2023 is that the S&P 500 would be negative for the year if it wasn't for seven big-cap technology names. This has been the primary topic of conversation for a while and has largely been caused by an intense interest in artificial intelligence (AI) technology that is benefiting these seven stocks.
The bulls are convinced this narrowness is not a problem and that it will eventually broaden and drive better action. Indeed, the market jumped very nicely on good breadth for a couple of days last week. The Russell 2000 (IWM) , which has been a laggard, jumped 3.6% on Friday and forced a number of skeptics to take a more positive view of the market action.
While money has been pouring into the Nasdaq 100 (QQQ) and a few big-cap technology names, the Wall Street Journal is reporting that there are nearly $500 billion in short bets against the S&P 500 while at the same time, bullish bets on key big-cap technology names are hitting their highest levels since the rally last year.
The question now is whether the market will continue to broaden out and close the gap between the dozen or so names that are producing the strength and the 490 stocks in the S&P 500 that were down 4.3% in May.
There are four potential catalysts at work:
- Short squeezes and FOMO. The key issue right now is that a substantial majority of market participants are poorly positioned. Only a few folks have portfolios that are completely leveraged toward the small group of big caps that are doing so well. Most everyone is feeling tremendous pressure to try to produce relative strength, and the bears are in even more trouble as the market fails to relent. Bears showed signs of capitulation on Friday and could easily be squeezed some more if conditions do not change.
- Debt Ceiling Sell-the-News. The strength on Friday was driven in part by a celebration of a debt-ceiling deal. The market never sold off on those worries, so the rally wasn't really justified, but it made for a good excuse to run things up. The question now is whether there is a delayed sell-the-news response. The Treasury Department will be issuing quite a few bonds, but the bulls claim that liquidity is not an issue. We shall see.
- Federal Reserve. The Fed has been signaling that it is likely to skip a hike in rates when it meets next week. And even with stronger-than-anticipated jobs news, odds are that the Fed will stay on the sidelines for now. That could change, but this also helped the market to jump on Friday.
- Economic. There isn't much economic news on the schedule this week, but the spike in oil caused by the Saudis cutting production is having an impact. The economic bears are still quite convinced that earnings estimates are too high and that a recession is going to hit, but they have been run over by the AI bulls and are being squeezed. The bearish economic arguments are compelling, but when will the matter?
We have a slightly mixed start Monday as market participants contemplate these issues. The main focus will be on the ability of the market to build on the robust gains that occurred on Friday.
