The NASDAQ Composite and NASDAQ 100 Indexes are going near-term parabolic as money piles into big-cap techs and Artificial Intelligence meme-stocks. The latest catalyst came in the form of Nvidia (NVDA) earnings which propelled a massive NASDAQ rally to higher highs as NVDA also posted a buyable gap-up with an intraday low and selling guide at 366.35.
As the NASDAQ Composite and NASDAQ 100 Indexes streak higher, the NASDAQ Advance-Decline line makes lower lows and the lowest lows since the start of the 2022 bear market year.
Meanwhile, the very broad 3700-stock plus NYSE Composite Index remains in a downtrend from the early February highs. While Friday's rally looked impressive elsewhere, the NYSE Composite made little more than a tepid attempt to reach its 200-day moving average but fell well short on the day.
AI meme-theme stocks remain hot, however, and we have seen a number of buyable gap-up moves in such names after reporting earnings this past week. NVDA is of course, but similar post-earnings gap-ups were seen in Marvell Technology (MRVL) and Workday (WDAY). MRVL reported earnings and announced it estimates that its AI-related revenues will increase from $100 million to $200 million in 2024. While this is just a sliver of revenues for a company that pulls in nearly $6 billion in revenues annually, the mere mention of AI was enough to send the stock gapping higher. WDAY also reported earnings on Thursday after the close and intimated that it is "well positioned" to benefit from AI. That was all it took for the stock to post a buyable gap-up move. In each case, MRVL, NVDA, and WDAY can technically be tested as BGU long entries as close to their BGU day intraday lows which then serve as selling guides, per standard Buyable Gap-Up rules.
The pile-in to big-stock NASDAQ names certainly has an AI meme-theme component, but it may also benefit from the fact that money managers have been massively underweight higher-PE tech names as interest rates remain elevated. As these names rally, many of these institutional investors are off-side, meaning they are not weighted enough in big-cap techs as they ramp higher and must scramble to raise their weightings in order to keep pace with their bogey, normally the S&P 500 or NASDAQ Composite Indexes against which their performance is measured. Thus, they either raise their weighting in big-cap techs pronto, or risk losing their jobs. Here we see pocket pivots over the past two days in four of the highest weighted stocks in both the S&P 500 and NASDAQ Composite indexes, Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOG), and Microsoft (MSFT).
While AI meme-stocks rocket higher, the rest of the market, including industrials, industrial metals, retail, financials (including regional banks, commercial real estate firms, and credit card issuers), agriculturals, machinery, oils, coals, solars, materials, and other economically sensitive sectors remain weak. This creates a highly bifurcated and divergent market environment. Whether this is an ominous sign or not remains to be seen as a teeter-totter type of market theme dominates. Regional banking issues remain a potential source of black swans for the market. The SPDR Regional Banking ETF (KRE) reflects the unresolved situation in the sector as it lingers just below its prior bear flag breakout point after running into shortable resistance along the 50-dma on Tuesday.
The current budget-deficit debate looks to have been settled at least in principle, but the outcome from both a legislative and market perspective is unclear. The U.S. Treasury is down to its last $50 billion, even less after this past week, and will need to replenish is coffers once the debt-ceiling is raised. That means $1.2 trillion or more of new Treasury issuance which could in turn create liquidity issues for the market. If no debt-ceiling deal had been achieved, the U.S. would go into at least a short-term default which would likely have very deleterious effects on the market as well as the financial system in general. That said, the debt ceiling has always been raised to avoid default.
Meanwhile, PCE inflation data released on Friday showed that inflation is reaccelerating as the year-over-year number came in at 4.7% vs. expectations of 4.6% while monthly core PCE came in at 0.4% vs. expectations of 0.3%. Fed Funds Futures responded by predicting a 71.1% chance of a quarter-point Fed rate increase when it next meets in June. Of course, whether this is the last hike depends on the data so should inflation remain elevated due to supply chain and other issues, the Fed may be forced to hike more than once this year.
The Market Direction Model (MDM) remains on a CASH/NEUTRAL signal.