Quick Take
· Record high rally driven by tech earnings
· Few companies are carrying the market
· Earnings season is strong
· Rising inflation, oil, and interest rates
What Happened This Week
S&P 500 and NASDAQ hit new record highs. Strong earnings from companies like Apple (AAPL) drove up most of the gains while the rest of the market struggled. The market capped one of the best Aprils in years with many indexes up ~10-15% on average. Lastly, oil prices and geopolitical tensions put a pause to the fear, but there is no actual end state insight.
Why It Happened
In our last article, we mentioned keeping an eye on earnings week through a cautionary tale, and it made quite the impact. Earnings beat expectations across sectors this week since earnings came out. This could be a short-term upside from the fears of the conflict with Iran and the closure of the straight. I would carefully watch insiders selling larger shares in the coming days and weeks. If the whales’ offload lots of shares, it means they don’t expect the price to rise and that they are cashing in at the top.
The AI spending boom is in full force. Later we will look at a company to show the madness driven by this. This mostly affected companies tied to chips, cloud, and software pulling the broader markets higher. The reason this works is how indexes are invested. Right now, they are extremely tech heavy, which dilutes the overall market.
Inflation seems to be cooling a little, but all the eyes have turned to the Fed Chairman. Will he stay, or will he go?
Why does that matter for stocks?
Investor momentum and money chasing. Retail investors are seemingly starting to carry the weight of the new record highs. I would caution anyone when the smart money starts to sell. MACD is showing a nearing convergence with an ever-declining momentum on the histogram (follow along with our Dashboard) meaning the momentum is slipping away.
Indexes, like SPY, are very heavy on tech stocks. Nearly 35% of the total fund (SPY) is in information & technology. Even worse is it’s only a handful of the big players are the ones moving the needle.
Once the excitement cools, prices should normally settle, leaving short-term traders at risk.
Iran is the other piece to the puzzle. The USA has yet to be hit by oil shortages. The ships carrying the oil are still at sea from before the conflict, and they are approaching without more ships behind them.
Why This Matters for You
Higher prices can mean more opportunity, but also more risk. When valuations get stretched like MXL (see below) the markets can pull back sharply. This unknown ticker gained over five times their value on AI news alone. That's a 500% return. Nothing else happened.
Even their RSI is quite literally off the charts. All of it is greed with nothing supporting the perceived value.
If rate cuts happen, borrowing gets cheaper and stocks often benefit. This could boost portfolios in the short term. The rally driven by only a few big companies and the lack of diversification in indexes means a potential sharp pullback could wipe away any gains held. For retail investors, focus on long term plays and stay away from emotional prospecting.
Big Picture Trend
The market is primarily driven by the AI boom. Massive spending and earnings growth is pushing the markets to new highs. At the same time, the backdrop is messy. Inflation is still elevated and interest rates are staying relatively higher, creating tension.
We are in a fragile position, and anything could be the thing that breaks the camel’s back. This means we could see some sharp drops driven by geopolitics, inflation, and shifting expectations by smart money.
What to Watch Next Week
I would keep my eyes on the following:
· News in the middle east
· The Fed raising or lowering rates
· Unemployment
· Earnings momentum
Simple Action Steps
Stay consistent in investing. Look at the 1980’s when we were in a similar position. Once the hype is gone, the markets continue. If you want, you could look to rebalance your portfolio out of tech heavy positions but remember to avoid chasing the hype.
Keep some cash on hand for flexibility when the market settles or even pulls back. As always, focus on the long-term goals.
Final Thought
Keep your eyes open and read up on the news. This is a very exciting time in the market.