Momentum Monday - The Wall Of Worry Is Strong and The Slow Motion Melt-Up Continued...

Every uptrend needs skeptics and doubters; otherwise, they would not be anyone left to buy. Many managers have been skeptical of this rally and are now in the precarious position of being underinvested during a slow melt-up. This is a recipe for performance chasing towards the end of the quarter. Those who don’t want to chase extended tech names, might opt in for stocks that haven’t run as much. This is why we saw an improvement in market breadth last week and stocks like SBUX, NKE, COST to perk up. Bull markets often correct through sector rotations. While one group of stocks is consolidating gains, another might run.

Sector rotations don’t exclude the indexes mean-reverting in some form. Nothing goes straight up, even Nvidia. SPY and QQQ have become quite extended. It would be completely normal if they test their 20 or even their 50-day moving average at some point. When SPY pulls back 5%, a high-octane momentum stock could pull back 20%. Not everyone is prepared for this kind of volatility.

The uptrend is not just a US phenomenon. Europe, Latin America, and Japan also have been running higher. Even China is trying to bounce after their central bank cut rates twice last week. It’s as if the market likes a non-zero interest rates environment better because it means that companies will utilize their capital in a more efficient manner. Last year, everyone talked about the threat of rising rates. This year, no one is even mentioning rates anymore. The Fed kept the benchmark rates at 5.25% and signaled that it might stay there until the end of the year. The stock market yawned and continued higher. The bull is running strong while the VIX is crashing. No doubt about it. Don’t get too drunk on bullishness. As usual, chasing extended stocks doesn’t have a positive edge, so one should never attempt to do. Yes, you can get occasionally lucky, but in the long-term chasing is not going to make money, especially if you are not quick with taking small losses.

We certainly saw some elements of froth – sizable short-term moves due to a short squeeze and fear of missing out. Even the IPO market is reopening. The Mediterranean restaurant chain CAVA opened 100% above its listing price. People are hungry for new stocks. Wall Street printing press will oblige. I am still surprised that we haven’t seen at least several A.I.-related stocks going public. Either someone at Goldman and Merryl is sleeping at the wheel or there aren’t enough pure A.I. businesses. They are coming though. Alongside them, we are likely to see some long-awaited IPOs like Stripe too.