How might one improve upon perfection? It’s an eternal query for the metaphysical mind and a timely one for the here-and-now investor, after the stock market has feasted for months on a near-ideal set of conditions. An adorable Goldilocks economic expansion, enough global disinflation to constrain bond yields in a benign range, lavishly generous credit markets and a clear upturn in earnings growth might be enough to explain the S & P 500 hitting further record highs last week and logging a 25% gain since late October. But on top of that rich bounty, the Federal Reserve seems prepared to start trimming the policy rate by summertime, exercising a well-earned prerogative to “normalize” rates in economic peacetime with stocks at a record rather than fight a battle against a macro downturn with markets under stress. Add in the fast-flowing enthusiasm for AI-enabling semiconductor stocks and the weight-loss miracle drugs, and we have a market that’s been riding waves of belief that good things are afoot, dealing out increasing rewards and defanging a succession of risks along the way. With all that, though, Friday’s market action furnished a tentative hint that the rally might have reached one of those “enough for now” moments, when prices and attitudes catch up to, and possibly surpass, the pileup of positives. After an early pop following a just-right jobs report showing moderate employment growth, rising labor supply and decelerating wage gains, the S & P 500 was jolted by some of the market’s fastest horses breaking stride. Nvidia unwind The headlong aggression of momentum-stock buyers in recent weeks has been one of the few decent reasons to expect this sturdy, tightly ordered rally to start trading a bit more loosely and unreliably for a time. While only one day’s action, the severe Friday reversal in Nvidia shares (from up 5% to down 5% within six hours on eye-watering trading volume) was a fitting preview of what a potential momentum unwind would look like. NVDA 1D mountain Nvidia, 1-day Nvidia has been the speedy flagship of this exuberant AI theme, adding $1.5 trillion in market value in the past year and last week coming within sight of Apple’s weight within the S & P 500. As many enjoy pointing out, Nvidia’s valuation has come down over that span, from 60-times forward earnings to 34, as revenue and profit projections have exploded. That’s reassuring so far as it goes, though at some point the market will start to express doubt about the long-term sustainability of these growth rates through a less-generous P/E. And even though the likes of Amazon and Tesla are more highly valued, we have no other precedent for a $2.2 trillion market cap company (Nvidia’s current size) sustaining a 34 times forward P/E. Relevant or not, the stock at Friday’s high touched a trend line going back more than six years, connecting short-term highs from early 2018 and late 2021, lending some credence to the “enough for now” idea. The main characteristic of Nvidia lately has been as the largest beneficiary of a relentless momentum-factor trade – buying what’s worked best and shunning the laggards. Momentum stocks It’s a feature of this market that extends beyond semiconductors, and even tech in general. Within retail and staples Costco has gone vertical relative to the sectors (until Friday). In pharma, it’s Eli Lilly. In basic materials, Martin Marietta Materials and Vulcan Materials. This long-term chart from 3Fourteen Research shows the percentage of S & P 500 market cap attributable to the 100 highest-momentum stocks of the prior 12 months, looking pretty maxed out. This is part of the case for expecting some turbulence, a reshuffling of market leadership, perhaps even a proper pullback at some point. The S & P 500 Volatility Index finished the week near 15 and is in a clear three- month uptrend from its mid-December low near 12, even as the S & P 500 has gained 10% since then. Hedgers and speculators are attuned for a possible break in the calm, or perhaps simply accounting for a higher-velocity tape. And yet, all of that said, nothing in Friday’s wobble or the overall setup suggests playing for a radical change in market tone right away or with high conviction. In fact, Friday the market minimized the headline damage to a mere two-thirds-percent dip in the S & P 500 through its signature rotational impulse. Laggards Apple and Alphabet perked up in the momentum unwind, up/down volume was evenly split and consumer cyclicals held firm. There were 674 new 52-week highs across the NYSE and Nasdaq against 110 new lows. Just about all of the trend indicators are reassuring, if extended. These include the market’s admirable ability to stay persistently overbought without even a 3% setback in more than four months, confirmation from strong global equity indexes, the equal-weight S & P 500 and mid-cap benchmark making new record highs. The broad array of sentiment and positioning metrics have surely nudged up to…
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