Mid-week market update: In the short run, how the market reacts after price gaps can be important clues to market psychology and direction. How quickly the market fills a gap is a measure of either strength or weakness.
As accompanying hourly chart of the S&P 500 shows, we have price gaps everywhere (upside gaps in grey, downside gap in pink). In particular, the price gap in reaction to the NVIDIA earnings report sticks out the most.
Here is how I interpret the gaps.
A bullish tilt
As Jeffrey Hirsch pointed out, early March is a period of negative seasonality for stocks. The ability of the S&P 500 to hold up above the NVIDIA reaction gap should be regarded as constructive during a period when stock prices are facing headwinds.
A rolling correction?
That doesn’t mean that the bulls can totally relax. Market breadth is starting to broaden out again, which is constructive. But evidence is building that the market may undergo a sideways consolidation with a rolling correction under the surface. And if a pullback were to begin, the logical support level would be the 50 dma, which is currently at 4909.
The AI-related technology plays, which led the advance, are starting to lose upside momentum. The NYSE FANG+ Index is still tracing out a bullish cup and handle breakout. But relative performance (bottom panel) is starting to roll over.
By contrast, the troubled regional banking stocks are turning up after testing relative support, which is constructive.
Beware of frothy sentiment
While I am now cautiously bullish on stocks, I remain concerned about excessively bullish sentiment. Bloomberg reported that even super-bear Nouriel Roubini is turning bullish. The Fear & Greed Index reached an “extreme greed” level recently, which is contrarian bearish.
Putting it all together, my base case scenario calls for the S&P 500 to consolidate sideways, but with a rolling correction beneath the surface. Today’s risk-on tone can be attributed to the combination of a bounce-back from yesterday’s weakness and excessive market expectations of a hawkish Jerome Powell. The relief rally held up because Powell’s remarks turned out to be less worse than expected.
Until the S&P 500 fills the NVIDIA reaction price gap. I would expect further sideways choppiness for the next few weeks.
While NVDA is currently the component with the highest weighting in the NYSE FANG+ index, it also includes recent underperformers like AAPL, SNOW and TSLA. NFLX, AMZN, GOOG and even MSFT have also not been able to keep up with the performance of NVDA, but I would argue that the recent strength of NVDA, AMD, SMCI and TSM indicates that investor appetite for AI-related stocks is not showing any signs of rolling over – this makes sense if one is taking the view that the beneficiaries of the AI-related computing capacity investments are going to be just a handful of companies that have the best technology ip currently available – there is ample research material available for why tech markets tend to develop winner-take-all characteristics.
Good point. The magnificent seven seem to be giving way to semiconductor stocks.
Is there a capitulation of ‘correction any time’ view to sideways consolidation/cautiously bullish view?
Other than a few stocks. Sustainable gains are hard to find.