Mid-week market update: My market analysis publication published on the weekend ended with the following:
The S&P 500 ended an upper Bollinger Band ride last week and weakened to the 50 dma support level. Past pullbacks in the most recent bull trend have ended when the 5-day RSI became oversold. Next week’s market action will be a key test of the market uptrend.
The bulls seem to have passed with flying colours. The S&P 500 bounced off its 50 dma, and the market rallied off the 5-day RSI oversold reading. Stock prices were ready to bounce, and news of a deal to reopen the government was the catalyst.
There is, however, one crucial detail. The VVIX, which is the volatility of the VIX, remains above the 100 level, indicating heightened market anxiety. It may be too early to sound the all-clear until VVIX weakens below 100.
Sentiment Normalization
Nevertheless, my base case calls for a rally into year-end and below. Sentiment is just starting to normalize. The Fear and Greed Index is an imperfect sentiment and market timing indicator, but readings are just rising from extreme fear levels. It’s unusual to see such levels of anxiety when the S&P 500 is within 1% of its all-time high – which is one reason why I believe this rally has a lot more room to run.
As well, we may be seeing early indications of a welcome sign of rotation from growth to value across all market cap bands and internationally, which is a sign that the rally is broadening from narrow AI-related market leadership.
Even as large-cap technology seems to have temporarily stumbled, small-cap technology continues to outperform the Russell 2000 (green line), which is another welcom sign of broadening breadth.
Key Risk
The one risk to the broadening breadth thesis is the continued weakness of the small-cap Russell 2000. The index recently breached a rising trend line and it has failed to rally back to trend resistance. Moreover, relative performance is failing at a key relative support level (bottom panel).
In summary, the bounce back is behaving more or less as expected. No rally is perfect, and I am seeming some minor blemishes, but I remain optimistic that the rally into year-end is under way.
What ETF follows small-cap technology? You used it to show it is beating the Russell 2000.
PSCT
That there is anxiety makes sense, prices are crazy and there are voices out there yelling about imminent wipeouts etc.
But as you say, anxiety is reassuring unless one can be anxious euphoric. It’s when the euphoria is unbridled that we need to worry.
When they talk about AI improving productivity can mean a lot of things, but what about what for me is the most obvious one…less worker salaries.
Some large companies will be able to afford and implement AI and cut 1000s of jobs…this is an increase in productivity, and should help the bottom line which would support narrow leadership.
But if there are many job losses, this has an effect on the economy, the small companies that can’t do AI because the savings are minimal, the political scene of more unemployed, a recession smacking the markets etc etc.
In other words, nothing that is great fun lasts forever.
Personal anecdote…my dad worked for CNR (Canadian national railways) from 1945 to 1977. He told me that when he started CNR had 88,000 employees, most of them in a back room keeping track of all these little white papers showing what was going where and on what train. Then CN got computers and boxcars had bar codes that got scanned. By the time he retired, CN had 28,000 employees. So a 70% cut in employees!
So where we end up with AI could be not as nice as we are led to believe. Higher taxes, wealth taxes, who knows? Stay humble in your lifestyle.