On Friday, the S&P 500 closed above 5000 for the first time ever. Once again it is overbought, with its RSI over 70. When the year began I pointed out that it was overbought with an RSI that had hit its highest level in over three years. I thought that meant that the market would go sideways first in January before it would go higher and it did.
I didn’t really think a meaningful pullback was going to happen.
Now things are a bit different, because the market rally has narrowed to only a few stocks, while some of them are going up in a manic, parabolic, fashion.
This is critical for you to understand.
First take a look at the S&P.
Is it time to chase that move?
On Friday, while the S&P 500 made a new high, inside of that index 200 of those 500 stocks actually went down.
Meanwhile, the percentage of stocks that managed to rally above their 200-day moving averages on Friday did not increase on the historic SPX 500 for 5000 day.
In fact, this indicator is lower now than were it was when it started this year.
In other words, while the market rally has accelerated, more stocks are now below their 200-day average than where they were on their 2023 close.
I went and looked, with TC2000, and half of the S&P 500 stocks are actually down for the year.
So, how is the S&P 500 up so much?
You have to understand that it is a market cap weighted index. That makes it so that the stocks with the biggest market caps have the largest impact on it, and several of them, four of the stocks now being touted nonstop in the media, as the “magnificent seven,” are going up so much that they are pushing the S&P 500 up practically by themselves.
Here is the S&P 500 is dominated by several big cap stocks.
Twenty five percent of the S&P 500 is made up of just six stocks.
If the S&P 500 was a market weighted index, where each stock was equal, this is how it’s price performance would look like.
Notice, it would be barely up at all.
What is funny is that the term “magnificent seven” refers to the performance of seven of the biggest S&P 500 stocks last year.
These seven stocks all did great last year, but this year three of them are trading poorly, and only four of them still going up like crazy to push the S&P 500 higher.
Oh, and yes, they are having this same effect on the Nasdaq.
Take a look at the charts of these seven stocks.
It’s really four stocks doing all the bull work and not seven.
Two of the seven are even down for the year.
In fact, TSLA is now trading below its 200-day moving average, so it’s now a broken stock.
All the financial media is talking about now are these stocks as not much else is going up in the stock market at all.
These also happen to be the stocks that are among the most widely owned by the masses and so they like to hear bullish talk about them.
The market can have a narrow structure like this and not go into a bear market for the rest of the year, but this makes for a risky time to put new money to work in the stock market, after the market has already rallied for three months at what is now a 45-degree angle.
I think it’s time to be cautious until there is pullback – and even to book some profits and take some money off the table for cash reserves to use later.
Sure, the market can rally up even more, with more gains from these four stocks, but that becomes a tough thing to trade, and I have no idea how one can time selling right at the moment it tops.
When the year began, I thought the overbought condition would lead to a mere pause in the rally, that would last only two or three weeks. This type of action now, though, is what leads eventually to a meaningful correction, as was last seen last year from July to October, or a sideways consolidation period that lasts for months instead of weeks.
It looks like a good time to take a little vacation from active trading and be more of an active watcher of the market action until a real fat pitch lines up. That’s my opinion. You can find those that differ. Just turn on CNBC and wait a few minutes and you’ll get some bullish predictions about these seven stocks, as must buys right now, delivered for you. Or just open up Youtube and you’ll see a video you can watch saying this for sure. But, remember as they sell you seven “magnificent” stocks it is now really only four that are still rocketing up this year.
-Mike
