We have dismal market action on Wednesday morning, with the stock market at an interesting juncture as it grapples with weak economic data that is shifting the primary focus away from inflation to concerns that a recession is about to hit.
The ISM services number is clearly indicating a slowdown. It came in at 51.2% versus 55.1% last month. Not that long again, this would be a market positive because it indicates that inflation is cooling off, but today it's a negative because it illustrates a slowing economy. Silicone Cutout
The bank crisis has also helped to put a damper on inflation worries. The most hawkish view right now is that the Fed may hike just one or two more times and that cuts are likely by the end of the year. However, the problem is that the lag impact of the fastest rate hikes in history is starting to be felt, and there is no way to know how much economic damage will be done. The banking crisis also has fallout beyond its impact on inflation.
The good news is that now that the market is recognizing the issue of a potential recession and isn't embracing the fantasy of a soft landing, it can begin to price in the shift, which should finally lead to a market bottom that will be the foundation for a new bull market.
This shift in focus from inflation to recession occurs as the market is dealing with some huge disparities. The spread between the Nasdaq 100 (QQQ) and the 3000 stocks in the Nasdaq Composite is the widest in history, according to Holger Zschaepitz.
It is also easy to see this by comparing the chart of the Russell 2000 (IWM) to the Nasdaq 100 (QQQ) . IWM is well under its 200-day simple moving average and not that far from the lows it hit last year. The Nasdaq 100 is being celebrated as being a new bull market because it moved more than 20% off its lows and is now far extended over its 50-day and 200-day moving averages.
The big issue for traders is how this disparity will close. Will large-cap technology stocks underperform and allow secondary stocks to catch up, or will small stocks start showing much better relative strength? Most likely, there will be a mix of large-cap weakness and small-cap relative strength, but it will be a messy process.
Still, most market participants seem to be unaware of the big disconnect that is taking place. If QQQ was acting like IWM, there would be widespread doom and gloom, but the big-cap technology names are keeping hope alive, and that means the process of correction is going to take longer.
I'm not doing any new buying right now, but I'll be discussing my plans for navigating what lies ahead.
At the time of publication, Rev Shark had no positions in any securities mentioned.
The stock is priced at levels that are a little lofty for a firm that is expected to post its sixth consecutive quarter of single digit revenue growth this evening.
The S&P 500's forward P/E multiple is significantly overvalued relative to ballpark fair value.
Readers should understand the significantly increased level of risk in Nvidia should it retest support any time soon.
Bonds and higher yields are still a major headline, and we also have to contend with a jump in oil, pressure on semiconductors, and the impact of earnings reports.
Will the rotation out of big-cap technology and into secondary stocks continue?
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