Joe Tigay The S&P 500 is soaring, but is it riding a unicycle? Investors are getting nervous that a small group of stocks, the “Magnificent Seven,” are leading the charge, leaving the rest behind.
Magnificent Gains, Unequal Returns
- A handful of hot stocks are crushing it, up over 48% this year.
- The rest of the S&P 500 struggles to keep pace.
Concentration Concerns
- This reliance on a few leaders raises a red flag. If they stumble, the whole market could take a tumble.
- Buckle up for volatility! When just a few stocks call the shots, swings can be wild.
Diversification Dilemma
- Index funds offer a basket of stocks, but right now, they’re heavy on the giants.
- This reduces diversification, a key risk management tool.
Bubble or Innovation Boom?
- Some fear a bubble brewing, similar to the dot-com crash.
- Others see innovation favoring specific companies, with strong performers outside the “Magnificent Seven” (think AI).
Digging Deeper This Week
- We’ll dive into the market to see if a correction is on the horizon, or if the party can keep going.
Volatility: A Calming Calm?
- Current volatility is super low, which can be a sign of investor complacency.
- But hey, it also means there’s plenty of cash flowing.
- Keep an eye on VIX futures, especially October contracts, which remain high.
Concentration and Volatility: A Recipe for Drama?
- The market’s focus on a few stocks could lead to higher volatility down the road.
Correction Countdown? Not So Fast!
- The S&P 500’s upward trend is strong. A break in this trend would be the first warning sign.
Technical Talk: When Breadth is Thin
- With fewer stocks driving the market, the technical health of those leaders becomes even more important.
- Good news: the “Magnificent Seven” are looking technically sound!
Stay tuned for more updates!
SPX 2 Year Trends
The SPX continues to follow the green channel, however, the CPI may cause fluctuations in the trend line. We expect the CPI report to either cause the SPX to reach the top or fall to the bottom of the green channel post-report.
Skew 2 Year
Skew is on the lower end and is wedging at the bottom. It continues to make higher lows and lower highs.
Vix Futures
Vix futures says volatility is priced about right for the next week (still off the charts for the October compared to the rest of the VIX). Vix futures are not that high in July relative to the back months like October where it has been steepening out. Right now it seems like things are calm and the green upward trend can continue.
Oil 1 Year
Good news that oil had begun to turn down. Another wedge is happening which is good new for stocks, but not oil companies.
Lack of Breadth
- Sustainability: A rally driven by just a few stocks might not be sustainable in the long run. If those leading stocks falter, the whole market could take a hit.
- Increased Volatility: When only a small number of stocks are driving the market, it can be more volatile. Prices can swing more dramatically, making it riskier for investors.
- Diversification is an issue right now because investors are essentially owning the very big stocks without much access to everything. That is why we pick the 50 names that are best in the economic conditions for our portfolio.
- Dot-com Bubble (late 1990s): The tech sector soared during this period, but many other stocks stagnated. The bubble eventually burst, leading to a major market crash.
Mag 7 Percent Change (Nvidia, Apple, Amazon, Google)
Currently, the Mag 7 is up 47 percent; This is where most of the gains in the SPX are from. None of the trend lines have really broken on any of the big names in the Mag 7. The leaders if they break will break the channels for the major industries and everything will go down together. This is why these names are so important. Index is reliant on these names for performance.
Mag 7 Leader (Microsoft)
Microsoft has one of the best trend lines of the MAG 7.
Important Disclaimer: This article is for informational purposes only and should not be considered financial advice. Always consult with a qualified financial professional before making any investment decisions.
