@theMarket: Tech Takes Break as Other Sectors Play Catch-up

One of the main complaints of market watchers has been the narrow breadth of the stock market. Few areas, besides the handful of tech stocks, have participated in the bull market this year. That has changed.

 

Biotech, crypto, financials, industrials, and even the staid healthcare sector have come to life this week. The Russell 2000 small-cap index outperformed as well. In the meantime, the Mag 7 and AI 5 marked time.

 

As I warned readers last week, I thought stocks were due for a little consolidation as traders took profits on some of the large gains accrued over the last two months. The fact that large-cap tech sold off and the markets barely budged was meaningful to me. It is an indication that there was a lot of non-tech buying under the hood of the averages.

 

The value of any one of three of the Mag 7 stocks (Microsoft, Apple, or Nvidia) is equal to the entire market capitalization of the small-cap, Russel 2000 Index. If all three were sold down at the same time (even a little), there needs to be an awful lot of buying in other areas just to keep the major averages afloat. That is what happened.

 

This week's most important data point was the Personal Consumption Expenditure Price Index (PCE), which is the Federal Reserve Bank's key inflation indicator. The PCE increased 0.3 percent month-over-month in January 2024. That was in line with market expectations. Prices for services went up 0.6 percent while goods decreased 0.2 percent. The monthly core PCE inflation, which excludes food and energy, edged up 0.4 percent.

 

All those data points came in as expected, and traders used that as an excuse to boost the market. However, nothing in the report would convince the Fed to cut interest rates in March at their next FOMC meeting on March 15-16, in my opinion. It may have been the smallest annual rise in inflation we've seen in three years, but it was still a rise. If anything, it justifies the Fed’s decision to wait until they see further headway on inflation before considering an interest rate cut.

 

The real star of the week was Bitcoin. The cryptocurrency breached $60,000 for the first time since November 2021 and came close to $64,000 before giving back some of its gains. Bitcoin is up more than 42 percent since the Securities and Exchange Commission approved spot exchange-traded funds back in January 2024.

 

With the move higher, Bitcoin has reclaimed its trillion-dollar status. But it has yet to top its all-time high made in November 2021. At that time, the coin surpassed $68,000 briefly as many panicky traders turned to the digital asset during the pandemic fears.

 

However, this week, it did hit an all-time high in 14 different countries with weaker currencies than the U.S. dollar. Some of the crypto bulls I follow predict we will break above the old high (after a pullback) and could see as high as $100,000 by the end of the year. I don't see why not.

 

We are at that stage in the markets where we could see an end to this bull run at any time. It could be today, two weeks from now, or ... The problem with that forecast is that everyone is saying the same thing. And what do the markets usually do in that situation — what is most inconvenient for the greatest number of people? In this case — up.

 

Last week we came close to my S&P 500 Index target of 5,140. Since then, we have traded down slightly, but momentum traders simply moved from buying tech to bidding up other sectors of the market. It is the financial equivalent of a game of moving chairs.

 

March is upon us, and it looks to me like we still have a little gas left in the tank. The charts say we can still go higher. Most technicians see this week's mild consolidation as no biggy. Yes, the markets are extended and overbought, but could get more so. Margin debt, which is a good indicator of speculation, stands at $702 billion as of the end of January. That is a lot of gambling money, but it is still lower than it was at the beginning of the two previous selloffs ($936 billion in October 2021, and $710 billion in July 2023). 

 

As I have written in the last few weeks we are no longer in the land of fundamentals. The markets are being driven by money flows. Momentum rules the day and as such, we could just as easily see 5,200 as we could see 4,800 on the S&P 500. I say enjoy the ride while it lasts and when we pull back buy the dip.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.