Powerful Price Action Is Overwhelming the Bearish Narrative

Bull and Bear Wrestling in Suits

There are two main stories driving the market on Wednesday morning.

The first is that oil prices are holding steady after pulling back despite the Strait of Hormuz remaining closed. There is talk about more negotiations between Iran and the U.S. in the next few days, and reports that Iran is under significant financial pressure due to a lack of oil revenue. Market participants are optimistic about progress and largely ignore the pain caused by prolonged high oil prices.

The second story is the rally itself. The Nasdaq is up 10 straight trading sessions, its longest winning streak since 2021. The S&P 500 sits just 0.2% from its all-time high set on January 27.

The Contrast Is Striking

Seldom has there been such a sharp contrast between macroeconomic and geopolitical concerns and the market's price action. According to UBS Systematic Advisory, hedge funds have the lowest long-to-short exposure ratio since the Liberation Day lows about a year ago. That is an enormous supply of potential buyers who have been caught leaning the wrong way and they are fighting hard to establish a negative narrative.

Instead of worrying about Iran, oil, inflation, and growth, market participants have been focused on an explosion of capital investment in AI. The competition among hyperscalers and their suppliers is intensifying by the day.

Meta Platforms (META) just announced it will work with Broadcom (AVGO) to produce several generations of custom AI chips. ASML Holding (ASML) boosted its guidance on strong AI demand Wednesday morning. The theme keeps getting fresh catalysts and with earnings reports coming up there is the great likelihood of more positive news.

The bottom line is that investors are betting on the long-term strength of the U.S. economy, with AI as the primary driver. The Iran situation is being treated as a temporary distraction, and there is optimism that, once resolved, oil prices will retreat.

The Setup

The biggest issue facing investors right now is whether the market can continue to move higher from here. This straight-up move has created extended technical conditions, but it has also created a large supply of investors who are not prepared for more upside. They need pullbacks to add long exposure and cover shorts. The Market Beast seldom shows mercy on folks in that predicament.

There is a good chance we will see some profit-taking and pullbacks, but the likelihood of a sudden market collapse is low. Dip buyers will be active and the prospect of strong earnings reports is a problem for the bears.

My Game Plan

What we have right now is a classic battle between powerful price action and an aggressive bearish narrative. With so many investors poorly positioned, I'm betting on price action rather than negative arguments.

At the time of publication, Rev Shark was long GOOGL and META.