Strong Breadth Is Better Than a Narrow Magnificent Seven-Led Bull Market
The surge in breadth and the Zweig and Whaley thrust indicators is the talk of the market. Here's how we view the market environment right now.
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After three days of substantial gains, there is a little slippage early on Friday morning as investors deal with overbought market conditions and contemplate the potential for more positive news on trade and tariffs.
A good earnings report from Alphabet GOOGL and news that China may be looking to cut some of its tariffs on U.S. goods are helping sentiment positive. Concerns about a slowing economy are providing the bears with some ammunition, but signs of a slowing economy combined with the tariff turmoil are boosting the potential that the Fed will start cutting interest rates sooner than previously thought.
Currently, no interest rate cut is anticipated at the next Fed meeting on May 7, but the chances of one at the meeting on June 18 have risen by over 60%. A more dovish Fed is giving market players some relief from the pressure on bonds, the dollar, and equities.
Technically, conditions have improved nicely, and that is feeding increased bullishness, short squeezes, and FOMO. There is much talk about the surge in breadth and various indicators that calculate it, such as the Zweig and Whaley thrust indicators. Basically, all that these indicators tell us is that a lot of stocks have been going up a lot in a short period of time, which suggests that upward momentum will be sustained.
Ironically, this is the opposite of what has been happening in the last couple of years when a very small group of big-cap technology stocks, dubbed the Magnificent Seven, produced the vast majority of gains while the rest of the market produced little performance.
A broad market with many stocks participating is much healthier than a narrow Magnificent Seven-led market, but at this point the biggest obstacle is that the economic cycle is turning down and won’t be the tailwind it was a year or two ago.
The price action has been strong enough to induce Investors Business Daily to raise its market exposure to 20-40%. The indexes have moved over key short-term levels at recent highs. The Nasdaq has had three straight 2% gains for the first time since April 2021, which was a good time to buy.
The market has gains to digest, and there is always the potential for more tariff turmoil. We have a slightly soft opening Friday, but after this big move, the dip buyers will be watching for opportunities.
At the time of publication, Rev Shark had no positions in any securities mentioned.
