Technology giants are driving US benchmark indices to record highs this month, while other sectors lag significantly. Traders are experiencing a sense of déjà vu, and understandably so.
However, a key difference in the current rally is the blistering pace at which leading stocks are rising, creating pockets of euphoria and widening their gap with other equities that have yet to recover their losses since the Iran conflict.
A prime example is the rapid ascent of semiconductor stocks, which has prompted Michael Burry, the investor famous from "The Big Short," to purchase put options to profit from a potential decline in the iShares Semiconductor ETF (SOXX).
Speculation that the worst of the Middle East conflict may be over has fueled a 47% surge in semiconductor shares in just 18 days, pushing the Nasdaq 100 Index toward its best monthly performance since 2020.
"I know the Philadelphia Semiconductor Index (SOX) will return to reason," Burry wrote in an April 24 communication, adding that if he held long positions in the sector, he would sell. "Veterans in the semiconductor industry understand this too. What is happening now is technical."
The momentum in chip stocks and the broader tech giant sector, even after a selloff triggered by OpenAI's failure to meet sales and user growth targets on Tuesday, "has that melt-up feel," according to Chris Verrone, Partner and Head of Technical and Macro Research at Strategas Securities. Julian Emanuel, Senior Managing Director of Equity, Derivatives & Quantitative Strategy at Evercore ISI, concurred, adding that the strength in large-cap tech stocks is encouraging speculative risk-taking.
He cited sharp rallies in companies like Intel and Avis Budget Group as evidence that "the public is becoming highly speculative." With approximately $8 trillion in money market funds on the sidelines, ready to flow into equities, "the public is well-positioned to engage in speculation."
The S&P 500 rose 0.1% on Monday, marking its sixth record close since mid-April, primarily buoyed by optimism that the Iran conflict might be nearing a resolution. However, excluding the substantial influence of tech stocks, the market landscape appears different. The equal-weight S&P 500 Index had fallen for five consecutive sessions through Monday, extending its decline to 1.5% since its last record in February.
Despite Monday's gains, only 55% of the constituents in the S&P 500 are trading above their 200-day moving averages. For investors, this may indicate that the foundation of the current stock market advance is not broad-based.
"This is not the kind of broad participation we typically see following a major or reset low," Verrone stated in an April 27 note to clients.
The tech-heavy Nasdaq 100 Index has gained approximately 19% since its low on March 30, compared to a 13% rise for the S&P 500. Recent fund inflows have increased notably, with about $18 billion flowing into US equity funds, according to data from Deutsche Bank.
Whether the current rally can sustain itself depends almost entirely on the upcoming earnings reports from
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