A1 Trading

The Risks of a Top Heavy Market

June 24, 2024
Frank Cabibi

US stocks are currently being carried by only a few stocks which is creating a top heavy market. The issue that any sort of bull rally does not seem sustainable. Here are the potential risk factors going on with the US indices and dollar in the foreseeable future.

'Uncertain' Score

The EdgeFinder struggles to pick a side when it comes to the stock market and the S&P which has remained a neutral score for some time. Despite this, the index has continued to move higher each week without much hesitation.

The problem with this is that there are only a few companies that prop prices higher, while the rest stumble. Now that NVDA has been falling the past few days, index returns are limited to the upside or mute for gains.

Blue Chips Are Green

Out of the Big Three, blue chips are the only ones to prevail today. The S&P and NAS had a rather muted open this morning, but the US30 ripped higher. The correlation between this index and the rest of the market have been a bit divergent as the US30 has been struggling to keep up with the other market rallies.

There has been speculation of a massive rotation from heavy speculative plays such as the AI trade with NVDA, AAPL, MSFT, AMZN, etc. to be in more reliable companies with dividends and more stability in high interest rate environments.

Honorable Mention

Gold remains the only clear bias when looking at USD related assets. As the metal remains a strong bullish signal on the EdgeFinder, prices finally start to rebound from last week's levels. A major obstacle for gold, however, is the dollar's strength as rate cut hopes dwindle.

Other countries have begun to cut rates which could be a sign that the US will follow suit at some point this year. Gold could serve as a great hedge against the 'looming' correction and weaker dollar in the next couple years.

Retail Spotlight

Retail traders are still bearish on the UK100, USDJPY, GER30 and SPX500. The NASDAQ and gold remain mixed while other metals are the top bought. The RUSSELL- the most interest rate sensitive index - is majority long by retail traders as well.

Smart Money Spotlight

Smart Money is buying oil, bond notes, and gold. Meanwhile, institutions continue to retreat from the indices. This could be a precursor to a correction in the stock market, especially if NVDA cracks.

Fundamental Spotlight

One factor that can contribute to a stock market correction is the inflation level in the US. Notice that from July 2022 to May 2023, there was a steady decline. From then on, we've seen sticky inflation that doesn't seem to want to cross below 3%.

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