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Will AI Carry Stocks For the Year?

June 27, 2024
Frank Cabibi

Despite market choppiness, the end result has always been up. Every small bump in the road is casually paved over by the optimism in the AI trade. So, is it worth looking for trading the downside on an overbought market, or should we just let the market do its thing?

Small Caps Struggle

When you see an overly bullish market, you tend to also see small caps outperform as well. The pressure that small caps are feeling are from the fear of higher interest rates. But if the market continues higher without the RUSSELL, there may be a catch-up trade in the small caps.

However, it is likely that the large cap tech companies' AI move could carry SPX and NAS higher and leave RUSSELL in the behind. There's too much speculation and potential risks involved that it is hard to trade a directional play unless you stare at your screen all day.

Weird Market Behavior

Looking at smaller timeframes on the SPX500 show that each drift higher is followed by quick sell offs and reset the gains for the day. Different areas of the market move in different directions from each other as well. When NVDA was down, other sectors were getting bought which ended up flatlining the gains.

The direction of stocks is really uncertain based off what's going on in the US economy and the lack of direction. From seeing unrealistic bull rallies in the past, this summer could just be a lull in direction. Even with all the warning signs of a giant correction, it can very well push higher until the bubble seems well beyond the expected move.

So what can we trade in such a mixed market? We could probably look long term. Think of the odds of high interest rates in the next 5 years. The Fed's forecast is now at a 3.75% interest rate by 2026. Regardless of where the market moves, the expectation is that rates will be lower over time.

The Fed is even expected to cut this year. Rates are going to come down at some point, and the first cut will be the sign of future rate cuts. We can look at the increase of bond prices over time as interest rates fall.

Retail Spotlight

Retail is now mixed indices and gold, while being long other metals, SPX500, Oil and small caps. The only short positions on retail sentiment are GER30 and USDJPY.

Smart Money Spotlight

COT data is now updated to display the latest filings from last week. There was now a sell-off in CAD, small caps and EUR. USD saw one of the largest gains last week while SPX and NAS were getting bought again.

Fundamental Spotlight

Unemployment claims remain steady for months suggesting a slowing labor market. Pending home sales came in lower as well, but house prices remain stubborn. No one is selling their homes with high mortgage rates. With house prices high and mortgage rates high, no one wants to buy a house. Sales will likely stay low, and a cooler jobs market could mean even less demand to spend on big purchases such as a house.

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