Money Flow – Positioning ahead of the PCE Index at 15:30.

A narrow market performance, led by a handful of large-cap technology stocks with AI exposure, continues to plague market participants. Earlier this week, it appeared that there might be some delay in this lopsided action  , but Nvidia ( NVDA ) stunned the market with guidance far beyond anything even the most bullish analysts expected.

Nvidia supplies about 80% of the GPUs that are used in the development of AI applications. It has more direct exposure to AI than almost any other stock and is valued as a monopoly in AI-related GPU manufacturing. 

A great example of the divergence between indices and individual stocks was seen in the Nasdaq 100. Up 2.6%, while the spread was a measly 2-to-1 negative. Over the past three months, the difference in performance between the benchmark S&P500 and the equal-weighted S&P500 is the largest since December 1999.

There was broad weakness in healthcare, biotech, energy, retail, consumer defensive stocks and financials, but this was offset by strength in technology and semiconductors.

The situation could have been even worse, but there has been a steady stream of rumors about a potential debt limit deal and even mention of a potential vote on Tuesday.

The bulls are starting to tire of the tight market and it looks like their resources are already limited. With most tech tops, without a rally correction there is an increased likelihood of one if today’s PCE index is up. The correction will hit the indices particularly hard, as the smaller stocks will easily continue to fall due to lack of interest and the large ones will be the main momentum of the movement. Such counter-trend rallies tend to last longer and higher than the market expects. The short squeeze has already driven many traders out of the market and liquidity from short positions is starting to diminish. At the moment, more and more attractive liquidity is starting to accumulate from long positions, and those who bought the last hype will be the ones who will benefit the most. Of course, it will take a catalyst to shake the confidence. Today’s PCE at 15:30 has serious potential to do that, but to do that we’ll need to see inflation pick up, which is actually highly likely as market appreciation pushes it more.

There is no historical precedent behind the technology’s actions. Usually when there is a technology as innovative as AI, there are hundreds of stocks competing in the emerging industry, but in this case there is only a very small group that benefits of AI – known large caps. There aren’t essentially many small AI stocks competing for market share, which is very unusual given AI’s growth expectations.

Maybe it’s too early.

The S&P has been flat for the past 2 days, mostly due to uncertainty surrounding the PCE index. For now, the market prefers to stay in these intermediate levels, as access to Sellside and Buyside liquidity is easiest from here. Right now, it looks like there is still some buyside liquidity to rob before the longs enter the unfavorable breakout levels. Price action showed weakness on a breakout of the top, hinting that the bulls’ resources are starting to run out, as well as their sentiments at the current highs. It’s hard to give direction from here. After the PCE today at 3:30pm we will see aggressive moves and repositioning of portfolios ahead of the end of the month next week and ahead of the long weekend for the states.

The Nasdaq, on the other hand, is showing a lot of bullish sentiment after the retracement of the breakout peak. A possible move to 61.8 fibo in the next sessions, but fundamentally there is no reason to continue the rally. The tech killer is high inflation and an aggressive Fed, and given the rally, we’re likely to see inflation pick up and the odds for another Fed hike at the next meeting. Of course nothing is confirmed yet, after the data there will be more clarity on the market.

 Dealer Anatoliy Pavlov

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