That the S&P 500 managed to log its first record close in more than two years late last week should be boosting investors’ confidence.
However, one widely followed technical strategist has highlighted several reasons why investors should be anxious about a looming pullback.
Concentration risk is rearing its ugly head once again, according to Jonathan Krinsky, chief market technician at BTIG. The megacap technology stocks, which powered most of the 2023 rebound rally in U.S. equities, are outperforming unprofitable technology stocks and almost every other corner of the market by a wide margin over the past two weeks, Krinsky said.
Comparing the performance between megacap technology stocks and unprofitable technology stocks found that over the past two weeks, megacap tech has outperformed by the widest margin since May 2022, according to Krinsky’s data.
BTIG
A similarly wide gulf can be seen between the small-cap-focused Russell 2000
RUT
and the Nasdaq-100
NDX.
Following a brief period where both rose in tandem late last year, the Nasdaq-100 has charged higher since the start of 2024, while small-caps have retreated.
This lopsided performance has caused small caps to trail the Nasdaq-100 by about 8% over the past 15 trading days through Friday, Krinsky said, the largest gulf since March 2023.
Granted, small-cap stocks and many of the top holdings from the ARK Innovation ETF
ARKK,
seen as a proxy for unprofitable technology names, aren’t represented in the S&P 500.
Another troubling divergence has emerged between market-based expectations for interest-rate cuts and the S&P 500’s
SPX
performance.
Market-based expectations for the Federal Reserve to deliver its first interest-rate cut in March have fallen sharply since the start of 2024, from roughly 90% in late December to 46% as of Monday, according to the CME Group’s FedWatch tool.
BTIG
To Krinsky, the notion that U.S. stocks will continue to climb while perceived chances of a swift start to Fed rate cuts falter seems unlikely.
“Correlations don’t last forever, but we have to imagine a decent part of the rally off the October lows was due to anticipation of rate cuts starting in March. If so, then this divergence is likely to resolve with [the S&P 500] moving lower over the near-term,” Krinsky said.
Finally, as megacap technology stocks have outperformed in January, a surprising share of trading volume in S&P 500 stocks has been lower, not higher. This is yet another indication of how the market is once again relying on a handful of megacap technology names to drive the main indexes like the S&P 500 and Nasdaq-100 higher.
BTIG
One problem is that many of these names, especially in the semiconductors space, are already looking exhausted, Krinsky pointed out, meaning that further upside for the S&P 500 will likely be limited without broader participation in the rally.
U.S. stocks opened higher on Monday, leaving the S&P 500 on track to potentially log a second-straight record close. The S&P 500 was up 0.5% at 4,862 in recent trade, while the Nasdaq Composite
COMP
gained 0.4% to 15,426, and the Dow Jones Industrial Average
DJIA
gained 137 points, or 0.4%, to 37,997.
