Stocks, or specifically the headline indices such as the S&P 500 (SPY) and Nasdaq 100 (QQQ) keep powering higher, once again hitting new highs today.  This comes despite last Thursday’s dive (when they fell over 1%, gasp!) where many felt the first warning shot across the bull’s bow.

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I understand today’s circumstances are quite unique due to the incredible liquidity injected by the Fed and Congress’s monetary stimulus.  Money is indeed sloshing around looking for a home. Oh, and have you seen home prices?! 

I also understand that the economy’s coming out of a self-induced, artificial recession as a response to Covid with the timetable and recovery magnitude being equally eye-popping. 

Talk about “V” bottoms; the SPY recovered the initial 25% March 2020 decline by June — meaning it gained 50% in a mere three months. 

Since then, its climb has been both relentless, and freakishly uniform.  The trend up can be drawn by a straight edge ruler along with the 50-day moving average.   

From the May to November period, one could explain the disparity between the indices performance and the incredible turmoil beneath the surface as a result of fast and furious rotation between sectors; growth vs. value, reopening vs. stay-at-home, and commodities with pricing power vs. those that cannot pass along input costs. 

 I big concern of mine is that market breadth has deteriorated over the past few weeks — we’re back to the FANG+M (Facebook (FB), Amazon (AMZN), Alphabet (GOOGL) Netflix (NFLX),  and Microsoft (MSFT) have been doing all the heavy lifting in the market cap-weighted indices. 

If we look at the equal market weighting, we see a clear divergence; breadth weakening even as the index climbs highs.

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If the soldier can’t follow or get behind the generals (AMZN, GOOGL, MSFT), the market might find itself in a precarious and fragile state.  One vulnerable, and honestly quite due, for a 10% or more correction. 

The Sentiment Trader chart below shows when the Nasdaq had made new highs with 50% less of the components trading below their 50-day moving average.  We’re here again, and the aftermath nearly results in a significant sell-off. 

Maybe I’m being overly cautious, but the Options360 portfolio has reduced exposure to individual names through adjustments to reduce cost basis. 

I also established bearish positions in Salesforce (CRM) and broad market hedge using a ratio spread in QQQ. 

I’ll keep things close to the vest and see how it all plays out as the deluge of earnings starts next week.  This should bring opportunity. But first, order it to keep your head above water. 

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