Hey trader,
Last week’s rate hike landed like a reality check for the bears. They’ve been throwing everything they have at this market, and the tape absorbed all of it.
Bulls didn’t just shrug off the hike. They shrugged off the AI backlash and the geopolitical tensions stacked on top of it.
The Nasdaq quietly outperformed for the third week in a row. Energy sold off. The Magnificent Seven rallied as a basket to new all-time highs.
Last week did a lot of work. I’ll break down what the rotation tells me about this cycle, show you the handful of sectors holding the entire index up, and lay out how I’m getting ready for what comes next.
The evidence is overwhelming that we’re in the later stages of this bull market.
This is where the most fun begins.
Welcome to the Next Market Stage
|
Performance Leader |
1-week |
30-day |
YTD |
1-year |
|---|---|---|---|---|
|
Sector |
Healthcare (XLV) |
Technology (XLK) |
Energy (XLE) |
Energy (XLE) |
Healthcare took the top spot last week. Technology wasn’t far behind it.
Technology also reclaimed the 30-day leadership spot. I read that as a clean risk-on signal, and it lines up with the Nasdaq’s three-week run of outperformance.
A rising rate environment changes what I need from tech. I don’t need it leading across the board anymore.
Rate hikes confirm the inflationary signal. That keeps energy competitive in its battle with technology for sector supremacy, even after last week’s selloff in crude names.
Tech should still do well from here. Energy has the macro tailwind, and the YTD and 1-year columns already show what that tailwind has been worth.
The Narrowness Is Real, And It Isn’t Fatal Yet
Most sectors on the board aren’t participating in this rally. That eventually turns into a problem for the index.
It doesn’t turn into one this week. Technology alone makes up over 33% of the S&P 500. Ten stocks make up over 40% of it.
When that much weight sits in that few names, a narrow tape can drag the index higher far longer than the bears think possible. Breadth deterioration matters at the end of the move. It rarely matters at the moment people first notice it.
The perma-bear crowd has been pointing at narrow leadership for months. They’ve been telling anyone who’ll listen that the top is already in.
They’ll be right eventually, probably for about a week. Being early has cost their followers an entire leg of this advance.
A peak is visible on the horizon now. Seeing something on the horizon is not the same as calling the top, and I’m not calling one.
How I’m Preparing For The Blowoff
Narrow leadership plus persistent strength opens the door to a parabolic, final blowoff top in the indices. The “Magnificent Ten” lead that move. Add SpaceX to the list and call it eleven.
Manias start slowly. Then they happen all at once. Traders who wait for confirmation of the melt-up usually get that confirmation somewhere near the high.
Positions matter more than opinions, so here’s how I’m handling this stage.
I’m staying with the leadership instead of fighting it. Every short against the Magnificent Seven this year has been a donation, and last week’s push to new all-time highs is the receipt.
I’m keeping energy exposure on through the weakness. Last week’s selloff in the sector doesn’t undo a YTD and 1-year leadership position, and the Fed just reinforced the inflationary signal behind it.
I’m treating drawdowns in the leaders as entries rather than exits. Late-stage bull markets produce sharp, violent pullbacks on the way to the high, and those pullbacks scare people out right before the vertical part of the move.
I’m also watching the Trinity Terminal for the moment leadership rotates away from tech and energy together. That change would tell me the mania has burned through its fuel.
Nothing in last week’s action says the ride is over. Everything in it says the character of this market is shifting into something faster and less forgiving.
The ingredients for a market mania are here. Preparing for one after it starts is how traders end up buying the top instead of riding it.
The time to prepare is now.
Come see how I’m positioning for this stage inside the Trinity Trade.
Talk soon,
Gianni Di Poce
