Mag 5 Holding Up S&P 500 Earnings
Equities have tracked with major central bank liquidity since the rescues in 2009.
The relationship broke in spring 2023 after Yellen bailed out billionaires who might have lost about 10 percent maximum on deposits at failed banks. The Nvdia started the AI rally in May. Then again in October 2023, Yellen steps in with a change to treasury issuance and Powell shifts Fed language in a dovish direction. Essentially, the gap with liquidity comes down to April-July 2023 and November-March 2024.
Markets don’t have to retrace back to the lows of October 2022, but if liquidity matters, then why not?
How about earnings as a reason to rally?
What percentage of the market owns these stocks directly, is levered to them with options, or owns them indirectly or is levered to them indirectly via passive indexes such as the S&P 500 and Nasdaq?
Sven Henrich also discussed some of the oversold readings created last week. There’s certainly risk for a bounce. Historically, bounces usually happen here. A bounce should happen. Whether it happens or not, and how long it happens will depend on earnings this week. Longer-term, liquidity is a magnet below.
More immediately though. If last week was mainly caused by a drop in Nvidia and chip stocks and it triggered some readings that sometimes come well into bear markets and panics, what does that mean?
It’s a binary scenario in my mind.
The market is strong and a very narrow slice of the market plunged, removing its crazy overbought readings.
The market is not strong because everyone is crowded, knowingly or not, into a handful of stocks. Nvidia revealed how only one stock dropping can trigger “panic” technical reading in the S&P 500 and Nasdaq.
My bias is towards the latter being true eventually. As I wrote earlier today, those earnings reports will decide the week and maybe the next few weeks because the entire S&P 500 Index and its earnings are propped up by that handful of stocks.