Wednesday's Market View from the Top

There’s a Serious Balancing Act Going on in the Market

One of my favorite indicators is still flashing danger signs.

The percent of stocks in the S&P 500 that are above their 50-day moving averages has been hovering around 50%, indicating that half of the stocks in the most widely watched index are slipping below their critical trendlines.

market breadth weighing heavy on stocks warnings of short correction

The move tells us that the recent all-time highs for the S&P 500 were driven by a very small, focused group.

That group, of course, is semiconductor and other AI stocks.

Here's the Danger

We just witnessed NVIDIA’s (NVDA) selloff of 15% in just three days.

NVIDIA is the one stock that serves as a proxy for those AI and chip stocks.

That means that weakness in NVIDIA means weakness for the market’s top performers.

Over the next few days, we’re going to see whether NVIDIA’s strength on Tuesday marked a true bottom for the stock or just a “Dead Cat Bounce.”

We’ll see a steep increase in selling pressure if it’s the latter.

Here’s what it means for the market and your money….

The S&P 500 will trigger a short-term correction if the percent of companies in the S&P 500 above their 50-day moving average falls below 40%.

Right now, that correction would be a welcome event as it would “refresh” the market ahead of second quarter earnings season.

The earnings season kicks off the week of July 15, so there’s plenty of time for that “healthy correction” to happen.

That would set the stage for earnings to act as a catalyst for the next 10-20% rally in the market through July and into August.

Expect that the S&P 500 will find support at 520, which is where the telltale 50-day moving average sits.

The S&P 500’s 50-day moving average is in a strong bullish trend. This means that a short-term correction should be limited to 5%.

spy correction trend chart