A man walks his dog in the shade to avoid the midday sun as he passes the New York Stock Exchange (NYSE) building in Manhattan in the heat on August 11, 2020 in New York City, New York, USA.
Mike Seeger | Reuters
The S&P 500 closed at an all-time high on the last trading day of May, but only a handful of stocks primarily focused on the AI sector set new highs.
This bizarre event mirrors what happened at the height of the dot-com bubble 26 years ago.
Only 20 index members achieved the record on Friday. Of those 20, only seven were not directly related to AI.
Bank of America’s Michael Hartnett noted in a note closed last week that only 20 stocks hit new highs at the height of the Internet bubble in March 2000.
The widely followed strategist said that while the “speculative price action” is likely not over yet, this incident is the latest sign that it is coming. Mr Hartnett believes central banks and rising interest rates will eventually spell the end and give clients a ‘post-bubble’ roadmap.
May’s stock market boom was mainly driven by semiconductors, particularly memory chip makers such as: micron technology, advanced micro deviceSK Hynix and Samsung, all of which are worth at or near $1 trillion. AMD soared 50% in the month, Micron 85%, Samsung 43% and SK Hynix 81%.
The tech-heavy Nasdaq Composite Index rose 25% in April and May, the strongest two-month gain in more than 20 years.
narrow bull
A growing number of strategists and investors are concerned that if this bull market doesn’t start to expand, it will eventually reverse.
The rise/fall line, which compares the number of rising stocks and the number of falling stocks, shows a similar trend, with a sharp rise at the end of March, followed by a downward trend from mid-April onwards.
“Internal performance has lagged since the initial spike in April,” Ari Wald wrote in Oppenheimer’s May 23 technical analysis.
As of May 20, only about 55% of S&P 500 stocks were trading above their 200-day moving average, according to BCA Research.
S&P 500, 1 year
“Despite the U.S. and (emerging market) stock indexes reaching new highs, the gains have been extremely narrow. Lack of breadth is often a sign of fundamental weaknesses in equity markets,” BCA strategists led by Arthur Budagyan wrote in a May 20 note.
Hartnett advises his clients to get defensive immediately.
“The post-bubble investor’s roadmap since 1929 has been a long-term combo of long-term bonds and defensive stocks and sectors that dramatically underperformed in the final months of the bubble,” he wrote.
