Beneath The Surface The Market Is Showing Signs Of A Top

While the S&P is only about 2% off its all time highs, beneath the surface the market is showing signs of a top. Warren Pies tweeted today that there have only been two other times when Consumer Staples and Energy have been up more than 10% and Technology and Financials negative over the previous 63 trading days: 1990 (Desert Storm) and 2000 – both of which were tops. Health Care – another defensive sector – has also been outperforming the S&P of late.

While software stocks have been taking the brunt of the market fears about Artificial Intelligence, on Monday the market came for the financials. Optuma pointed out that JP Morgan (JPM) and American Express (AXP) both closed below their 200 DMAs for the first time since the Tariff Tantrum of April 2024. Schwab (SCHW) has also lost its 200 DMA in recent days. That’s three more leaders whose race appears to be run and have now broken down. Indeed, the entire sector is rolling over.

As I have argued many times, the market simply cannot go much higher without the participation of The Magnificent 7. It’s just math: Because the S&P is a market cap weighted index and those 7 stocks make up ~1/3 of its value, the rest of the market can only push the index so much higher without their participation.

As investors have become increasingly concerned about the size of these hyperscalers capital expenditures to build out AI, they have started to sell these stocks. A big test is coming Wednesday afternoon when the largest ($4.7 trillion market cap) and most important stock in the market, Nvidia (NVDA), reports earnings.

In sum, the rotation into defensive sectors (Consumer Staples and Health Care) and out of offensive sectors (Tech, Mag 7, Financials) as well as the outperformance of commodity stocks suggests that we are transitioning into a new macro regime from the one that has ruled markets over the last 15+ years. Those who understand this transition stand to make enormous profits in the years ahead while those stuck in the past will be left behind.