šFever Breaking; Blow-Off Top Formed
The short squeeze may be coming to an end
Welcome back to MktContext. We time the stock market.
Current market timer: HOLD
SPX just closed its 7th positive week in a row. Rallies of this speed and magnitude are often unstable. We are fully invested riding the bull wave, but recognizing that a pullback will be inevitable at some point.
This week we saw signs of exhaustion in the rally. Technical signals point to an interim peak and imminent selling to come. If our theory is correct, then a brief pullback could occur as early as next week.
Weāve been hearing from many investors that this market has been incredibly painful. Some were left sitting out the V-shape rally, others have been trying to time the market peak and getting run over. Lacking the proper framework for identifying turning points can be debilitating in this type of environment.
Todayās topics: Market is peaking, Xi-Trump meeting, inflation, our portfolio.
Technical analysis
The torrid rally in tech stocks continued this week, culminating in a blow-off top. There were several bullish news catalysts this week:
US clears sale of Nvidia H200 chips to China
Cisco (CSCO) earnings and pivot to AI
Chip startup Cerebrusā explosive IPO debut
AMDās strategic stake in Marvell
By the end of the week, positive news of Trump and Xiās meeting in Beijing was overshadowed by a sharp gap-down/selloff on Friday. Traders had already priced in the good news earlier in the week, leading to a sell the news reaction (wherein good news is met with selling). It is often a sign of exhaustion and imminent reversal; exactly what youād expect at a peak.
The result is a large spinning top candlestick on the weekly SPX chart after 6 straight weeks of green. This candle usually indicates indecision or a rejection of a key level ā in this case the 7500 price level and major Fibonacci extension we mentioned last week:
Tops are often messy and difficult to time. However, due to the extent of this short-squeeze rally, a pullback is inevitable and a bit overdue. In the rest of this report, we discuss whether this is the start of a bear market or whether the rally can continue after a brief pauseā¦
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Short squeeze continuesā¦
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When will the short squeeze end?
Xi-Trump summit changes nothing
Hot inflation print
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