đIs This An Overextended Rally?
Markets have rarely rallied this high this fast
Welcome back to MktContext where we study the US economy and time the stock market.
Current market timer: HOLD
The market continues a relentless rally but looks due for a pullback. In times like these, our job is to ride the bull for as long as possible and not attempt to time the peak.
This week we got blow-out earnings results from AMD, SMCI, HUT, ALAB, and other AI-related names.
Chip makers are entering a blow-off top phase. Can this nosebleed rally continue?
Todayâs topics: Nosebleed Nasdaq, volatility analysis, bifurcated consumer, AI agents, software rebound, our portfolio.
Nosebleed Nasdaq
The Nasdaq is on a tear, like nothing weâve ever seen. Itâs up 26% from the lows a month ago. It touched 3.5 standard deviations above its 200-day moving average. A statistical anomaly that hasnât happened since â you guessed it â the dot com bubble.
It feels like QQQ has been gapping up almost every day, with some of those gaps left unfilled. Here at MktContext we tend to think âgaps get filledâ meaning the stock will retrace the air pockets left behind. That could happen soon as the market needs to consolidate gains.
Whatâs driving this rally? Mag 7 is languishing (on a relative basis) even as QQQ breaks highs. That means this rally is not led by the most concentrated bunch. It is also not led by equal-weighted QQQ, which means there's no breadth to this rally.
McClellan Oscillator for QQQ is declining, confirming the lack of breadth:
It appears the rally is carried by a select few AI supply chain companies. GPUs, CPUs, networking, hardware, electronic circuitry, things of that nature.
This doesn't mean we immediately sell our holdings or go short. There are tactical ways to capture profits (weâll discuss one in the paid section) but blow-off tops can continue longer than expected. Dips are still being aggressively bought in this tape. Don't fight the trend.
On Thurs we saw the first sign of a potential change in character as the index and chip stocks sold off mid-day. However, they gapped up again on Fri and were bought all day. Timing tops is hard.
After a rally of this magnitude, a pullback would be healthy and expected. But we donât think itâll be a deep selloff. Watch the chips, memory, and opto-electronics stocks for signs of what the leaders are doing.
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Volatility analysis
Bifurcated consumer
AI agents and the new bottleneck
Software stocks rebound
Our portfolio
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