Market Duality: A Tale of Two Indices
December is shaping up to be a month of stark contrasts in the market. On one hand, the Dow Jones Industrial Average has suffered its worst day in a month, capping off a nine-day losing streak – its longest since 1978. On the other hand, the Nasdaq Composite has notched six record highs this month, including one on Monday.
The “Magnificent Seven” Stocks
The driving force behind this dichotomy is the impressive performance of the “Magnificent Seven” stocks – Apple, Alphabet, Microsoft, Meta, Tesla, and Nvidia. These tech giants have added a staggering $1.2 trillion to their market capitalization this month alone, with Tesla leading the charge with a remarkable $680 billion gain. Despite Nvidia’s $200 billion loss over the same period, the collective market capitalization of these seven stocks has surged by $1.8 trillion since the election.
A Narrowing Rally
Investor concerns about the narrowing rally are not new. Since the bull market began two years ago, the S&P 500 has gained $22 trillion in market capitalization, with the “Magnificent Seven” contributing a significant $10 trillion, or 45%. This dominance has drawn comparisons to the late 1990s dot-com bubble, but each time, other areas of the market have stepped up to assert themselves, while the tech stocks have continued to thrive.
Rotation: The Lifeblood of Bull Markets
As Ralph Acampora, the godfather of technical analysis, puts it, “Rotation is the lifeblood of bull markets.” This rotation has been evident in the market, with utilities, real estate, and consumer staples cushioning the fall when the “Magnificent Seven” index itself fell into a bear market in July.
Cash Allocation: A Sign of Sentiment
However, the massive amounts of cash being tapped into the market indicate a level of “super-bullish sentiment.” According to BofA, the allocation to cash by fund managers has dropped to a net 14% underweight, the lowest level since at least 2011 and the sharpest decline in five years. This level of sentiment is a warning sign, as prior periods of low cash allocation have coincided with significant drops in the market.
A Cautionary Tale
As the analysts at BofA ominously highlight, previous lows in cash allocation have preceded big tops in risk assets. With cash disappearing from portfolios at a record pace, investors would do well to exercise caution and diversify their portfolios to mitigate potential risks.
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