The Margin For Error Is Shrinking
Markets Priced For Perfection
Markets continue to reward perfection. The AI trade remains relentless, valuations are expanding at a remarkable pace, and investors show little interest in downside protection. At the same time, Treasury yields are attempting to move higher again, creating a backdrop that looks increasingly stretched. For now, momentum remains firmly in control, but several indicators suggest the market is becoming more vulnerable to disappointment.
Perfection
The bull remains intact. SPX continues to respect the massive trend channel that has been in place since 2023. The market feels due for a pullback, but perspective matters: a 5% correction would only take us back to where we were trading a month ago and would likely coincide with a test of the 50DMA.
Source: LSEG Workspace
That was quick
"The S&P Tech sector's trailing 12-month P/E ratio has jumped from roughly 32 to 48 since the 3/30 low."
Source: Bespoke
Long term NDX
NDX is testing the upper trend line that connects three major highs. Nothing we'd base a short-term trade on, but it adds to the list of stretched signals. Weekly RSI has also climbed to its highest level since the first explosive post-Covid squeeze.
Source: LSEG Workspace
Skew picking up
Protection remains unwanted. Skew has spent months resetting as investors have grown increasingly comfortable selling or abandoning downside hedges. Today's uptick is modest, but it serves as a reminder: when everyone is naked on the downside, small declines have a tendency to become larger ones. More on extended markets and how to hedge here and here.
Source: LSEG Workspace
Bouncing
The US 10-year is bouncing right off the trend line that has been in place since March. Yields are also attempting to reclaim the 21-day moving average, a level worth monitoring closely. More here.
Source: LSEG Workspace
King of tech
EEM isn't what it used to be. Many still view it as a commodities and old-economy EM trade, but the ETF has quietly evolved into a tech beast driven by semiconductors and AI-related exposure.
Source: iShares
Five stocks, 35%
TSMC, Samsung, SK Hynix, Tencent and Alibaba alone account for roughly 35% of EEM, highlighting just how concentrated the ETF has become in a handful of technology and internet giants. TSMC and the 2 Korean giants make up 30% of the EEM.
Source: i Shares
The AI trade nobody talks about
The market remains fixated on Nvidia and the Mag 7. EEM is up 30% year-to-date versus just 7% for the Mag 7, highlighting where much of the AI money has actually been made. More on EEM here.
Source: LSEG Workspace
The IPO pop trap
Recent IPO history is littered with examples of spectacular opening-day excitement followed by disappointing returns. Investors consistently overpay for stories that have already achieved maximum narrative saturation. Below is a Goldman chart on how some recent IPOs have struggled during the initial weeks and months of trading. Sell the pop. Latest IPO note here.
