"Nasdaq has risen for 7 consecutive months," "Only the Magnificent 7 are rising," investors seem convinced the US stock market will only go up? Even the 'most optimistic people' are starting to worry.
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Although U.S. stocks have entered November, traditionally their best-performing month, the divergent trends in the market are starting to worry even Wall Street’s most optimistic investors.
On November 3, Wallstreetcn reported that Amazon had signed a $38 billion computing power agreement with OpenAI, which will provide it with hundreds of thousands of Nvidia GPUs. This news pushed Amazon's share price up by 4%, and also drove an increase of 1.2% in the "Magnificent Seven" tech index.
However, Monday's disappointing U.S. ISM manufacturing data resulted in a market pattern where tech stocks were strong while other sectors were weak. More than 300 companies in the S&P 500 index declined, and the Dow Jones and small-cap indices also closed lower.
On one hand, there are strong corporate earnings and the revolutionary narrative brought by AI. On the other hand, stretched valuations and fragile market breadth. Investors seem to firmly believe that stocks can only go up. This unshakeable faith is now making some of Wall Street's best-known optimists worry.
Wallstreetcn reported that renowned Wall Street bull Ed Yardeni issued a rare warning about U.S. stocks, believing that investors’ excess optimism has become a contrarian indicator. He thinks with poor market breadth, any unexpected event could pull the market down from its heights.
Market Breadth Weakening, Cracks in the Uptrend’s “Foundation”
Since April, the Nasdaq Index has long since broken away from its lows, surging nearly 40%. But behind this seems to be more of a "solo celebration" by tech giants.
A key indicator of market health is "market breadth," that is, the number of shares participating in the rise. Currently, this indicator is flashing a red warning sign.
(The widening gap between S&P Index and S&P A/D indicator shows severe market divergence)
Furthermore, while the S&P 500 index has been rising, the equal-weighted S&P 500 Index has been declining. This suggests the gains are entirely contributed by a handful of large-cap stocks, with most stocks not participating.
As Louis Navellier of Navellier & Associates said:
Market momentum remains positive, but returns are highly concentrated. Investors overweight in AI have performed much better this year.
LPL Financial strategists Adam Turnquist and Jeff Buchbinder point out that when an index rises and market breadth does not keep up, it shows "new cracks" in the market’s “foundation.”
They agree with the motto "Don’t fight the trend," but also remind investors of another saying: "Bull markets do not rise in a straight line."
Soaring Optimism: A Contrarian Signal?
Renowned Wall Street bull Ed Yardeni issued a rare warning on U.S. stocks, believing that excess investor optimism has become a contrarian indicator.
Ed Yardeni, founder of Yardeni Research, stated:
There are too many bulls in the market. With poor market breadth, any unexpected event could pull the market down from its highs.
He believes that this widespread optimism itself is a warning sign. The S&P 500 index has soared 37% since early April, a gain that has occurred only five times since 1950.
Technical signals are also flashing warnings. The S&P 500 is currently 13% above its 200-day moving average, which usually means the rebound is overstretched.
(S&P 500 daily candlestick chart; orange line is the 200-day moving average)
Analysts believe this longtime bull is starting to doubt his own year-end rally expectations. This shift is worth particular attention because Yardeni has been a staunch supporter of the rebound since April, and his target of 7,000 for the S&P 500 by the end of 2025 is among the highest on Wall Street.
Julian Emanuel of Evercore also warned:
Record high bullish sentiment increases risks for the stock market when faced with imperfect news.
Analysts believe that when almost everyone expects the market to rise, any negative news can be amplified, leading to a reversal.
eToro’s Bret Kenwell added that as the Fed forces investors to reconsider the possibility of a December rate cut, any significant deterioration in market sentiment could trigger selling.
Can the Year-End Historic Strength Offset Pullback Risks?
Looking ahead, historical data provides strong support for the bulls.
According to Bespoke Investment Group data, since 1928, there have been 40 instances where the S&P 500 index gained more than 10% in a year by the end of October. After such cases, the average November gain is 2.6%. The firm’s strategists said:
The old saying “strength breeds strength” applies here.
CFRA’s Sam Stovall also believes that though recent gains may face a brief correction, he still expects stock prices to continue rising by year-end. However, some analysts warn that given the strong performance over the past six months, part of the gains may have been “borrowed from the future.”
Anthony Saglimbene of Ameriprise believes that aside from technicals and a short-term overbought condition that may trigger a brief pullback before year-end, the fundamentals of the market's most sought-after stocks remain "very strong."
Michael Brown of Pepperstone also said:
In my view, by year-end, the path of least resistance for the stock market remains upward.
He believes that impressive earnings growth, the resilience of the U.S. economy, and an accommodative monetary environment are all positives.
Risk Warning and DisclaimerThe market carries risks, invest with caution. This article does not constitute personal investment advice, nor does it take into account any particular user’s specific investment goals, financial situation, or needs. Users should consider whether any opinions, views, or conclusions expressed herein are appropriate for their individual circumstances. Investing accordingly is at your own risk. ```