The Fed surprised everyone with 2024 rate cuts projection during the December 12-13 2023 meeting.  The market immediately thought of the first rate cut coming in March 2024 therefore the rally continued into February.  The Fed realized the market’s unrealistic expectations about rate cuts, and has come out several times to talk down the timing of the first rate cut.  Nobody was listening to the Fed as if the monetary policy doesn’t matter to the stock market.  The momentum has gotten hold of the market.

One of the momentum stocks, Super Micro Computer, ticker SMCI closed at 284.26 on December 29, 2023.  SMCI reached intraday high at 1077.87  last Friday which gave 279% gain year to date.  Sellers showed up in the stock after such an extreme run in such a short time.  SMCI was pushed from intraday high at 1077.87 to intraday low at 801.15, that’s a 26% drop.  SMCI closed at 803.32 last Friday, that was 20% drop in one day.  It still had 183% year to date gain though.  SCMI made a climax top with very high volume last Friday.

SMCI makes AI related hardware and it is not as popular as Nvidia among the retail investors.  But it is by no means a fake company, it has been traded as a meme stock like AMC in 2021 though. With such a high priced stock, the speculators are deep pocket hedge funds trading against each other.  The SMCI up trend trading momentum will keep going unless something with greater force presents itself.

We had hotter than expected CPI and PPI data last week and the bond market responded with higher yields.  The 10-year treasury yield had 2.58% weekly gain.  The rising bond yields tighten financial conditions, therefore the momentum driven stock market eventually comes back to reality.  Nvidia and Super Micro Computer can be the best companies in the planet and everyone needs their products, still there is a price for everything.  Their stock price just can’t go to infinity.  Meme stock styled trading is only possible at market top.

Nvidia stock also had a bearish day last Friday so were the three major indexes.  Last Friday Nvidia had a price target upgrade to $1200 and the stock didn’t move.  In the past, Nvidia had a slew of price target upgrade and each time the stock responded positively to the price pump. When Nvidia stock kept trading higher, the analysts would be forced to update price target to reflect the market.  The analysts are people too.  They don’t want to look stupid.  If they had a price target of $500 and stock traded to $700, they look stupid.  Therefore trading momentum and price target upgrade are feeding each other to make the price go higher and higher.

It appears that everything is setting up for a market top.  The market is very vulnerable for a pullback of 7-10%, it could even be a 20% pullback.  Nvidia will report earnings on February 21, Wednesday after market close.

As we said in our private email before, we need to see the market to start the correction by February 22.  If there is no correction by February 22, then the rally could stretch into March.  Everything is possible with momentum.

Core PCE, the Fed’s favorite inflation data will be released on February 29.  Based on higher CPI and PPI, we should get a higher core PCE reading which probably will push the market down seriously.  Right now, the market is still sort of in denial.

We have been looking for the 4-year cycle top. The February 2024 top could be the 4-year cycle.  Once we get into correction, the Fed would come to the rescue.  That’s when we want to buy the market, not here at the top.

Below is the S&P 500 daily chart.

If you look at the S&P 500 chart alone, there is nothing to suggest a top is nearby.  The positive trend is still in place.

We suspect that a top is nearby based on the following thoughts:

  1. The treasury yields acting in reverse of the stock market rally
  2. The meme stock trading activities
  3. 4-year cycle top is due anytime

Anyway, the worst thing you can do now is to buy stocks at this level.