There is some good news and some bad news.
The good news is that the US stock market has hit new all-time highs, and we’ve been able to cash in some solid trades.
The bad news is that we’re probably going to see the market get rug pulled in the month of July.
About a month ago, we showed our clients that fund managers were severely underallocated to US stocks in May.
Since then, fund managers have very likely amped up their exposure to US equities significantly.
Until recently, most retail and institutional investors were concerned about downside risk from Donald Trump’s tariff policies.
Now, stocks have rallied quite severely since May.
This has been driven by FOMO and short squeezing.
Investors are buying back into the market to avoid missing out on profits, while those hedging against downside risk need to cover their short positions.
This is why V-shaped recoveries can be so violent.
Similar to 2020 and 2019, the index gets taken back up to all-time highs because of all that forced buying.
But, while the index itself has powered through, the average stock within the S&P 500 hasn’t performed well.
🚨 Ready to Profit From These Markets?
We recently booked a 9.4% profit on $HDB and 17.55% profit on $ZIJMF.
Secure a membership to see:
- Our entire trading strategy
- Buy/sell alerts for all our trades
- Market analysis and 3 weekly Strategy videos
- Guidance on booking profits and closing positions
Click here to join Bravos Research
The Hidden Weakness Behind New Highs
The percentage of stocks within the S&P 500 that are trending higher is still below 50%.
While the S&P 500 is at all-time highs, the majority of stocks within the S&P 500 are still trending lower.
This tells us there are still underlying concerns on the average S&P 500 stock.
The big runup has been fueled by just 4 companies: Microsoft, Nvidia, Meta, and Netflix.
Since its April low, the S&P 500 has rallied by roughly 20%.
- Microsoft and Meta have rallied by 40% – 2x the S&P 500’s performance
- Netflix has rallied by 50%
- Nvidia has rallied by 60%
These 4 companies make up almost 20% of the S&P 500 index.
Their extreme outperformance has lifted the index higher, creating a divergence between the cap-weighted S&P 500 and the equal-weighted RSP.
We saw something very similar in 2020 during the recovery from Covid.
In August 2020, the S&P 500 made a new all-time high, while the RSP was still struggling below its previous high.
Right after the S&P 500 made that new all-time high, it corrected back lower by roughly 10%.
This is a textbook scenario.
After a rapid V-shaped recovery, investors rush back into the market and pour into large cap companies.
Right as the index makes a new all-time high and everyone is convinced the market is heading higher, that’s when it actually corrects.
We saw exactly the same thing in 2019.
Right after the S&P 500 hit a new all-time high, you got a correction of roughly 7%.
We can rewind to 1998 for another example.
After a similar rapid W-shaped recovery back to all-time highs, the index corrected by about 5%.
Our Current Strategy
The combination of lack of participation from the average stock, overextended mega cap leaders, and the stock market making new all-time highs makes us think the market could pull back in July.
We’ve highlighted why we think this bull market can be sustained heading into the end of the year as it’s supported by strong fundamentals.
But a pullback here would be natural and actually quite healthy.
We are trimming more of our allocation to US equities, especially our tech-focused trades like Spotify, KLAC, and IBM that have been melting up with this market.
But we’re keeping parts of our portfolio that can hold up well during this correction.
Bitcoin being one position that we think could actually benefit from the large cap names pulling back.
We have successfully navigated through the recent market recovery with multiple successful trades.
In the past year, we’ve had an average gain of 16.65% on winning trades, while limiting average losses to just 3.67%.
View our complete track record on our website here.
