Brace for Impact

Stock market investors have had a lot to be happy about in recent weeks.

In fact, since the start of the year, the S&P 500 is currently up about 13%.

But if you only looked at the combined performance of 493 of the stocks that make up the S&P 500, the market would be about flat for the entire year.

That means just seven companies have been responsible for almost all of this year’s gains.

Those companies are Amazon, Apple, Google, Meta, Microsoft, Nvidia, and Tesla. Combined, these seven mega stocks are up over 50% this year alone.

That’s a crazy concentration of capital that’s flowing into a very limited number of stocks. And it’s a bit worrying for market bulls.

The only logical conclusion is that one of two things is going to happen next:

1. The first possibility is that market sentiment will continue improving. This would be great news for bulls as it would likely see cash go to work in some of the other names in the S&P 500 index.

2. The second possibility is that the buying power flowing into those seven mega stocks will eventually exhaust itself. And when that happens, investors won’t be lining up to buy other stocks as well. The only option left would be for investors to start selling their positions in the hopes of realizing a profit.

   This will have a compounding effect as increasing numbers of investors exit the market. The end result would be a vicious sell-off.

Unfortunately, my analysis of the VIX suggests that the second possibility might be relatively close at hand.

Let me walk you through a price chart of the VIX so you can see what I mean.

On Friday, the VIX reached a level it hadn’t seen since February 14, 2020. Just a few days later on February 19, the market put in a major top.

What happened next has come to be known as the coronavirus crash. The S&P 500 sold off by over 35% in just 23 trading days.

I’m not saying that we’re going to see the same thing happen today. But I can’t deny that a lot of the elements I’ve been looking for leading to another major market top are all starting to come together.

On Monday, I wrote about how the Nasdaq is lining up in an eerily similar fashion to what happened right before the worst of the Dot-Com Crash.

Now, the VIX is telling me the market is getting complacent again.

All eyes will be on the Fed’s announcement later today. If the market is disappointed by what Chairman Powell has to say, then we could be primed for a blow-off top.

If there’s a significant sell-off later this afternoon, it’s crucial to keep an eye on the VIX. If the VIX doesn’t accelerate higher, then it’s likely buyers will come in once more to buy the dip.

But if the rest of the S&P 500 doesn’t soon start participating in the rally, the bull run of 2023 will remain on shaky ground.

Best regards and good trading,

Imre Gams

Are you prepared for a sell off?

Let us know your thoughts – and any questions you have – at [email protected].