There has been a curious phenomenon in global stock markets which is getting a lot of investors worried. The situation is most pronounced in the US, likely because the Fed has been among the most aggressive of the central bankers.

What’s happening is that stock markets are going up, but most company’s shares are going down. It’s bringing back echoes of 2007, just before the start of the subprime crisis that ushered in the last organic recession.

What’s this about?

The thing at issue here is what’s called “breadth”, which refers to the number of listings participating in a move in the market. So, if the market is moving higher, and a large number of companies’ shares are going up, then analysts will call this a “broad” market. On the other hand, if it’s just a few companies rising, then analysts will start to worry about the lack of “breadth” in the market.

The implication is that if only a few stocks are going up, and the majority are going down, then the upward momentum is an exception. The market could quickly turn around. This is the situation with US markets now, with Big Tech companies roaring ahead. Some companies, like Meta and Nvidia have doubled their share price in the last few months. Microsoft and Google have jumped over 50% in a similar period of time. Meanwhile, over 60% of the S&P 500 are trading below the 200 SMA, an indication that those stocks are either trending lower, or are in conditions to do so.

Signs of weakness

It seems everyone is piling into a few large names that have an oversized impact on the market. The seven biggest tech firms on the Nasdaq, for example, concentrate over a quarter of the index’s weighting. The meteoric rise of these companies has dragged the index higher, despite most of the companies underperforming.

And the bulk of these gains have been thanks to a single phenomenon: Generative AI. The share price jump in Nvidia and Microsoft are seen primarily thanks to ChatGPT. The need for increased data processing and hosting is helping advance other tech firms that provide cloud solutions. But, this is a new technology, and it’s not sure just how far it can advance. Already, analysts are comparing AI with the dot-com boom. Which was followed by a recession when the bubble burst.

So, how does this affect forex?

A recent survey of trading positions showed that over 17% of traders hold short positions on the S&P 500. That is, they are betting it will go down, with the expectation of a recession hitting the US later in the year. This is the highest number of shorts on the US benchmark stock index since September of 2007.

When traders expect the stock market to take a spill, they like to position themselves by buying up US bonds. Typically, this drives down yields, while the dollar gets stronger. But, over the next few months, the US Treasury is expected to dump as much as $1.5T on the bond market. Even if investors are snapping up bonds as much as they can, the large issuance could still push up yields, and by extension the dollar. Unless the “breadth” of the market expands, then there could be further upside for the greenback in the short term.

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