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Introduction

Our weekend report focused on selling strength as DeMark signal alignment continued to emerge across the major indexes. We never know when the market will decide to care about higher oil prices, elevated yields, or excessive exuberance. We do know that parabolic advances rarely end gracefully. Eventually, momentum exhausts itself and reversion follows.

As we detailed in our 6/1 report, momentum has been the dominant factor this year, outperforming the S&P 500 by a wide margin.

If you are not overweight momentum, you are likely underperforming.

Below is the factor performance breakdown for the market. Momentum has been the undisputed leader this year, outperforming the next closest factor by roughly 1,000 basis points. Not surprisingly, that leadership is heavily concentrated in technology.

Another way to gauge momentum is through the Goldman Sachs Momentum Basket. Since the March 30th low in the Nasdaq 100 (NDX), the basket has surged roughly 43%, making it one of the market's most crowded and influential trades.

We do not envy the job of professional managers navigating today's benchmark dynamics. As we discussed last week, a small group of stocks has been responsible for a disproportionate share of the market's gains.

After the bell, two bellwether technology names delivered results that were simply not good enough. The question now is whether this finally takes some air out of the momentum trade. The market certainly appears set up for it.

Broadcom (AVGO) issued a disappointing outlook for AI chip revenue, raising questions about the pace of growth within one of the market's most crowded themes. The stock is down roughly 16% after hours.

CrowdStrike (CRWD) also reported after the close and delivered a strong quarter. However, in a momentum-driven market, strong results are often not enough after a stock has already doubled from the lows. CRWD, a bellwether software name, is up more than 100% since the March low, making some profit-taking unsurprising.

Software needs every win it can get to continue changing investor perception, but after a massive run over the last several weeks, expectations had become elevated. Recall that we highlighted Software as an attractive area for alpha in our 5/10 report. Since then, the Software ETF (IGV) rallied roughly 20% into yesterday's high. While we remain constructive on the group longer term, these earnings reactions are likely to take some air out of the trade in the near term.

If momentum is going to lose leadership, it will probably start around here. The chart below compares the S&P 500 to the Nasdaq and shows the ratio testing a major pivot zone that dates back to the Internet Bubble.

This same area also marked the peak in relative outperformance during early 2021, leading to a reversal that lasted nearly two years. We are not calling for a repeat. We are simply acknowledging that difficult areas tend to produce reactions, and this is a difficult area.

Maybe we are due for one.

And this chart from 3Fourteen Research hammers home just how euphoric the momentum trade has become. The percentage of Nasdaq 100 constituents up more than 400% over the trailing 12 months is now approaching the levels seen at the March 2000 peak.

We are not calling for another dot-com bust. We are simply highlighting that momentum has become crowded, extended, and increasingly difficult to sustain. When this many stocks have generated such extraordinary gains, expectations become increasingly difficult to satisfy and the margin for error narrows considerably.

And the Semiconductor Index (SOX) is trading further above its 200-day moving average than at any point since March 2000. That doesn't tell us when a reversal will occur, but it does tell us the move has become historically extended.

Of course, you already know the market is stretched. You do not need us to tell you that. What matters is that the more extended a move becomes, the more vulnerable it is to a reversal. As longtime readers know, we are constantly looking for momentum breaches. Sometimes they are obvious and other times they emerge subtly before becoming apparent to everyone else.

It is entirely possible that the AVGO and CRWD earnings reactions serve as the catalyst for a wave of momentum selling that helps relieve some of the recent euphoria.

This also comes as our weekend report identified Wednesday as a potential pivot point, with multiple DeMark signals aligning across several major instruments. Perhaps the market shrugs off these earnings reactions and capital simply rotates into other momentum names. That is certainly possible. At this stage, however, it is difficult to make that determination without resorting to conjecture. The weekly closes will be important.

Bitcoin is not helping the bullish case. As we discussed over the weekend, it continues to act as a potential canary in the coal mine. Not because Bitcoin has any direct bearing on AI infrastructure spending or the momentum factor, but because it remains a useful proxy for risk appetite. When risk appetite begins to deteriorate, volatility often follows.

The reality is that we have been growing increasingly cautious on Bitcoin for weeks. Over the weekend, we again highlighted its vulnerability, and it has since broken its final meaningful support level and accelerated lower. It is possible Bitcoin is setting the stage for a broader volatility event. As we often say, risk happens slowly, then all at once.

As we have written many times, calling tops is hard. Our job is not to predict the exact turning point, but to recognize when risks are increasing and the evidence is starting to stack up.

When signals begin to align and clues present themselves, we owe it to our readers to highlight the growing risks—even if the result is only a tactical pullback before the trend resumes.

With that, let's check the charts.