The Cycle That Refuses To End
The S&P was up an additional 2.44% last week, closing at a new record high on Friday and leaving behind an unfilled gap from Wednesday.
The lockout rally and unfilled gap is a good reminder that the higher this market goes without digesting, the uglier the pullback is likely to be.
As we’ll discuss later, to successfully navigate the pullback, we’ll need to keep a close eye on sector rotation. If money doesn’t completely go to the sidelines, and instead is redistributed into sectors other than the XLK, the market will likely correct sideways through time, rather than lower through price.
If You Couldn’t Tell… It’s Not Just Nvidia
As we’ve know for the last few months, the AI trade is no longer just Nvidia. It had its moment as the one stock to rule them all, but now we’ve got a broader basket of winners in the AI space.
AMD hit a record high after gapping up on earnings and reporting revenue of $10.25 billion up 38% year over year. Data center revenue was $5.8 billion up 57% year over year.
AMD is up over 70% from the breakout level.
On the earnings call though, Lisa Su said the industry is shifting towards a 1:1 CPU:GPU ratio in next generation data centers. This is due to AI agents generating new tasks at an unprecedented rate.
Its such a fast rate that she doubled her forecast for CPU TAM (total addressable market) from $60B to over $120B.
This broadens the AI trade from being only focused on Nvidia’s ground breaking GPU developments over the the full AI stack.
Understanding how each company is innovating in the AI value chain helps us keep an open mind to remaining interested in finding entries in the new leaders.
The chart above contains the nine largest market cap AI related names that have doubled over the last year; MU, SNDK, AMD, INTC, GOOGL, STX, ASML, AMAT, DELL.
Three of the nine are memory related companies; Micron, Sandisk, Seagate.
The memory trade was historically treated as being cyclical, however if Lisa Su’s argument about agentic AI means an exponential increase in CPUs, each one will need memory bandwith.
Customers are also only getting about half of what they need for DRAM or NAND capacity, and build time is years, not months.
If the semiconductor narrative is going to break, this story needs to break or be priced to perfection. The first signs of actual slowdown wont come from the memory names themselves but rather the equipment and manufacturing names like AMAT and LRCX.
So far revenue trend growth for these two companies is still up and to the right. Looking out at analyst forecasts, there is the potential for a slowdown end of FY2027 in terms of growth rate, but still net positive.
The Fed’s Hands Are Still Tied…
April nonfarm payrolls came in at a massive beat of 115k vs the forecast of 60k. This is the second beat of over six-figures prints after a string of concerning prints through 2025.
The labor market isn’t breaking and the Fed doesn’t need to save the day.
CPI inflation numbers come out on Tuesday with expectations of 3.7% year over year up from 3.3% year over year in March. Core is expected at 2.7% year over year vs 2.5% year over year prior.
Last week Fed odds even priced in aggregated probabilities of a Fed hike in early 2027.
Although I don’t actually think the Fed will be hiking rates, it does seem that with hotter inflation still being forecast based on the oil shock, and three dissenting members already on the committee, rate cuts are still quite far away.
Crude still remains the top watch as the structural disruption. Markets are becoming desensitized to headlines, but prices still remain elevated.
From the peak of the Iran war tensions price is down 20%, but from the unaffected price still up 42%.
Although the market has broken its negative correlation with crude, its still something worth having in the back of the brain. If it becomes a topic that starts rippling through earnings calls and finding its way into the AI build out as a disruptor, this will immediately become the markets focus… and not in a good way.
We’re not there yet, so for now and as always, we let the charts light the way.
Trade Brigade Live Squawk
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Broad Market Analysis
SPY – Weekly
Solid green bodied bar, highest high in the trend count, plenty of room to pullback and offer a higher low anywhere over the pATH level at 698. Now confluence with the fib 38.2.
SPY – Daily
Price closed strong on Friday indicating the potential for continuation early in the week. If price pulls back on the daily a higher low over the gap close level at 725 or the retest of the breakout level at 712.4 would be welcomed… at this point it seems the market doesn’t remember what a “pullback” is.
The measured move of the bull flag FYI is at 743.5 area. Within the bounds of the weekly expected move.
SPY – Hourly
Looking for Brigade Bolt™ continuation over the ATH levels. If we pullback and can hold 732.5 there is a technical higher low on the 1h charts that keeps the trend up on the short timeframes. From there looking for continuation to new highs.
If the market goes for a look above and fail at the ATH and comes back into range, then looking for at least the gap close to the downside at 725.
Should the market start with an opening drive to the downside closing the gap and getting either a lower high or some kind of bear flag consolidation, with NO ROTATION, looking for a deeper pullback to retest the flag breakout level at the 712.4 area. I would think lower odds of this, and the rotation of sectors will be the determining factor as to if this is possible at all.
Market Internals – NYSE
Internals show a bit of the poor market breadth on Friday, but nothing so bad where I would actively be looking to put on a major short. The most important combination going into Monday will be watching the sector rotation PAIRED WITH weak internals if there is going to be a larger downdraft.
Market Profile
Value on Friday was shifted higher in the profile, which makes it easier to “topple.” Longs with poor location from Friday will be quicker to close position should we take out VAL, potentially triggering a stop run to help kick off the pullback. Another data point to pair with the sector rotation (or lack thereof) thesis.
QQQ – Nasdaq Impact
All you can do is smile and laugh. The index is now 10x its ATR from the 50 SMA. Bulls on parade, but boy oh boy, new money longs are hairy here… Ideally if there is no rotation and markets fade this week, shorts on the Nasdaq side vs the S&P side will be more lucrative. For now strong parabolic move that I would wait for a failure pattern on first before even thinking about shorting.
If you are going to try short side… make sure you can stick to stops. Above VWAP intraday and you’re asking for trouble.
XLF – Financials
This has been one of the sectors we’ve been worried about the most the last few weeks… needs to get bid if semis pullback otherwise the S&P will not have a gentle higher low. If 51.2 fails… not a great look.
If you want the full take, including all of the nuance of breadth, risk appetite and much, much more, check out the weekend episode here:
Economic & Earnings Calendar
- CPI Inflation – If > forecast, cements no cuts and potential hikes. Tough spot for Kevin Warsh. Expecting mild bearish reaction, but nothing to derail daily uptrend.
- PPI Inflation – Looking for same reaction as CPI but more muted.
Top watches: CRCL, CEG, ASTS, MARA, OKLO, KRMN, NXT, NBIS, CSCO, ONDS, LUNR, AMAT.
Swing Stock Scans
ADEA – Daily Chart
Earnings gap down that fails to go lower. If price can break over 29.55 looking for the gap to close and then continuation towards the high at 34.33. Not interested if it starts to lose the daily 50 SMA (blue).
AMKR – Daily Chart
Flagging up at the highs after a powerful move higher. Looking for breaks over Friday high for an early break entry over 79.30 area. Not interested in this one if it loses the daily 20 SMA (orange).
ATEN – Daily Chart
Flagging at the highs and surfing the 20 SMA. Looking for breakouts over 28.15.
NXT – Daily Chart – !! Mind Earnings !!
Looking for a breakout over 131.5. Would be interested post earnings to see if we get a PEG setup above. Stalking before, and acting after earnings. Tuesday after the close!
TSN – Daily Chart
Bull flagging after breaking out of the weekly base. Over 69.10 can get in gear up towards the 80 area on the weekly chart. Not as thematically relevant, unless they’re working on AI chicken?, so manage expectations here.