A.I., Narrow Markets, And The New T.I.N.A.

The A.I. chase is making for a very narrow market. As Bob Farrell once quipped:

“Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.”

Breadth is important. A rally on narrow breadth indicates limited participation, and the chances of failure are above average. The market cannot continue to rally with just a few large-caps (generals) leading the way. Small and mid-caps (troops) must also be on board to give the rally credibility. A rally that “lifts all boats” indicates far-reaching strength and increases the chances of further gains.

As Bob noted, the chart below shows the ARMS Index. This volume-based indicator, developed by Richard W. Arms in 1967, determines market strength and breadth by analyzing the relationship between advancing and declining issues and their respective volume. It is usually used as a short-term trading measure of market strength. However, when smoothing the index with a 34-week average, extremely low readings often coincide with near-term market peaks. Such is what we are seeing currently.

ARMS index

The rally this year has been extremely narrow. As quoted in last week’s article discussing the “A.I. Revolution:”

“The A.I. boom and hype is strong. So strong that without the A.I.-popular stocks, S&P500 would be down 2% this year. Not +8%.”Societe Generale

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