Stock markets are rallying however, volatility lingers due to elevated AI/tech valuations, a recent government shutdown’s data delays (e.g., October CPI postponed to December 18), and rotation out of mega-caps into value sectors. The S&P 500 is down about 3% from its record high yet many well known names linked to AI are down 10%, 20% or 50%. Bitcoin is down 30%, crypto is struggling to rally. This is not something you see in a healthy bull market, when the S&P 500 is down 3% you would expect stocks to be up or a bit down in line with the S&P. There is fear, that’s why people sell, they get out because they know it is not the best time to be long.
The fear of overvaluation takes its toll, but after the first wave of decline the 34-day BTI is no longer overbought. This process is normal and does not mean we are in a bubble. People must understand that the stock market can decline when earnings are growing strongly. We can see the demand for AI has created many opportunities, these companies making money from AI will grow strongly but investors are quick to invest and in the process they have pushed valuations to silly numbers. These valuations must come down, we get to a situation where people are not happy with valuations and they sell. Add some uncertainty like no rate cut, and stocks decline. The stock market does not collapse, it simply corrects until investor are happy to buy again.