Is this Rally Becoming Too Momentum-Driven?

Key Concepts

• AI Infrastructure: Hardware and connectivity solutions (cables, optical DSPs) essential for data centers and "AI factories."
• PCE (Personal Consumption Expenditures): The Federal Reserve’s preferred inflation gauge.
• Momentum Investing: A strategy of chasing stocks that are trending upward, often seen in the current AI-driven market.
• Implied Volatility (IV): A metric representing the market's expectation of future price fluctuations; high IV often precedes earnings announcements.
• Calendar Put Spread: An options strategy involving two different expiration dates to capitalize on time decay and volatility.
• Bull Put Spread: A credit strategy used when an investor expects a stock to remain above a certain price level.
• Hyperscalers: Large-scale cloud service providers that represent the primary customer base for AI infrastructure companies.

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Market Overview and Economic Context

The US markets are currently hovering near record highs, supported by strong corporate earnings despite persistent inflationary pressures. The latest PCE data showed a 12-month inflation rate of 3.8%, which met expectations but remains a concern for the Federal Reserve.

• Inflationary Challenges: Liz Miller (Summit Place Financial Advisors) notes that inflation is being driven by supply-side constraints, particularly in energy (gasoline costs rose nearly 6% in the latest report). She argues that raising interest rates is an ineffective tool for addressing supply-driven energy costs and risks stifling consumer spending.
• The "Wall of Worry": Investors are balancing optimism regarding AI-driven earnings against risks like Middle East geopolitical instability and sticky inflation. Miller suggests that the market is not ignoring these risks but is currently unable to draw definitive conclusions, leading to a "wait-and-see" approach.

The AI Trade: Infrastructure vs. Applications

The market is currently in a "prove it to me" phase regarding AI. While hardware and infrastructure companies have seen massive gains, investors are beginning to scrutinize software companies to see if they can successfully integrate AI into their platforms.

• Snowflake: Shares jumped over 30% following a strong annual outlook and a $6 billion cloud services agreement with Amazon.
• Salesforce: Despite beating earnings, the stock faced volatility, highlighting the market's skepticism regarding the speed of AI adoption in existing software stacks.
• Diversification Warning: Miller cautions that the S&P 500 is currently highly concentrated in 6–7 AI-related names. She recommends that investors seeking true diversification consider "equal-weighted" S&P 500 funds rather than relying solely on standard market-cap-weighted indices.

Credo Technology Group: Technical Analysis

Credo Technology, a provider of optical DSPs and cables for AI data centers, is highlighted as a "picks and shovels" play.

• Fundamentals: The company is experiencing rapid growth, with revenue expected to rise 154.8% year-over-year. However, it carries high valuation risks, trading at a P/E of approximately 100 and a price-to-sales ratio above 30.
• Technical Levels:
  • Support: The $90 level acts as a long-term floor.
  • Resistance/Targets: The stock has been testing highs near $228. A successful earnings beat could push the stock toward a measured move target of $240.
  • RSI: At 63, the stock remains bullish but is not yet in overbought territory.

Options Strategies for Credo Technology

• Bearish Strategy (Calendar Put Spread):
  • Methodology: Sell a $200 put (June expiry) and buy a $200 put (August expiry).
  • Rationale: This strategy profits if the stock remains above $200 in the short term (collecting premium) while providing protection against a significant pullback in the longer term.
  • Risk: Max loss is limited to the net debit paid ($1,200 per contract).
• Bullish Strategy (Bull Put Spread):
  • Methodology: Sell a $160 put and buy a $150 put (July expiry).
  • Rationale: This is a credit strategy that profits if the stock stays above $160.
  • Risk: Max loss is $650 per contract if the stock falls below $150.

Synthesis and Conclusion

The market is currently defined by a tension between fundamental earnings strength and macroeconomic uncertainty. Investors are advised to look beyond the concentrated "AI giants" and consider sectors like healthcare (specifically devices and supplies) which may benefit from AI integration. The consensus is that while the "AI arc" is real, the transition from infrastructure build-out to software application remains the next critical phase for the market to validate. Investors are encouraged to perform rigorous due diligence, as the current environment is characterized by high volatility and rapid institutional rotation.