Likely to see swift revision lower in semi-AI trade, says BTIG's Jonathan Krinsky

Key Concepts

• Market Breadth: The number of stocks participating in a market move.
• 50-Day Moving Average (DMA): A technical indicator used to measure the average price of a stock over the last 50 trading days; used here to gauge market health.
• Equal Weight S&P 500: An index where every company has the same impact, regardless of market capitalization, used to measure broad market participation.
• Factor Trading: An investment strategy that chooses securities based on attributes (like "AI" or "Tech") rather than individual company fundamentals.
• Reversion to the Mean: The theory that asset prices will eventually return to their long-term average or historical trend.
• Animal Spirits: A term describing the human emotions and instincts (like confidence or fear) that drive financial decisions.

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1. Market Breadth and Divergence

Jonathan Krinsky, Chief Market Technician at BTIG, argues that the current market rally is dangerously narrow. While the S&P 500 is hitting new highs, the underlying participation is historically weak:

• Statistical Divergence: The S&P 500 is currently 8% above its 50-day moving average, yet only 49% of its components are trading above their own 50-day moving averages. Krinsky notes this is the lowest level of participation for such a high index level in 30 years of data.
• Historical Comparison: The only comparable period for this level of divergence is the late 1990s, where participation was roughly 60%.
• Negative Participation: 8% of S&P 500 stocks are currently at 52-week lows despite the index hitting a 52-week high, a phenomenon not seen since late 1999.

2. The "Catch Down" Thesis

Krinsky posits that instead of the broader market "catching up" to the tech/AI rally, the market is more likely to experience a "catch down."

• Sector Concentration: Of the 11 S&P 500 sectors, only Technology, REITs (a small portion), and Energy have exceeded their recent spring highs.
• The Unwind: Krinsky believes we are in the "later innings" of the semiconductor and AI trade. He anticipates a "swift reversion lower" for the leading tech names, though he does not necessarily expect the rest of the market to crash significantly; rather, he expects a lack of upside as the AI-driven momentum unwinds.

3. Historical Analogies: The Late 90s

The current market environment shares structural similarities with the dot-com bubble:

• Performance Extremes: A BTIG analysis of the top ten performing NASDAQ 100 stocks shows that their average move over the last year has exceeded the performance of the top ten stocks leading into the end of 1999 and the March 2000 peak.
• Fundamental Differences: Krinsky acknowledges that today’s market is fundamentally stronger than the late 90s, as current leaders (Microsoft, Google, etc.) have real revenue and earnings. Consequently, he does not expect a repeat of the 85–90% drawdowns seen in the NASDAQ and semiconductor indices between 2000 and 2003.

4. The Role of Private AI Entities

The discussion addressed whether the influence of private companies (like OpenAI and Anthropic) creates unique risks.

• Animal Spirits: These private entities are driving significant market sentiment ("animal spirits").
• Public Market Exposure: While the fundamental backdrop is better today than in 2000, the reliance on AI-driven hype—fueled by private startups—leaves public markets exposed to a potential correction if the momentum in these specific sectors exhausts itself.

Synthesis and Conclusion

The primary takeaway is that the current stock market rally is historically narrow and heavily reliant on a small cluster of AI-related tech stocks. Krinsky’s technical analysis suggests that the lack of broad participation (as evidenced by the Equal Weight S&P 500 failing to hit new highs) indicates an exhausted trend. While the current market is supported by stronger fundamentals than the 1999 bubble, investors should prepare for a "catch down" or a swift correction in the leading tech sectors rather than expecting the rest of the market to rally to meet them.