Russell 2000 Breakout And AI Concerns

The long weekend has been kind to markets. The Russell 2000 (IWM) finally joined lead indices with a breakout to new highs. The MACD is still on a 'sell' trigger, but other technicals are bullish once more.

The equal-weighted S&P managed to post its breakout before the Memorial weekend, and added a little by today's close. We will want to see how 8.3K support holds on the next test, when - or if - it manages such a test. A retest of 8.3K would be a buying opportunity, but we need to be aware for the potential of a 'bull trap'

Gains in the Russell 2000 are causing a relative strength shift away from the Nasdaq (QQQ) and S&P. The Nasdaq is on a MACD 'sell' trigger alongside that of the S&P.

The Semiconductor Index made yet another breakout, turning already extended technicals into new 'buy' signals. These gaps point to overextension, but it can be hard to jump off for FOMO. I have added a new measured move target as a result of the new gain, but for an entire sector to double in just a few months just isn't a fair evaluation. Like many, I have been making increased use of AI at work, but as someone experienced in technical writing - where brevity and clarity are key to good writing - the verbosity of AI is a significant cost, and ultimately, a natural resource concern, that AI companies have little incentive to correct in the chase for profits. Studies have also shown models can work against their prompters, obfuscating their workings. Even if models didn't obfuscate their intentions, what they are doing may be hidden in plain sight behind the content deluge returned during processing. AI has given me the ability to solve coding problems I don't have the knowledge to do myself, but at what cost? I would be lying if I understood the hows or picked through its reasoning as to how it got there. Or indeed, if any vulnerabilities were introduced from its self-generated checks? There will be increased pressure to roll out production-level, AI-generated code across sensitive sectors like financials, care, and manufacturing. But is AI the fox that has been left to look after the chicken house... Go watch "The Game", Star Trek: The Next Generation, and frame it in the context of AI, and those who control it.

Going back to price action, the Bitcoin (BTC.X) recovery looks to be stalling out. Today's selling brought it back to breakout support, undercutting the 50-day MA in the process. The next move here is likely to be lower as technicals remain predominantly bearish.

For the tech rally optimists, look to Nasdaq breadth metrics. The last major top in 2021 was driven by bearish divergences across these metrics, following breadth peaks in the early part of the year. Currently, we are not even close to marking such peaks, and it could be 12-18 months before we do - and then, it could be another 6 months from there before we see a decline in the Nasdaq. Who knows where Semiconductors may be then...

There is increasing talk of a major top in markets, but I'm not entirely convinced, given the recency of fresh breakouts, particularly for the Russell 2000, but we need to be aware of the possibility of 'bull traps'. Maybe Semiconductors have been mispriced, but not to the extent we are seeing in recent months; expect the hangover to be painful.