Good morning! In today’s edition we are covering investors pouring into the momentum trade, crowded tech stocks, and the new battle between Elon Musk and the SEC.

Programming note: Opening Bell Daily will be off on Wednesday, as markets will be closed.

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Momentum is the hot play - for now

Trading on momentum means buying stocks when they go up and selling when they go down.

This straightforward play has paid off handsomely this year. 

Solid fundamentals and upbeat earnings explain some of that. But at the same time, markets are enjoying an abundance of FOMO and exuberance.

Hedge funds, professional traders, and retail investors alike have all capitalized on gains across the board, ranging from AI bets, the upswing in Japanese equities, and supersonic rallies in commodities like copper and cocoa. 

The S&P 500 hit its 30th record high on Monday. It’s up 15.4 percent so far this year, and Wall Street’s most prominent forecasters expect more gains to come. 

Now, it’s reasonable to expect momentum to stick around. No one wants to miss a rally, especially one that’s happening before the Fed has cut interest rates. 

The danger, however, lies in how concentrated these gains have been. Over the last two years, we’ve gone from the Magnificent Seven to the Magnificent Three — Nvidia, Apple, Microsoft — which now account for one-fifth of the S&P 500.

“Crowded trades are difficult to exit,” said Steve Sosnick, chief strategist of Interactive Brokers. “If everyone is long a select group of stocks, who is left to buy them if they fall?”

The markets’ bad breadth is not new. Yet one peek under the hood makes the landscape appear even more troubling.

Mega-caps — which benefit from both momentum and the AI wave — have shrouded the weaker performance from their smaller counterparts. 

The small-cap S&P 600, for example, is down 2 percent this year. Its relative strength to the S&P 500 is hovering near a two-decade low. Same for the small-cap Russell 2000. 

Meanwhile, the century-old Dow Theory has quietly entered the market narrative. 

In a note Monday, economist David Rosenberg, the president of Rosenberg Research, pointed out that the Dow’s Transportation Average has fallen into “correction” territory, which historically bodes poorly for both stocks and the broader economy. 

The 20-stock transport index has yet to return to its record seen in November 2021. 

And all the while, the VIX, Wall Street’s fear gauge, remains near a five-year low, which reinforces the idea investors should maintain or add to their current positions. 

“The message here,” Rosenberg said, “is that outside of big-cap tech, there actually is quite a bit of rot beneath the surface of the major averages.”

Do you plan to cut any positions in your portfolio before the end of the year? Hit reply to this email or let me know on X @philrosenn.

*At a glance:

Elsewhere:

📈The Dow isn’t hitting record highs even as the S&P 500 and the Nasdaq do so with regularity. The disconnect comes down to the Dow’s price-weighted approach and the heavy concentration of financial stocks in the index, which are more sensitive to interest rates. (Barron’s)

🗣️Central bankers sounded off on Monday. Philly Fed President Harker said he sees one interest rate cut coming in 2024, while Cleveland Fed President Mester voiced her concern over truncated Fed communications. (Reuters)

⚡️It’s Elon Musk vs. the SEC (again). Regulators are taking aim at the billionaire once again in regards to late disclosures over his Twitter stock purchases before he took over the company. Musk allegedly brushed off compliance at the time when he was supposed to have revealed his stake. (WSJ)

Rapid-fire:

• A $71 billion ETF is about to reshuffle its portfolio to give more space to Nvidia — at the expense of Apple (Yahoo Finance)

• GameStop stock plunged 15% during its highly anticipated shareholder meeting (CNBC)

• Berkshire Hathaway sold 1.3 million shares of Chinese EV maker BYD (Barron’s)

• Digital asset products just saw the biggest week of outflows since March (Bloomberg)

• Ether ETFs could come to market as soon as this summer (WSJ)

Last thing:

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