03/07/24 01:02 PM EST

As Semiconductors Diverge From ISM, "A Bubble Seems Almost Expected"

Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

Today's bonus chart analysis is straightforward. The "alligator" chart suggests Semiconductors (SOXX) has moved ahead of the ISM, hinting at expectations for an economic uptick in the upcoming months. This isn't about causality but rather an incidental correlation. While a blowoff top like 2021 is clearly possible if the ISM rebounds sharply, markets are already pricing the majority of that recovery. A challenging setup for bulls.

The recurring comparisons with the 1999 tech bubble elicit concern, signaling wariness of a bubble in the making. Bubbles form over time, often under initially conducive financial conditions, akin to the early stages of the 2000 tech bubble's burst. Despite today's market values not hitting those extreme highs, such comparisons warrant a cautious approach.

Today differs from the late 90s' rate-cut-driven market boom; the Federal Reserve has paused its rate hikes and subtly suggested potential rate reductions. Amid these significant market advancements, this cautious shift toward less restrictive policies is reflected in Fed Chair Powell's recent hint in Congress about adjusting policy restraint later this year, suggesting a nuanced backdrop against which a bubble could be forming.

With economic and financial conditions aligning, a bubble scenario seems almost expected, yet the momentum suggests favorable conditions for such dynamics to unfold. Not every day can we say a bubble is the highest-probability outcome.

Learn more about the Market Situation Report written by Tier 1 Alpha.