To The Moon

This week: monthly chart, the age of speculation, risk flags, opportunity signs, emerging markets adjusted for AI stocks, AI earnings euphoria...

Welcome to the latest Weekly S&P500 #ChartStorm!

Learnings and conclusions from this week’s charts:

• The S&P500 gained +5.15% in May (up +10.73% YTD).

• Investor expectations, allocations, valuations are near record highs.

• Buyback tailwinds have faded, and semis look heavily overbought.

• Median stock short interest has surged to decade+ highs.

• Small caps & Software show there’s overlooked opportunities out there.

Overall, there are more and more signs of market extremes as a generational run in stockmarket speculations sets in. And while the risks/vulnerabilities are arguably rising, the trend is still your friend for now…

1. Happy New Month! 

The S&P500 closed up +5.15% on the month (placing it up +10.73% YTD). This sees the index comfortably above its 10-month moving average, confirming Q1 as the third big bull market correction since the 2022 low. Meanwhile the trend is still your friend.

2. The Age of Speculation: 

with the strong uptrend in stocks and repeated bull market corrections, you could forgive folk for believing that stocks only go up. And if you look at the surveys, the percentage of people expecting higher stock prices a year from now reached its second highest reading ever in May.

3. Generational Shift in Investing: 

this is also echoed in actual investor behavior, with the average investor holding a record high allocation to equities, and stockmarket valuations (basically a measure of investor confidence) close to all-time highs.

4. AI Earnings Euphoria: 

and Wall Street analysts are not immune from this rising euphoria either, with the Long-Term Average Earnings Growth estimate closing in on record highs thanks to the AI earnings boom (/bubble?).

5. Unusual Times: 

as another angle on it, Goldman Sachs shows a composite of market indicators at stretched levels ——that don’t necessarily mean imminent crash, but levels that indicate that we are living in unusual times.

6. Buyback Backdown: 

the thing about the previous few charts is that while they indicate an increasingly vulnerable/risk-prone market, expensive valuations by themselves aren’t necessarily an issue, they need some kind of catalyst or trigger to make valuations matter.

One potential issue on that front is the way that buybacks have gone from a major tailwind for stocks to nearly irrelevant (+we have some big IPOs and issuance on the horizon). Having said that, while this is important, the more likely trigger for a market downturn would be a recession/shock/crisis or prolonged tightening of monetary conditions.

7. Semis Fully Overbought: 

yet we also need to consider how extraordinary the price action has been — we haven’t seen this type of scrambling into semi conductors (or any sector really) for a long time. The religion of AI stock market euphoria has many believers and zealots, semis are the “sure thing” of the current market moment.

8. Short Surge: 

this is a curious chart, it shows the median stock short interest at decade+ highs. I don’t know whether this is people betting against AI losers (e.g. software), using boring stocks to fund longs in sexier AI stocks (e.g. defensives), some sort of hedging/derivatives effects, or actual directional bets against AI euphoria. But it is interesting for sure, and if the stockmarket rally continues to broaden out (e.g. equal-weighted S&P500 has broken out now), we could see a bit of short-squeeze action providing an assist higher.

9. Small Caps Still Can?  

Small cap stocks have been quietly achieving (albeit less spectacularly than their mega cap peers). But there may still be upside left as Frank Cappelleri muses: “IWM is now up 70% from its 2025 low and has pushed back into weekly overbought territory. That sounds like a lot, but it pales in comparison to the 2020-21 advance, which ultimately ran roughly +150%. Highlighted in green in 2020 is the point where IWM had also gained 70% and first reached weekly overbought — which turned out to be the middle of that entire run.”

10. Software Stocks (…and Bitcoin):

meanwhile Software stocks (remember the sector everyone thought was dead thanks to AI?) have gone from slow and steady recovery to sharp and surging, with IGV up +6.25% on Friday. Bitcoin on the other hand is looking a little less convincing. Again I think these two are worth keeping tabs on as a risk barometer by joining in the rally, but also as examples of opportunities that are just sitting there under the radar and out of the AI euphoria spotlight.

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