Artificial Intelligence Hype Drives Microsoft's Shares Toward Alphabet. Investors May Have A Chance

A wealth of market statistics, trends, and stock ideas can be found in Mike Santoli's daily notebook.

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• Market actions have been better, even during the current consolidation/pullback phase. There is a decent rotation of sectors, some good support beneath, and a pattern of intraday strength.

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• In spite of the 8.5% rise in the S&P 500 so far, the index is still down 8.5% year-to-date as of Tuesday's close.

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• As well as emotional, messy trading in parts of the tech sector, it must absorb the pricing-in of another rate hike.

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• Many handicappers have given the S&P 500 credit for its breadth, resilience, and risk-seeking tone, which has earned it some points from the wider picture of a decent little uptrend. Maintaining above the early-February lowest level of 4,030 while also staying near the 20-day moving average would be ideal for the bulls. Down just under 4,000, the market would have experienced a typical pullback of 5%. The chorus of "just another bear market rally" will resume if it goes much deeper than that.

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• Powell has essentially put the Federal Reserve's policy into "data dependent" mode, changing it every six to seven weeks with 25 basis point steps. It's a good sign Wall Street can handle the current stance that stocks rallied before, during, and after the Fed hike. Inflation isn't likely to rise significantly if unemployment doesn't rise much, according to Powell, as investors are happy that he seems willing to let the economy land softly.

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• Currently, short-term interest rates are likely to stay at 5%, plus or minus a few basis points. The market is making peace with this, but we must keep in mind that it will only last as long as inflation data and economic growth continue to bolster the market. 

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• A “no landing” scenario could lead to a rise in the yield on the one-year Treasury note as the market reacts to Friday's hot jobs number.

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• Markets are once again being swept by high-energy money. In the past week, the old spec-tech investments have had monster moves off of depressed levels, and now anything claiming to be an artificial intelligence play is experiencing silly trading. It seems to alter the market capitalization of stocks like Microsoft and Alphabet in real time, adding or subtracting tens of billions.

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•  Certainly, this action is overreach, but it also represents some underlying concerns over Google's franchise. Despite Wednesday's 8% drop in GOOGL shares, they are still near the same level as last week.

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• GOOGL slides along with perceptions of its long-term moat and cost discipline as MSFT opens its biggest cap versus GOOGL since Alphabet's IPO. Microsoft still holds a 25x forward price/earnings multiple, pretty much at pre-pandemic peak, while Google's remains higher than 25x. Does anyone who thinks the short-term hype around AI is overblown have an opportunity here?

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• Stocks and short-dated options, along with retail-trading activity, are gaining popularity. Going too far or dominating the tape is never a good thing. Whether it's indicative of a core market risk is still debatable: The key is whether the frothy stuff can settle down without jeopardizing broad index support. This was the case when I tried to make this point in mid-2020, a few months after the Covid low. Professional nervousness from watching amateur speculative shenanigans tends to keep broader investor sentiment in check.

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• A 2:1 decline in volume outpaced an increase in volume Wednesday, but new highs continue to outpace lows almost every day. Despite being at unthreatening levels, the CBOE Volatility Index has gained a point, which signals a test of the new-year rally.