US Markets At New All Time Highs: Have We Reached A Dangerous Profit Taking Zone?

Since 2020 The Market Has Continued Climbing Almost Nonstop

Since the massive money printing of 2020 that was designed to stop the market collapse during the coronavirus crisis, US stock indexes have continued climbing with almost unprecedented strength.

The enormous liquidity injections by central banks, low interest rates and high market liquidity created a historic rally in stock markets.

In recent years, the rally received additional fuel mainly from semiconductor stocks and the massive excitement surrounding the AI sector.

Stocks such as Nvidia, AMD, Intel and other semiconductor companies became the main engine pushing the Nasdaq and S&P 500 indexes to new highs.

Semiconductor Stocks Are Carrying A Large Part Of The Market

A very large portion of the recent gains in the indexes is coming from a relatively small group of AI and semiconductor stocks.

This means the market is becoming narrower and narrower, with a small number of stocks pulling the indexes higher.

Historically, such situations often appear during later stages of extremely strong bullish trends.

At the same time, more and more discussions are beginning to appear suggesting that the semiconductor and AI sector may be reaching a state of exhaustion after such an aggressive rally.

Technically We Are In A SELL ZONE

As can clearly be seen on the attached chart, the Nasdaq index has reached an extremely significant technical extreme zone.

The price has already completed:

More than 700% of the size of the 2020 coronavirus decline

More than 250% of the size of the 2022 decline

And approximately 100% of the size of the 2025 decline

In other words, every major decline during recent years was followed by a much larger bullish move, while currently the market is reaching an area where historically profit taking and buyer exhaustion often begin to appear.

From our perspective, the current area is beginning to look like a very clear SELL ZONE.

Inflation Is Beginning To Worry The Market Again

Alongside the rally in stock indexes, recent macroeconomic data is once again raising concerns regarding inflation.

The latest US PPI report came in stronger than expected, bringing back fears that high interest rates may remain for much longer than markets previously expected.

In addition, early discussions are beginning to emerge regarding the possibility of additional rate hikes if inflation continues surprising to the upside.

Are The Gains Really Driven By Real Growth?

One of the biggest questions currently facing investors is whether the rally in stock indexes truly reflects real business growth, or whether a significant part of the move simply comes from the weakening purchasing power of the US dollar after years of money printing and monetary expansion.

When the dollar weakens, it often simply takes more dollars to buy the same assets, even if their real value has not changed dramatically.

Some investors believe the AI revolution fully justifies the rally, while others are beginning to warn that part of the market is already trading at extreme valuations resembling previous bubble periods.

We Believe The Risk Of Profit Taking Is Rising Significantly

In our opinion, as long as the indexes continue trading near the current extreme levels, the probability of sharp profit taking and significant downside moves is beginning to rise clearly.

As can also be seen on the chart, after such aggressive and extended rallies, sometimes only a small trigger is needed to begin a major decline.

Especially when the market becomes dependent on a relatively small number of stocks holding the indexes near their highs.

Conclusion

Despite the Nasdaq and S&P 500 continuing to break new all time highs, we believe the market is beginning to enter an extremely sensitive technical zone.

The combination of an extreme AI rally, heavy concentration in semiconductor stocks, inflation beginning to rise again and discussions surrounding higher interest rates for longer creates an environment where the risk of profit taking is beginning to rise significantly.

In our opinion, as long as the indexes continue trading near the current extreme levels, the probability of a significant correction and even sharp declines in the near future remains elevated.

It is important to emphasize that this article does not constitute a recommendation to buy, sell or perform any action in the financial markets. This article reflects technical analysis, personal opinion and market interpretation only.

Disclaimer: This article does not constitute investment advice, financial advice or a substitute for independent judgment. The information provided is for educational and informational purposes only.