Last week saw a very strong market extension helped by a strong fourth-quarter earnings season, suggesting that a reacceleration is underway, supporting new highs in stocks.

However, a few of the Magnificent 7 stocks have started lagging the S&P 500, (especially AAPL & GOOG). This might be indicating that the tech leadership is starting to wane and possibly a rotation into other sectors will broaden ahead.

Not only did the S&P 500 rise 5% last month, marking the fifth-strongest February gain since 1980, but also the world equity market hit an all-time high, as several key equity indexes around the globe reached record levels. This included the German DAX, the French CAC, and Japan’s Nikkei, which, after 34 years, surpassed its prior high set in 1991.

Fed rate cuts should help drive further U.S. market gains, but markets could get choppier in the short term, as the bar of expectations is high and the short-term indicators are overbought. However, one thing has often been the case, the markets can and will go further than you think they can.

One important note of caution. Market technicals just aren’t as strong as one would expect with such strong gains in the indices. Advance/decline and up/down volume ratios are narrower than normal for these type rallies. This non-confirmation of price advances in the indices to new all-time highs may indicate that a top in the recent rally may be approaching.

Another possible sign of a nearing top is the sharp rise of speculation in biotechs and small caps. Biotechs have been exhibiting exceptionally strong leadership as speculation heightens. The outperformance of the growth-sensitive small-cap stocks in February could be a sign that investors are starting to get more confident about the sustainability of the economic expansion, but it is often also a sign of a late-stage market advance.

I believe the period just ahead could be quite volatile, and the need for close attention to the technicals is warranted for clues to market direction in the near term.

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