Traders on the floor of the New York Stock Exchange.
The market is showing signs of exhaustion, and for good reason. Most of the major market segments have grown significantly over the past month.
But there is a growing refrain that we are on the “top of it all”. In other words, maximum profit growth, leading economic data and maximum reopening.
Michael Batnick, director of research at Ritholtz Wealth Management, embodied some of these concerns in a recent Publish titled, “It Gets More Difficult From Here.”
Noting that the S&P 500 is up 76% from a year ago, Batnick notes that “we’ve had bear markets before, but we’ve never had this type of rally in such a short time.”
Her advice: “Now is probably a good time to do some spring cleaning in your wallet.”
However, there is still no consensus on this notion.
“We’re talking about maximum growth, but the idea here is that this reopening is just beginning,” said Mike Labella, senior portfolio manager at Franklin Templeton on CNBC. “We have just taken an important step with 50% vaccinations in the United States, and that number will only improve in the United States and Europe, a few months behind. rally, but it will likely come more from the value and cyclical sectors than from the tech trade, which is more of last year’s. “
JPMorgan chief strategist Marko Kolanovic also repulsed against the story of “maximum valuation”, insisting that the reopening / reflation trade is not yet over. The reopening “will resume with a movement that will be bigger than what we saw at the start of this year,” he told customers. He says there is an ongoing recovery that starts first in the United States, then continues in Europe, and then in emerging market countries. This mobile recovery trade will extend the turnaround and prevent returns from rising too quickly, he says.
Judging by recent market action in the speculative parts of the market, many investors are taking Batnick’s advice and doing a “spring cleaning”.
The appetite for the riskier parts of the market declined dramatically even as the market as a whole progressed.
Formerly hot areas for investors such as IPOs, PSPCs, cannabis, clean energy, EVs / lithium, and ‘thematic tech’ in general are all well above their peaks:
Speculative sectors take a hit
(% of 52 week high)
- SPAC (SPAK) 32%
- Initial public offering (IPO) 20%
- Cannabis (MJ) 42%
- Clean Energy (ICLN) 32%
- 3D printing (PRNT) 25%
- Lithium / batteries (LIT) 18%
- Cloud Computing (WCLD) 18%
The Ark Investment portfolio of Cathie Wood was particularly affected:
Cathie Wood wallet
(% of 52 week high)
- Ark Innovation (ARKK) 26%
- Ark Fintech (ARKF) 20%
- Ark Genomic Revolution (ARKG) 26%
- Internet Ark Next Generation (ARKW) 23%
- Autonomous arch technology (ARKQ) 20%
Does the lack of interest in pushing these speculative segments of the markets to new heights indicate some concern about a broader assessment of the market?
This is hotly debated, but traders note that these “speculative” parts of the market have one important thing in common: They all peaked in mid-February as interest rates began to rise.
Rising yields traditionally put pressure on multi-multiples stocks as the higher rate lowers the present value of future cash flows these companies might reject. However, the more speculative segments of the market that often have little or no income can also suffer when rates rise.
“Some of the sales that were triggered by the higher rates” continued, Jim Besaw, chief investment officer at GenTrust told me, but he also noted that the liquidation of these sectors in mid-February was the peak. speculation. Trading fever: “Most of these charts looked pretty parabolic before they went down in February,” he told me.
This combination – the cooling of an intense speculative fever and a sudden change in interest rates – has proven to be a headwind for this “speculative” corner of the market.
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