The stock market is continuing its unprecedented rally with the S&P 500 surging past the 3,000-point benchmark and the Dow Jones Industrial topping 25,000 for the first time since the beginning of March. Secular growth stocks had driven the last two months of the markets rally with the pandemic providing well-positioned tech companies with a rare tailwind. Now, investors are beginning to rotate towards cyclical and value names, which have yet to breakout from the market's initial crash.
Investors are starting to feel more optimistic about our economic condition as state economies begin opening, and another round of fiscal stimulus is in the works. As tech-heavy growth stocks appear to be running out of runway, the relatively cheap banks, airlines, and cruises lines are getting a boost with investors looking for somewhere to put their money to work.
Airline stocks like Delta (DAL - Free Report) , Southwest (LUV - Free Report) , United (UAL - Free Report) , and American (AAL - Free Report) are up 20%+ in the first two days of trading, following the long Memorial Day weekend as air travel begins to pick up. Banks stocks are also seeing a big boost with JP Morgan (JPM - Free Report) , Wells Fargo (WFC - Free Report) , and Bank of America (BAC - Free Report) up high single-digits this week in hopes of a swifter economic recovery. Cruise liners such as Carnival (CCL - Free Report) , Royal Caribbean (RCL - Free Report) , and Norwegian NCLH are all up double-digit percentages in the past 2 days on economic optimism, but should we buy into the hype?
Should We Start Buying The Losers?
There is a value argument to be made about buying shares of some of the hardest hit and most depressed industries because they are trading at a "discount." I am not one to make this argument and will not be chasing the bear rally in these pandemic stricken industries.
The S&P 500 has run up 37.5% from its March 23rd lows and just over 10% off its all-time highs from February. This excessive run-up is not justified. The most economically exposed segments, as I mentioned above, may still retest their lows on a broader market pullback.
Battle At The 3,000 Level
There is a battle brewing between the bulls and the bears at the S&P 500 3,000 level at which the market struggles to keep its head above with its top 5 weighted stocks edging lower. These names include Microsoft (MSFT - Free Report) , Apple (AAPL - Free Report) , Amazon (AMZN - Free Report) , Facebook FB, and Google GOOGL, making up almost 20% of the index. These tech powerhouses have remained very buoyant throughout the pandemic, with all of them exhibiting share price appreciation since the beginning of the year.
These stocks are losing steam as their upside potential appears to have run out of steam. Now investors that missed out on the rapid market run-up these past 2 months are looking to put their money to work in value stocks as they fear they will miss out on a further market upside.
This FOMO trading is only stretching the market's valuation further and setting us up for a more significant downside on the slightest (unexpected) negative news.
The Federal Reserve and government stimulus have been the primary catalyst for the market rapid recovery. Still, with unemployment hitting its highest rate since the great depression, it is difficult to justify the current equity market level in a capitalist society. The government cannot fund or economy for much longer without significant long-term negative implications such as excessive inflations and a substantial increase in taxes.
The rotation towards value and cyclical stocks has put another marginal tailwind into the exhausted sails of the stock market, but I am not sure how much longer this rally can sustain. The market is hanging by a thread and will likely breakdown on any unexpected bad news.
I would be cautious with any stock purchases at this level.
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