Wall Street teaches us that historically, bull markets climb the metaphorical “Wall of Worry.” Indeed, the stock market often surprises us: it tends to hit rock bottom amidst dismal news, ascends amidst fear and skepticism, and peaks when optimism knows no bounds. Once more, the Street appears to be unfolding this playbook, aligning with historical patterns. Major U.S. equity indices, like the Nasdaq 100 ETF (QQQ) and the S&P 500 Index ETF (SPY), found their floor in October 2022, a time when the inflation rate soared to 40-year highs.
From both a fundamental and price action viewpoint, the mega-cap tech sector has reigned supreme on Wall Street in the past year. The Nasdaq 100, shadowing tech giants such as Nvidia (NVDA), Microsoft (MSFT), and Apple (AAPL), has surged by over 30% in the last year, soaring past its previous all-time high of late 2021. Despite this stellar performance, the reality is that fewer market participants have reaped the benefits compared to what a casual observer might assume. For instance, a survey by the National Association of Active Investment Managers (NAAIM) in late 2023 revealed less than a 25% allocation to the market.
RSI Flashes Extreme Overbought Signal
The Relative Strength Index, known as RSI, is a momentum gauge used by market technicians to assess an asset’s price intensity over time. An “overbought” RSI reading is typically seen as unfavorable for stocks; nonetheless, to form an accurate judgment, investors should depend on data and historical patterns rather than mere opinions. A recent RSI reading above 95 for the Nasdaq 100 may not be as gloomy as many on Wall Street fear:
· 1-month later average return = +2.9%
· Positivity Rate = 80%
· The three failed signals were all macro-related (Gulf War, Covid-19, Inflation Spike)
Rate Cuts Near All-Time Highs
Market expectations point to a 94% likelihood of an interest rate cut in December. What do historical data say about rate reductions when stocks are within 2% of their peaks? As per Ryan Detrick of Carson Research, “Fed has cut rates with SPX within 2% of an all-time high 20 times since 1980. Each time this has occurred, SPX was higher a year later with an average return of nearly 14%.”
July’s Decade Long Track Record
Historical trends during the month of July have served as a reliable guide for investors in recent times. QQQ has shown an upward trajectory in all ten previous Julys, boasting an average return close to 5%! Can this tech-heavy index uphold its winning streak?
Poor Breadth?
The prevalent argument among Wall Street analysts and traders is the market’s purported poor breadth, indicating that a handful of stocks (“The Magnificent 7”) are shouldering the load while most others lag behind. However, this narrative may soon be nearing its end. The Direxion Nasdaq 100 Equal Weight Index ETF (QQQE) is up by more than 1% for the week and is on the cusp of surpassing March highs – a bullish development.
Are Valuations too Expensive?
Valuations hint that the stock market could see a rotation rather than a crash. The top ten stocks carry a current P/E ratio of 28.1x, notably higher than the S&P 500’s 20.5x. Conversely, the rest of the market holds a multiple of 17.6x, suggesting that most stocks remain attractively priced.
Bottom Line
Stocks have traversed a considerable distance since hitting rock bottom in late 2022. However, various data points indicate that the bull market still has room to stretch its legs.
Exploring the Energy Wave
The Rise of Energy Stocks
Amidst the tumultuous tides of the stock market, energy stocks have emerged as a beacon of hope, riding on the crest of an energy wave that has captivated investors. The surge in interest can be likened to a sudden gust of wind filling the sails of a ship, propelling it forward with newfound vigor and vitality.
Industry Dynamics Leading the Charge
Behind this meteoric rise lie industry dynamics as dynamic as the ebb and flow of the ocean. Companies within the energy sector are harnessing innovative technologies, such as hydrogen power and sustainable energy sources, to revolutionize the landscape and steer towards a greener future.
Market Speculations and Future Projections
Speculations are rife as market analysts and traders alike peer into their crystal balls, attempting to decipher the future trajectory of these energy stocks. The market echoes with whispers of potential gains and the promise of uncharted territories, akin to explorers setting sail in search of new horizons.
Challenges on the Horizon
However, amidst this euphoria, there looms shadows of uncertainty and challenges that could potentially dampen the fervor surrounding energy stocks. Like a ship navigating through rough waters, these companies must weather the storms of regulatory changes and global economic shifts.
The Call for Investor Caution
As investors navigate these uncharted waters, prudence and caution must be their guiding stars. Just as sailors rely on the North Star to lead them safely home, investors must anchor themselves in diligent research and thoughtful analysis to avoid being swept away by the unpredictable currents of the market.