Trending
Written by: Eugene Peroni | Peroni Portfolio Advisors
The S&P 500, Nasdaq and Russell 3000 closely tracked one another through mid-May of this year. But that changed as investors perceived that the Federal Reserve might be adopting a more dovish monetary course despite previous statements to the contrary. This was an inflection point for aggressive growth segments of the stock market, most notably Artificial Intelligence. The Nasdaq mounted an advance that distinguished its performance from the other major indices. As this trend intensified, some equated the action to the late 1990s period when technology stocks raced higher following the collapse of the long-term hedge fund and the swift efforts by the Fed to calm the markets by injecting liquidity. This eventually spawned the historic technology bubble, which some fret soon could be repeated in the prevailing market climate.
I do not believe we are on the cusp of a speculative bubble at this juncture. Not even close.
This does not rule out the possibility of a correction in the short term. In fact, based on a recent survey by the American Association of Individual Investors (AAII), bearish sentiment has slumped to its lowest level since early April — just before a 5% decline in the S&P 500 ensued. That same survey also reported a ramp up in bullish consensus. And the CBOE Volatility Index (VIX) recently fell to its early-April lows, implying heightened investor complacency. These technical readings, however, should be considered in concert with important current market characteristics, specifically broad and diverse sector, and theme participation, as well as regular and routine rotational policing of price and sentiment excesses. These are significant differentiators from the late 1990’s market and the euphoric psychology that bulged near the end of that unprecedented cycle. Also, the current proliferation of bullish “cup-and-handle” price formations (which historically imply durability and elasticity) may argue that a correction is probably not at the market’s doorstep. Despite forecasts for a deep correction by some market observers, I estimate that pullbacks could be held to a range of between 1% and 3% short term.
Aside from the market’s uncanny ability to detect and address increased buying demand by limiting the windows of opportunity, rotational movements among a variety of leading sectors and themes could reduce the market’s overbought condition and the need for a severe pullback. While aggressive growth categories embarked on a sharply higher trajectory after mid-May, the move did not constitute a climactic buying surge. Some analysts are attentive to the overall market’s advance/decline performance, but I find it more insightful to study the degree to which sectors and themes are participating. I believe it can better determine the most important drivers in the market and present a more reliable measure of its upside prospects. Separately, I expect growth to continue to outstrip value. The bullish relative strength patterns of numerous small and medium capitalization stocks — which often offer earnings leveraged opportunities — further reinforce this expectation. The buying sprawl into the SMID (small-mid cap companies) tiers reflects investors’ willingness to accept more risk for more reward.