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Wall Street teaches us that historically, bull markets climb the proverbial “Wall of Worry.” One of the great paradoxes of the stock market is that stocks tend to bottom on poor news, climb a wall of worry, and top when news seemingly cannot get any better. Again, Wall Street seems to be following this playbook and historical precedent. Main U.S. equity indexes like the Nasdaq 100 ETF ((QQQ - Free Report) ) and the S&P 500 Index ETF ((SPY - Free Report) ) bottomed in October 2022 when the inflation rate reached 40-year highs.
From a fundamental and price action perspective, the mega-cap tech market segment has been the undisputed leader on Wall Street over the past year. The Nasdaq 100, which tracks mega-cap tech juggernauts such as Nvidia ((NVDA - Free Report) ),Microsoft ((MSFT - Free Report) ), and Apple ((AAPL - Free Report) ), is up more than 30% over the past year and is running away from its previous all-time high achieved in late 2021. Nevertheless, despite the market’s performance, not as many market participants have enjoyed the gains as a casual observer might think. For example, in late 2023, the National Association of Active Investment Managers (NAAIM) survey had less than a 25% allocation to the market.
U.S. Equity Markets: Peak Optimism?
Whether or not investors have profited from the bull market thus far, investors must evaluate the current prospects for stocks to take advantage of the future. Below, I will analyze five bearish arguments and provide data on whether they hold weight.
RSI Flashes Extreme Overbought Signal
The Relative Strength Index, or RSI, is a momentum indicator used by market technicians to measure the speed and magnitude of an instrument’s price over time. Investors often consider the term “overbought” as being negative for stocks. However, as always, investors should rely on data and historical precedent, not opinions. The Nasdaq 100 just flashed an extreme and rare RSI reading greater than 95. According to data from Seth Golden (@sethCL), the data may not be as bearish as many on Wall Street may think:
· 1-month later average return = +2.9%
· Positivity Rate = 80%
· The thee failed signals were all macro-related (Gulf War, Covid-19, Inflation Spike)
Rate Cuts Near All-Time Highs
Markets are pricing in a 94% chance of an interest rate cut in December. What does the data say about interest rate cuts when stocks are within 2% of highs? According to 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 seasonality trends have been an excellent roadmap for investors in recent years. QQQ has been higher in ten of the past ten Julys with an average return of nearly 5%! Can the tech-heavy index continue the streak?
Poor Breadth?
The most popular argument among Wall Street analysts and traders is that the market’s breadth (participation) has been poor. In other words, a small subset of stocks (“The Magnificent 7”) are carrying weight while most stocks are weaker. However, this trend may soon be coming to an end. The Direxion Nasdaq 100 Equal Weight Index ETF ((QQQE - Free Report) ) is up more than 1% for the week and is threatening to break out above March highs – a bullish sign.
Image Source: Zacks Investment Research
Are Valuations too Expensive?
Valuations suggest the stock market may be more likely to rotate than collapse. The top ten stocks have a current P/E multiple of 28.1x, far higher than the S&P 500’s 20.5x. However, the rest of the market has a 17.6x multiple, a sign that most stocks are still cheap.
Image Source: (@awealthofcs)
Bottom Line
Stocks have come a long way since bottoming in late 2022. However, data points suggest the bull market still has room to run.
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Have Stocks Run too Far, Too Fast? (5 Clues)
Wall Street teaches us that historically, bull markets climb the proverbial “Wall of Worry.” One of the great paradoxes of the stock market is that stocks tend to bottom on poor news, climb a wall of worry, and top when news seemingly cannot get any better. Again, Wall Street seems to be following this playbook and historical precedent. Main U.S. equity indexes like the Nasdaq 100 ETF ((QQQ - Free Report) ) and the S&P 500 Index ETF ((SPY - Free Report) ) bottomed in October 2022 when the inflation rate reached 40-year highs.
From a fundamental and price action perspective, the mega-cap tech market segment has been the undisputed leader on Wall Street over the past year. The Nasdaq 100, which tracks mega-cap tech juggernauts such as Nvidia ((NVDA - Free Report) ), Microsoft ((MSFT - Free Report) ), and Apple ((AAPL - Free Report) ), is up more than 30% over the past year and is running away from its previous all-time high achieved in late 2021. Nevertheless, despite the market’s performance, not as many market participants have enjoyed the gains as a casual observer might think. For example, in late 2023, the National Association of Active Investment Managers (NAAIM) survey had less than a 25% allocation to the market.
U.S. Equity Markets: Peak Optimism?
Whether or not investors have profited from the bull market thus far, investors must evaluate the current prospects for stocks to take advantage of the future. Below, I will analyze five bearish arguments and provide data on whether they hold weight.
RSI Flashes Extreme Overbought Signal
The Relative Strength Index, or RSI, is a momentum indicator used by market technicians to measure the speed and magnitude of an instrument’s price over time. Investors often consider the term “overbought” as being negative for stocks. However, as always, investors should rely on data and historical precedent, not opinions. The Nasdaq 100 just flashed an extreme and rare RSI reading greater than 95. According to data from Seth Golden (@sethCL), the data may not be as bearish as many on Wall Street may think:
· 1-month later average return = +2.9%
· Positivity Rate = 80%
· The thee failed signals were all macro-related (Gulf War, Covid-19, Inflation Spike)
Rate Cuts Near All-Time Highs
Markets are pricing in a 94% chance of an interest rate cut in December. What does the data say about interest rate cuts when stocks are within 2% of highs? According to 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 seasonality trends have been an excellent roadmap for investors in recent years. QQQ has been higher in ten of the past ten Julys with an average return of nearly 5%! Can the tech-heavy index continue the streak?
Poor Breadth?
The most popular argument among Wall Street analysts and traders is that the market’s breadth (participation) has been poor. In other words, a small subset of stocks (“The Magnificent 7”) are carrying weight while most stocks are weaker. However, this trend may soon be coming to an end. The Direxion Nasdaq 100 Equal Weight Index ETF ((QQQE - Free Report) ) is up more than 1% for the week and is threatening to break out above March highs – a bullish sign.
Image Source: Zacks Investment Research
Are Valuations too Expensive?
Valuations suggest the stock market may be more likely to rotate than collapse. The top ten stocks have a current P/E multiple of 28.1x, far higher than the S&P 500’s 20.5x. However, the rest of the market has a 17.6x multiple, a sign that most stocks are still cheap.
Image Source: (@awealthofcs)
Bottom Line
Stocks have come a long way since bottoming in late 2022. However, data points suggest the bull market still has room to run.