Why the spiking bond yields driving sharp losses in tech stocks are not a long-term threat to the market, according to one Wall Street chief strategist

trader nyse pray
  • Rising interest rates have sparked a surge in stock-market volatility that’s seen tech shares take a sharp dive.
  • But investors should not fear rising interest rates, according to a recent client note from The Leuthold Group.
  • “Yields may be rising, but yield pressure is still extremely low because real growth is improving even faster,” said Jim Paulsen, the firm’s chief investment strategist.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

A spike in interest rates since the start of the year has accelerated a rotation out of high-growth technology stocks and into value stocks poised to benefit from a reopening of the economy.

The Nasdaq has fallen more than 10% over the past month as the Dow has soared to record highs, with a spike in the 10-year US Treasury yield acting as the main catalyst. It recently surged to a cycle high of more than 1.60% after starting the year below 1%.

But according to Jim Paulsen, the Leuthold Group’s chief investment strategist, rising interest rates do not represent a long-term threat to the stock market. Paulsen expects the 10-year yield to cross 2% by the end of the year.

A spike in interest rates and its impact on the stock market depends on the economic backdrop, according to Paulsen. Rising interest rates amid a strengthening economy “may prove no challenge at all for stocks,” Paulsen said.

Since 1950, the S&P 500 achieved an average annualized price return of 9% during quarter when interest rates were on the rise, according to the note. “The effect of rising-yield quarters is probably not that much worse because real economic growth also improved for many of these quarters,” Paulsen explained.

With COVID-19 subsiding and the full reopening of the economy imminent, economists are expecting 2021 GDP growth to surge to 5.5%. This represents a favorable backdrop for the stock market even if interest rates continue their ascent.

If the pace of economic growth slows in 2022, the stock market will become much more sensitive to rising interest rates.

But for now, “with the economy enjoying a post-pandemic boom, rising yields may prove far less damaging for stock investors in 2021,” Paulsen concluded.

Read more: UBS says to buy these 13 ‘most compelling’ contrarian stocks that are poised to surge, including one with 40% upside – and shares what could drive each one higher

Read the original article on Business Insider

The S&P 500 is primed for a 10% rally by the end of June following a bullish upside breakout, Fundstrat’s Tom Lee says

Tom Lee
  • The S&P 500 is primed for a 10% rally by the end of June following a bullish breakout to the upside on Thursday, according to Fundstrat’s Tom Lee.
  • A breakout in the S&P 500 is taking place as the stock market’s volatility index is breaking down, which represents “double confirmation” of an imminent market rally, Lee said.
  • Lee recommends investors buy cyclical stocks in the energy and financial sectors that are poised to benefit from a swift reopening of the US economy.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The stock market is poised to extend its recent rally following an upside breakout in the S&P 500, Fundstrat’s Tom Lee said in a note on Friday.

Lee expects the S&P 500 to surge 10% to 4,300 by the end of June, before any potential correction materializes, according to the note. Lee said Thursday’s record highs in the S&P 500 occurred as the Cboe Volatility Index – or VIX, also known as the stock market’s fear gauge – is on the decline. To him that represents “double confirmation” of the move higher in stocks.

Over the past year, periods of consolidation in the S&P 500 have been followed up by 10% rallies, Lee observed in the note. From June to July and from September to November, the S&P traded flat before jumping 10% after a breakout in its respective trading range.

According to Lee, the technical breakout in stocks does come with a favorable fundamental backdrop that will help drive the market higher.

Those fundamental drivers include COVID-19 retreating faster than expected, resulting in a faster re-opening of the US economy, pent-up demand and operating leverage that could be greater than expected, and interest rates could stabilize or even fall, the note said.

“We think there will be fundamental surprise in the coming months,” Lee said.

To take advantage of the expected move higher in stocks, Lee continues to recommend investors buy cyclical stocks in the energy and financial sectors that are poised to benefit from a swift reopening of the US economy.

But the expected 10% rally higher in the S&P 500 won’t happen overnight, with Lee setting expectations that the next seven to 10 trading days could be flat as stocks “catch their breath.”

Read more: UBS says to buy these 13 ‘most compelling’ contrarian stocks that are poised to surge, including one with 40% upside – and shares what could drive each one higher

fundstrat chartt
Read the original article on Business Insider

General Electric extends 2-day decline to 14% as JPMorgan’s Stephen Tusa sticks with $5 price target

Larry Culp GE CEO
Larry Culp, CEO of General Electric.

  • Shares of General Electric have plummeted as much as 14% over the past two days after the company held its analyst day.
  • Investors are souring on the company’s plan to combine its GE Capital Aviation Services unit with AerCap as well as its reverse stock split.
  • JPMorgan analyst Stephen Tusa thinks the downside in General Electric is not over, as he sticks with his $5 price target.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

General Electric investors are souring on the company’s plans revealed at analyst day earlier this week, with the stock falling as much as 14% over the past two-days.

The company announced plans to combine its GE Capital Aviation Services unit with AerCap in an effort to reduce its debt burden by about $30 billion. On top of that, the industrial company said it plans to initiative a 1-for-8 reverse stock split to bring down its nearly 9 billion share count.

JPMorgan analyst Stephen Tusa thinks there’s more downside left for General Electric. Tusa reiterated his Neutral rating on the company and maintained his $5 price target in a note on Thursday, representing potential decline of 59% from current levels.

Tusa argues that General Electric bulls can no longer point to the GE Capital Services unit as a source of value for the stock since the company is merging the unit with AerCap.

“Starting yesterday, there are no longer GE Capital assets around which Sell Side Bulls can argue there is enough value/equity to support related debt,” Tusa said. The average sell side price target for General Electric is $13, Tusa noted.

Some investors have cheered General Electric’s decision to offload GE Capital Services, as it is now a pure play industrial company. But Tusa still sees weakness in those businesses as well.

“We continue to see structural concerns in the key Power markets, and now structural weakness at Aviation, combined with still relatively high financial leverage, and numerous tail liabilities for both GE and GE Capital Services, all hurdles to a speedy turnaround,” Tusa said.

ge chart.JPG
Read the original article on Business Insider

Recent stock market weakness represents a rotational correction rather than a big top, BofA says

FILE PHOTO - Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., March 20, 2020. REUTERS/Lucas Jackson
  • The recent weakness in the stock market represents a rotational correction rather than a big top, Bank of America said in a note on Tuesday.
  • The NYSE advance-decline line remains near record highs, indicating that underlying market breadth is strong.
  • “We believe that rotation is the lifeblood of a bull market,” Bank of America said.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

A correction in technology stocks over the past month represents a rotational correction rather than a big top in the stock market, Bank of America said in a note on Monday.

The bank is taking its cues from the New York Stock Exchange advance-decline line, which remains near record highs. The advance-decline line measures the difference of stocks that are moving higher or lower on a daily basis.

Near record highs, the NYSE A/D line indicates that underlying market breadth is strong. In other words, a broad swath of the market is performing well despite the sell-off in mega-cap technology names over the past month, which have been responsible for a bulk of the gains in the stock market over the past few years.

Other indications of strong market participation include an improvement in the percentage of S&P 500 stocks above their 10-day moving averages even as the market fell on Monday, and the strongest reading in the percentage of NYSE stocks at 52-week highs since March 2020.

“These solid breadth indicators suggest that market rotation is alive and well as US equities have corrected/consolidated lower from mid-February,” BofA said.

The rotation accelerated over the past month following a spike in interest rates, with investors selling out of technology stocks to buy cyclical stocks that are poised to benefit from a reopening of the economy.

“We believe that rotation is the lifeblood of a bull market,” Bank of America said.

But there are risks that could turn the recent rotational correction into a bearish breakdown for stocks, BofA highlighted.

The outperformance of the Nasdaq 100 relative to the S&P 500 is currently testing big support at the prior high from the 2000 tech bubble. “A decisive loss of this support [would] confirm a more sustainable loss of leadership, or bearish rotation, for the Nasdaq,” BofA said.

Additionally, a break below support in the high-yield and corporate bond indexes is a potential bearish leading indicator for the stock market, BofA said.

“This increases the risk for a deeper corrective phase on the S&P 500 with supports in the 3,714/3,700 to 3,647 range as well as at the prior highs from September and October,” BofA said.

bofas chartt
Read the original article on Business Insider

3 reasons why the correction in tech stocks has further to run, according to Morgan Stanley’s top US equity strategist

Mike Wilson
  • The sell-off in technology stocks is likely not over, according to Mike Wilson, Morgan Stanley’s chief US equity strategist.
  • In a note on Sunday, Wilson highlighted that the bull market in stocks will continue with value and cyclicals leading the way rather than the technology sector.
  • But technology stocks will continue to lag for three key reasons, according to Wilson.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The swift decline in technology stocks over the past month likely has further room to the downside, Mike Wilson, Morgan Stanley’s chief US equity strategist, said in a recent client note.

Since its peak on February 16, the Nasdaq 100 has declined by more than 10% even as a constant stream of good news hit investors. Vaccinations for COVID-19 continue to surge, daily COVID-19 cases have collapsed since the January peak, and Congress is on the verge of passing a $1.9 trillion stimulus package.

But with a full economic reopening within reach, coupled with a surge in interest rates, investors are rotating out of high growth tech stocks and into value and cyclical stocks that are poised to benefit from consumers finally being able to leave their homes and spend money following a year of rolling lockdowns. 

The recent trend of high-growth technology stocks underperforming its value peers will likely continue as Wilson sees more downside in the technology sector for these three reasons, according to the note.

1. “Markets lead the Fed, not the other way around.”

“The non-linear move in 10-year yields has awoken investors to a risk they thought was unlikely, if not impossible. The equity market now knows the 10-year yield is a ‘fake’ rate that either can’t or won’t be defended. To that end, the Fed did expand its balance sheet by $180 billion in February, 50% greater than its target. Yet, rates surged higher,” Wilson said. 

2. “The rotation might accelerate even further.”

“There will be a big shift in the top and bottom quintiles of 12-month price momentum by the end of this month. Most of the stocks going into the top quintile are value and cyclical stocks. Conversely, many of the stocks moving out of the top quintile are tech and other high-growth stocks.

Read more: Wedbush says to buy these 16 stocks that represent its analysts’ best ideas and are set to outperform in the next 6-12 months

“Part of the rotation from growth to value has been due to better relative fundamentals, as the economy recovers, and cheaper valuations. However, as these value stocks move into the top quintile of price momentum and growth stocks move out, the rotation might accelerate even further. This could be quite disruptive to portfolios and lead to another round of deleveraging like in January.”

3. “The Nasdaq 100 should test its 200-day moving average.”

“Based on the technical damage to date, the Nasdaq 100 appears to have completed a head and shoulders top and should test its 200-day moving average,” Wilson said. 

The 200-day moving average of the Nasdaq 100 currently sits at 11,635, representing potential downside of 10% from Friday’s close. 

A head-and-shoulders pattern is a bearish topping pattern that often signals a reversal following a bullish trend. The pattern takes its shape from a series of three tops, with the second top being the highest of the three. A neckline represents support and is formed by connecting the bottoms associated with the peaks. When the stock breaks below its neckline, a sell signal is triggered for traders.

qqq chart.JPG
Read the original article on Business Insider

Nikola slides 12% after JPMorgan downgrades to neutral given that the ‘good news is priced in the stock’

nikola tre prototype
Nikola said it completed the first of five Tre prototypes planned for this year.

  • Nikola fell 12% on Friday after JPMorgan downgraded the firm to neutral from overweight, according to a note. 
  • The call from JPMorgan was “a tactical move” as much of the good news is priced into the stock.
  • Nikola’s steep decline on Friday came amid a broader decline in electric vehicle stocks like Tesla.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Shares of Nikola dropped as much as 12% on Friday after JPMorgan downgraded the fuel-cell truck developer to neutral from overweight, according to a research note.

JPMorgan’s drive to downgrade Nikola was “a tactical move” based more on the timing of future catalysts than the underlying fundamentals, the note said.

According to the bank, the “good news is now priced in the stock, so we step aside for now,” the note said. The bank maintained its price target of $30, representing potential upside of 87% from Thursday’s close. 

Much of that good news includes evidence that the company is more focused on its goals and is passed the drama caused by founder and former CEO and chairman Trevor Milton.

Milton voluntarily stepped down from the company as chairman in late September, after a short-seller report from Hindenburg Research alleged that Milton and Nikola deceived investors. Nikola dismissed many of the claims raised in the report.

Nikola “has left much of the drama of 2020 behind,” JPMorgan said. 

But JPMorgan sees the Nikola’s story exciting investors once again in mid or late 2021 if customer orders are announced, “and as the first FCEL prototype comes to life,” the note said.

The decline in Nikola on Friday came amid a broader market sell-off in high-growth tech stocks that have been shunned by investors amid rising interest rates. Shares of Tesla were down as much as 13% on Friday.

Read the original article on Business Insider

Tech stocks can soar another 25% as reopening boosts digital transformations, Wedbush says

NYSE trader
  • Tech stocks will climb 25% or more over the next year as economic-reopening progress spurs new growth, Wedbush said Tuesday.
  • FAANG, cloud, and cybersecurity names will lead the climb, while Uber and Lyft represent the best reopening plays, they added.
  • Valuation concerns are valid, but secular trends lifting the group will offset such worries, according to Wedbush.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The trends poised to lift all manner of tech stocks are only just beginning, Wedbush analysts Dan Ives and Strecker Backe said.

Equity investors are in the midst of a transition. While tech mega-caps and other growth stocks led the bulk of last year’s rally, expectations for a swift economic reopening recently shifted attention toward companies set to benefit most from a recovery. Value and cyclical names have roared higher and left tech names lagging.

Wedbush doesn’t expect the underperformance to last. Blowout earnings from pandemic-darling Zoom show tech stocks are set for another quarter of “beat and raise” reports, the analysts said. Digital transformations will take hold soon after and lift tech stocks by 25% or more over the next 12 months, they added. 

“As we have witnessed in the cloud, collaboration, cybersecurity, and 5G, this tech party is just getting started with consumer and enterprise-driven demand catalyzing a multi-year growth boom for the tech sector looking ahead,” the team said.

Wedbush sees FAANG, cloud, and cybersecurity stocks leading the charge. Disruptive recovery names like Uber and Lyft are the firm’s favorite reopening plays, as lifted restrictions will likely revive ridership.

The political backdrop also lends itself to continued strength in tech stocks, according to Wedbush. The Biden administration will likely have a softer tone against China and ease tensions in the “Cold Tech War,” the analysts said. The 2020 SolarWinds hack also places a fresh focus on cybersecurity efforts in government, they added.

To be sure, the tech sector still enjoys elevated valuations following last year’s rally. Debate over the stocks’ pricing will continue, but Ives and Backe expect the group to swing higher even in the face of the broader rotation to value.

“We believe the underlying fundamental stories and white-hot growth creates a yellow brick road to an upward bullish trend,” they said.

Read the original article on Business Insider

The Fed has ‘lost control’, and the historic spike in bond yields points to a looming stock-market crash, Bank of America says

trader nyse worried chart
  • The recent spike in interest rates has Bank of America warning of a potential stock market crash, according to a Friday note.
  • The bank sees 1987 as a potential roadmap for 2021, in which a continued spike in yields helped spark weakness in the market.
  • “Unless the Fed fights back very soon with more treasury/MBS purchases, a similar fate likely lies ahead,” BofA warned.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Last week’s spike in interest rates has Bank of America analysts on edge about a potential stock market crash. 

In a note on Friday, the bank highlighted the historic yield spike in mortgage-backed securities and compared the current environment to 1987, when a continued jump in MBS yields preceded a stock market crash of more than 20%.

In 1987, an interest rate shock in April was followed by further rate increases that ultimately led to the October stock market crash, BofA said.

But this time around, the Fed may have “lost control,” as its options to combat rising yields dissipate due to rapidly improving COVID-19 cases and a swift economic reopening. 

“The question is whether the Fed wants to respond now with more treasury and MBS purchases or wait for an even larger risk-off event before doing so,” BofA explained.

A surprise from the Fed would likely temper bond vigilantes and lead to a decline in interest rates, helping stave off a substantial stock market crash like in October 1987.

“Unless Fed fights back very soon with more treasury/MBS purchases, a similar fate likely lies ahead,” BofA warned.

Read the original article on Business Insider

The ‘most aggressive’ areas of the stock market could be set for more gains as spiking bond yields shuffle portfolios, a Wall Street chief strategist says

trader nyse floor yell shout aggressive
  • The reversal of a multi-year trend could have been accelerated this month as interest rates spiked higher, according to a note from Leuthold Group’s James Paulsen.
  • Investor fund flows have started to favor stocks over bonds, which hasn’t happened in years.
  • “When fund flows have shifted toward stocks, it has typically led to leadership from the market’s ‘most aggressive’ sectors,” Paulsen said.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Rising interest rates sparked a volatile week of trading for the stock market, but it could also be accelerating the reversal of a multi-year trend that suggests more long-term upside ahead for stocks, according to Leuthold Group’s James Paulsen.

As interest rates rise, bond prices fall, which often sparks current fixed income investors to question whether they own too much of the asset class and not enough stocks, Paulsen said in a note on Thursday.

And there are likely a lot of investors asking that question right now, given that over the past decade, fund flows have overwhelmingly favored bonds over stocks. Even since the start of 2019, bonds have seen cumulative fund inflows of more than $1 trillion, while stocks have seen cumulative outflows of about $600 billion. 

And according to Fundstrat’s Tom Lee, 94% of retail fund flows have gone into bonds rather than stocks since 2008.

But more recently, this trend has reversed, with stocks seeing an uptick in inflows at the expense of bonds.

“This newfound trend of investment flows probably has a long way to go,” Paulsen said, and if so, the stock market should find strong support from the new money pouring into equities.

Sectors that have led the market higher during a sustained trend of fund flows into equities are the “most aggressive,” according to Paulsen.

If cumulative fund flows into stocks turn positive, “not only could the stock market continue to surprise to the upside,” but the most aggressive sectors might keep leading the market higher, Paulsen concluded. 

fundflowchart.JPG
Read the original article on Business Insider

This week’s GameStop surge could be upending the stock market as it leads hedge funds to reduce leverage, Fundstrat’s Tom Lee says

gamestop line
  • This week’s 355% surge in GameStop could be upending the entire stock market, according to Fundstrat’s Tom Lee.
  • Stocks sold off broadly on Thursday, with major averages like the S&P 500 and Nasdaq 100 down more than 2% at intraday lows.
  • “It’s not surprising to see GameStop create another wave of panic and post-traumatic de-gross, Lee said.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

This week’s stock market sell-off could in part be due to the recent surge in shares of GameStop, Fundstrat’s Tom Lee said in a note on Thursday.

Shares of GameStop surged as much as 355% this week, returning to levels not seen since the epic short-squeeze in late January. The rally started Wednesday afternoon, potentially sparked by the abrupt resignation of GameStop’s CFO, Jim Bell. Sources told Insider that Bell was forced out by the board as part of a push by activist investor Ryan Cohen.

As shares of GameStop soared, the broader stock market averages sold off, with the S&P 500 and Nasdaq 100 down more than 2% on Thursday.

And while many investors are attributing the broad market decline to rising interest rates, with the 10-year US Treasury note moving above 1.5% on Thursday, Lee thinks it could actually be caused by a de-grossing event in which hedge funds are unwinding their leverage by selling stocks.

Lee observed that the Cboe Volatility Index – or VIX, frequently called the stock market’s fear gauge – has closely followed the price of GameStop shares since mid January, “when GameStop went mental,” according to the note.

Lee explained that GameStop could still be a popular short among hedge funds, and a surging price in the video game retailer’s share price means quant funds require short-covering.

“Going long the VIX is not a bad proxy, and a rising VIX causes value-at-risk models to require hedge funds to de-gross, or reduce leverage,” Lee said.

The GameStop surge could lead to a surge in the VIX, which could then result in hedge funds de-grossing their portfolios, leading to stocks falling, the note said.

“It is not surprising to see GameStop create another wave of panic and post-traumatic de-gross,” Lee said.

He added: “This is merely an observation and may not be the actual mechanism.”

But since economic momentum is strengthening, volatility surges represent “temporary equity headwinds,” according to Lee. Instead of signalling new lows ahead, Lee views the spike in market volatility as a “rotational” event based on cautious (not ebullient) client conversations and improving economic visibility, the note said. 

gamestop vix.JPG
Read the original article on Business Insider