Consumer confidence in stock prices suggest there’s more time left for the bull market, NDR says

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  • Consumer confidence in the stock market has not reached excessive levels, suggesting there is more time left for the current bull market, Ned Davis Research said in a Wednesday note.
  • Consumers’ view on bonds is bearish, which is a hopeful sign for the economy going forward, NDR said.
  • Despite the bullish signals from tamed sentiment toward stocks, record high margin debt serves as a risk for the market.
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Many sentiment indicators have shown an excessive amount of optimism towards the stock market in recent weeks, but consumer confidence readings tell a different story, according to a Wednesday note from Ned Davis Research.

US consumers are still skeptical about stocks, according to a survey by the Conference Board. Expectations for a decrease in stock prices over the next 12 months has fallen to a neutral level after being elevated amid the COVID-19 pandemic. The indicator is still far away from reaching excessive levels that would trigger a contrarian sell signal.

This indicator is contrarian in that stocks perform well over the next 12 months when consumers are overwhelmingly bearish on stock prices, and perform poorly when consumer are overwhelmingly bullish on stock prices.

A neutral reading towards stocks for this consumer confidence survey “suggests that the bulls could still have some time” for the rally in stocks to continue, according to NDR.

Another bullish indicator is US consumers’ confidence towards bonds, which has reached a pessimistic level.

“When people get this negative on bonds historically, a lot of the bad news (good news for nominal economic growth) is starting to get priced in,” NDR explained.

But one high-risk warning that should be flashing for stock market investors is record levels of margin debt. While rising margin debt often coincides with rising stock prices, a fast rate of change over the past year has hit a level where stocks have often struggled, NDR warned.

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The stock market could soar 40% as the bull market enters its 3rd inning, Wharton professor Jeremy Siegel says

Jeremy Siegel Wharton CNBC
  • The bull market in stocks is just getting started, according to Wharton professor Jeremy Siegel.
  • Siegel said the stock market could surge 40% from here before it stages a 20% correction.
  • “I have never seen a Fed Chairman so dovish,” Siegel said of Jerome Powell in an interview with CNBC.
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The bull market in stocks is just getting started as it enters its third inning, Wharton professor Jeremy Siegel said in an interview with CNBC on Thursday.

Siegel said the stock market could surge 30%-40% from current levels before it stages a 20% correction. The bullish backdrop for Siegel is partly based on Fed Chairman Jerome Powell, who has been steadfast in recent weeks that the Fed is not planning to raise interest rates anytime soon despite growing evidence that a strong economic rebound from the COVID-19 pandemic is materializing.

A 30%-40% jump in the S&P 500 from current levels would see the index trade in a range of 5,322 and 5,731.

Siegel expects a strong inflationary year of 4% to 5% as increased demand and supply chain disruptions lead to a boost in prices. Powell views the expected jump in inflation as temporary.

“I have never seen a Fed Chairman so dovish,” Siegel said of Powell. Siegel expects that a rise in inflation and interest rates amid a booming economy will ultimately force the Fed’s hand, leading them to raise the fed funds sooner than expected.

But even in that environment, Siegel reminded viewers that in an economic environment dominated by a jump in growth, inflation, and interest rates, investors want to own stocks, which represent a claim on real assets like land, trademarks, and businesses.

“Enjoy this ride [because] it’s going to keep on going,” Siegel said of rising equities, before adding that he sees stock market gains extending through the end of 2021 at least. “I would not be cautious [on stocks] right now,” Siegel said.

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A broad sell-off in the stock market looks less likely as rolling corrections hit tech and energy, according to Fundstrat

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  • The chances of a broad sell-off hitting the stock market in the first half of 2021 are diminishing, according to Fundstrat’s Tom Lee.
  • Rolling corrections in certain sectors like technology and energy have diminished the chance of a big sell-off, Lee said in a note on Friday.
  • Technology, energy, and small cap stocks have all experienced declines of more than 10% in recent months.
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The chances of a broad sell-off hitting the stock market in the first half of 2021 are diminishing as rolling corrections hit certain sectors, Fundstrat’s Tom Lee said in a note on Friday.

Since the start of the year, technology and growth, energy, and small cap stocks have all experienced sell-offs of at least 10%, Lee highlighted.

“Because of this recent suite of rolling corrections, we believe the prospects for a larger correction in 1H2021 have largely diminished,” Lee explained.

Tech stocks have sold off on fears of inflation and rising interest rates, while energy and small cap stocks have taken a breather in recent weeks after staging over-extended rallies on the reflation trade.

The change in leadership within the stock market has led to a choppy range of trading, with tech and energy switching places for 2020 and 2021. Tech is now the worst performing sector within the S&P 500 so far in 2021 after being the winner in 2020, while the energy sector is the best performing so far this year after suffering in 2020.

Four structural factors driving this change in 2021 include the first real rise in long-term interest rates not driven by the Fed in decades, rising inflation expectations, a less business-friendly Biden administration that is mulling a rise in the corporate tax rate, and the re-opening of the US economy.

Read more: Buy these 30 stocks that are best-placed to benefit from the pandemic’s ‘seismic shifts’ and continue surging in its aftermath, BTIG says

“Each of these individual factors would be difficult for a fund manager to discount. But 2021, these 4 are happening simultaneously. Moreover, the first two factors have not been part of the investment playbook for a generation, so it is natural for markets to be uncertain,” Lee said.

To navigate the uncertainty of the markets, Lee suggest investors buy cyclical stocks poised to benefit from a strong reopening of the US economy as the COVID-19 pandemic subsides.

“Energy is really the sector facing the best tailwinds in 2021,” Lee said.

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The bull market in stocks is heading into its second year, and history suggests a 17% gain could be in store

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  • This week is the one-year anniversary of the end of the fastest bear market on record and the start of a new bull.
  • With the bull market about to enter its second year, LPL looked at historical data to gauge how stocks may trade over the next 12 months.
  • The second year of a bull market tends to build upon its gains, rising an average 17% following a bear market decline of more than 30%, according to LPL.
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It’s been one year since the stock market found its bottom amid the fastest bear market on record, in which the S&P 500 fell more than 30% amid the COVID-19 pandemic.

One year later, the bull market in stocks is alive and well, with the S&P 500 rising as much as 75% to new record highs since the bear market low on March 23, 2020. That’s the strongest start to a new bull market on record, according to data from LPL.

Now entering its second year, the bull market will likely build upon its gains and continue to move higher with some volatile swings along the way, according to a Monday note from LPL.

Since World War II, bull markets that began after a sharp bear market decline of more than 30% saw average second year gains of 17%, LPL highlighted. But a pickup in volatility is likely, with an average 10% sell-off in the second year of a bull market, according to historical data analyzed by the firm.

The bull market that began in 2009 saw a similar start to the current bull run, gaining 69% in its first year. In its second year, stocks managed to gain 16% despite suffering a brief 17% sell-off.

“Considering the current bull market reflected the best start to a bull market ever, this could open the door for an above-average pullback during year two,” LPL said.

If an above-average pullback does occur during the second year of the current bull market, LPL recommends investors consider “buying the dip”. The firm has high confidence in stocks due to the current pace of vaccine distribution, fiscal and monetary stimulus, and a robust economic recovery.

And as to whether a rise in interest rates will lead to a large contraction in stock valuations, “we see that as unlikely,” LPL said. The firm reiterated its year-end S&P 500 price target of 4,100, representing potential upside of 5% from Friday’s close.

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The stock market’s fear index just dropped below a key level that suggests further upside ahead

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  • A decline in stock market volatility over the past few weeks suggests more upside ahead for stocks.
  • On Tuesday, the CBOE Volatility Index fell below the key 20 level and hit its lowest levels since the start of the COVID-19 pandemic.
  • According to Fairlead Strategies’ Katie Stockton, a consistent VIX reading below 20 would signal a bullish shift in sentiment.
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The stock market’s fear gauge fell below a key level on Tuesday that suggests further upside ahead for stocks.

The CBOE Volatility Index, also known as the VIX, fell below the 20 level and hit its lowest point since the start of the COVID-19 pandemic. A VIX below 20 is seen as a signal that the stock market is transitioning from a high volatility regime to a low volatility regime, according to Fairlead Strategies’ Katie Stockton.

And according to Fundstrat’s Tom Lee, a fall below 20 in the VIX signals a risk-on environment that would spark fund flows into stocks from systematic and quantitative investment funds.

“A fall below 20 takes this volatility index to pre-2020 levels and a drop in the VIX would be a risk-on signal,” Lee said in a note last month.

But the VIX has staged multiple head fakes over the past few months, briefly falling below 20 before spiking higher in February, November and August.

That’s why Stockton recommends investors wait for confirmation of a breakdown in the VIX before making any portfolio changes, like removing market hedges. Confirmation of a VIX breakdown would require consecutive daily closes below the 20 level, according to a Tuesday note from Stockton.

“This would mark a potentially bullish shift in sentiment, and a move from a high-volatility regime to a low-volatility regime, last seen pre-Covid with a new floor for the VIX near 11,” Stockton said, adding that a VIX breakdown “would support near-term upside follow-through for the inversely correlated S&P 500.”

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JPMorgan pinpoints the exact trigger for when investors should start buying tech again at the expense of value stocks

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  • A rise in interest rates has helped fuel an extreme rotation into reopening stocks at the expense of high-growth technology stocks.
  • According to JPMorgan, valuations in cyclical stocks have become stretched, suggesting that the bulk of the rally “might be behind us.”
  • These are the factors that will tell investors when to start buying tech stocks at the expense of value stocks, according to JPMorgan.
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A violent rotation out of technology stocks and into cyclical stocks poised to benefit from a full reopening of the US economy has some investors asking when to take profits in value and pile back into growth, according to a Monday note from JPMorgan.

The bank outlined factors investors should monitor to signal the optimal point of buying tech stocks at the expense of the value stocks that have worked so well recently.

Driving the reopening trade higher has been a surge in interest rates, with the 10-year US Treasury note hitting a 13-month high on Friday of 1.64%. JPMorgan thinks the move higher in yields is not yet exhausted, even as the Fed is likely to push back on rising rates. Until interest rates begin to turn lower, the reopening trade should continue to work.

From an economic standpoint, the outperformance of growth stocks relative to value stocks will likely resume once again when country Purchasers Managers Index, or PMI, peak. According to JPMorgan, China momentum is “potentially peaking,” while the US is approaching highs.

“The general growth backdrop is likely to be firm into summer,” JPMorgan said.

Also helping cyclical stocks maintain its momentum over growth stocks is the acceleration of earnings, which should continue over the next few quarters. “As long as cyclicals EPS is faster than for defensives [and tech], they tended to hold onto their gains,” JPMorgan explained.

“Put together, the size of the cyclicals run, and their stretched valuations, likely suggest that the bulk of the move might be behind us,” JPMorgan said before adding, “Still, we think it is premature to position for an actual reversal.”

Investors should position for a reversal out of cyclical stocks and into high-growth tech stocks once country PMIs begin to peak, relative earnings begins to fade, and as interest rates stop rising and instead begin falling, according to JPMorgan.

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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.
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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.

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Rising interest rates are usually bullish for stocks when these 3 factors are met, according to LPL

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  • Some investors have been worried about the sudden rise in interest rates over the past month.
  • Higher interest rates have helped spark a rotation from high-growth technology stocks to more value-oriented sectors like energy and financials.
  • But rising interest rates tend to be accompanied with rising stock prices, especially when these 3 factors are met, according to LPL.
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A sudden spike in interest rates has accelerated the internal leadership change of the stock market over the past month, with high-growth technology stocks underperforming relative to more value-oriented sectors like energy and financials.

But rising interest rates have historically been accompanied by rising stock prices, especially when an improving economic growth outlook is part of what’s driving rates higher, according to an analysis from LPL Financial.

“If an improving growth outlook is part of what’s driving rates higher, it should also support corporate profits, creating a positive fundamental backdrop for stocks,” LPL said in a note on Monday.

Based on historical data going back to the early 1960’s, LPL found that of the periods in which the 10-year US Treasury yield rose by at least 1.5%, the stock market moved higher nearly 80% of the time, delivering an average return of 17% over an average time period of just more than two years.

Since the start of the year, the 10-year US Treasury yield increased by about 0.70% to its current standing of 1.59% as of Monday afternoon.

These are the 3 factors that need to be met during a period of rising interest rates for stocks to perform well, according to LPL.

1. “The starting point for interest rates is low.”

“Rates have been rising but they are still historically low, with the 10-year Treasury yield at the end of February falling into the bottom 2% of all values dating back to 1962. While it’s true that rates become a bigger burden for business, consumers, and governments as they rise, even at current and higher levels rates are still attractive and can continue to support a robust economic rebound,” LPL said.

2. “We are not in an extended period of high inflation.”

“Rising interest rates during periods of high inflation have generally resulted in lower stock returns,” LPL said, pointing to its historical data.

“From 1968 to 1990, the consumer price index rose an average of 6.2% per year and was above 3.5% every year except three. Five of the rising rate periods took place at least partially during those inflationary years. The average annual return during those rising rate periods was -0.4%. During all other rising-rate periods, the average annual return was 13%, well above the average for all returns since 1962,” LPL said.

3. “Rising rates are accompanied by strong yield curve steepening.”

“The yield curve is the difference between long-term and short-term interest rates. A steepening yield curve usually tells us two things: economic growth expectations are picking up, pushing long-term rates higher; and the Federal Reserve probably is not yet pumping the brakes, helping to keep short-term rates relatively low, which usually also means inflation is under control,” LPL explained, adding that stocks performed best during periods of rising interest rates when the yield curve saw the most steepening.

According to LPL, all three factors are being met in today’s rising rate environment, which leads the firm to conclude that “stocks may tolerate the current rising-rate period well.”

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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.
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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.

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The recent tech sell-off creates a ‘massive buying opportunity’ with another 30% jump for the sector possible in 2021, Wedbush says

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  • The recent decline in tech stocks has created a “massive buying opportunity” in the sector, according to Wedbush analyst Dan Ives.
  • Ives said he believes another 30% jump in tech names is possible in 2021.
  • The analyst argued that 30% to 40% of employees could eventually be permanently remote, adding fuel to the digital transformation.
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The recent decline in tech stocks has created a “massive buying opportunity” as another 30% jump in the sector is possible over the next 12 to 18 months, according to analysts at Wedbush Securities.

In a note to clients late Thursday, Wedbush analyst Dan Ives said he believes the current tech stock sell-off has run too far.

“The momentum names in tech are down anywhere from 15% to 25%+ this week and in our opinion, this sell-off is way overdone given the $2 trillion of digital transformation spending on the horizon coupled by a massive M&A spree set for the next few years in the tech space,” Ives said.

This past week’s tech-stock weakness pushed a popular exchange-traded fund that tracks the Nasdaq 100 index below key support levels on Thursday. Popular tech names like Tesla and Microsoft led sector losses throughout the week, falling roughly 10% and 4% respectively.

Much of the decline was caused by a sell-off in government bonds that intensified over the week.

The yield on the 10-year US Treasury note, which acts as a benchmark for global borrowing rates, climbed to 1.54% on Thursday following Federal Reserve Chair Jerome Powell’s comments. This led to further rotation out of the highly valued tech sector into more cyclical stocks in the energy and financial sectors.

Wedbush’s Ives said he sees the tech sell-off as a “golden opportunity” and argues the “digital transformation across the enterprise and consumer world is just in its first few innings.”

While some analysts and investors have said tech stocks market leadership is fading, Ives believes the post-pandemic reopening won’t hurt tech companies to the extent that some might argue.

The analyst said his team spoke to CEOs around the world who told them that “30%-40% of employees could be remote in a semi-permanent structure.” Ives said this will “put further pressure on CIOs to rip the band-aid off and go aggressive on a cloud/digital transformation roadmap the next few years.”

Ives and company highlighted several tech names that they believe offer considerable upside in his note including Microsoft, Docusign, Salesforce, Zscaler, and Apple.

Despite recent tech weakness, Wedbush “believes tech stocks have another 30% upward move in the cards” in 2021 led by “FAANG, cloud, and cybersecurity names.”

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