Strategist warns ‘euphoria’ is taking over markets: Morning Brief - Yahoo Finance

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Wednesday, August 26, 2020

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But there are still no ‘obvious catalysts’ for a market selloff.

The S&P 500 closed at its third-straight record high on Tuesday.

But some strategists on Wall Street are concerned that the current market environment has made stocks vulnerable to a decline.

“US earnings expectations have certainly ‘V-shaped’ and this has been accompanied by an enormous reversal in risk appetite in almost a miniscule amount of financial time,” writes Sean Darby, global equity strategist at Jefferies.

“Some of our indicators are beginning to move into the ‘euphoria’ stage, and we caution that managing drawdown risk is coming to the fore.”

Among other factors, Darby notes that the equal-weighted S&P 500 is flat-lining while the cap-weighted index cited as the “benchmark index” makes new highs. The FAAMG names now make up more than 23% of the S&P 500’s market cap.

And as we noted Monday, hedge funds have piled into these names — Facebook (FB), Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), and Alphabet (GOOGL, GOOG) — and beat the market handily as a result. But the divide between the equal- and cap-weighted indexes shows fewer stocks have participated in the latest leg of this rally.

Darby also cautions on the speed of the market’s ascent, adding that, “this rally has been well above the average of the previous S&P 500 recoveries from market lows.”

The stock market's rally off the market bottom has been significantly faster than the last three recoveries. Of course, little about this recession and market period has any parallel in financial history. (Source: Jefferies)

Of course, this has not been an average recovery. Or an average recession.

The economic and financial market snapback we’ve seen in the last few months followed a scary, abrupt decline in financial markets and mandated closures across the U.S. economy.

But with these changes happening at what Darby calls “the speed of financial light,” caution right now is warranted. “The bottom line is that as investors ‘buy’ into the ‘earnings growth,’ risk appetite is moving into the euphoria stage,” Darby adds.

“The obvious catalysts for a correction are not present but the technical ‘stretch’ of some of our indicators are a warning sign. A close watch should be kept on the US 30-year yield and any sign that that US money supply is rolling over.”

Morgan Stanley’s Mike Wilson — who we’ve cited in recent weeks as one of the more ardently bullish strategists on the Street — also expressed some caution in a note published earlier this week.

Wilson sees the current challenges being faced on college campuses as a sign any realistic re-opening trajectories for the economy in the months ahead could fall short of market expectations. Additionally, the more time that goes by without a new stimulus plan in place, the more this consumer-led recovery is likely to falter.

And while Wilson expects Congress will pass a new bill given that it is an election year, “that doesn’t mean we won’t see some moments of doubt and uncertainty about the size and timing of the next package reflected in the market.”

This commentary from Darby and Wilson also comes as Citi strategist Tobias Levkovich raised his yearend price target for the S&P 500 to 3,300 from 2,900 after having been the second-most bearish equity strategist on the Street.

The capitulation of another market skeptic thus serves as another pillar of support for Darby’s worries over euphoria creeping into the market.

And a reminder that this rally seems intent on converting every market bear before all is said and done.

By Myles Udland, reporter and co-anchor of The Final Round. Follow him at @MylesUdland

What to watch today

Economy

• 7:00 a.m. ET: MBA Mortgage Applications, week ended Aug. 21 (-3.3% during prior week)

• 8:30 a.m. ET: Durable goods orders, July preliminary (4.5% expected, 7.6% in June)

• 8:30 a.m. ET: Durable goods orders excluding transportation, July preliminary (1.9% expected, 3.6% in June)

• 8:30 a.m. ET: Non-defense capital goods orders excluding aircraft, July preliminary (1.7% expected, 3.4% in June)

• 8:30 a.m. ET: Non-defense capital goods shipments excluding aircraft, July preliminary (1.8% expected, 3.3% in June)

Earnings

Pre-market

• 7:30 a.m. ET: Dick’s Sporting Goods (DKS) is expected to report adjusted earnings of $1.20 per share on revenue of $2.46 billion

Post-market

• 4:00 p.m. ET: Splunk (SPLK) is expected to report an adjusted loss of 34 cents per share on revenue of $520.73 million

• 4:00 p.m. ET: NetApp (NTAP) is expected to report adjusted earnings of 41 cents per share on revenue of $1.15 billion

• 4:15 p.m. ET: William-Sonoma (WSM) is expected to report adjusted earnings of $1.01 per share on revenue of $1.47 billion

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