The U.S. equity markets have lately been testing uncharted
territories, with two out of three major indices scaling record
highs amid questionable fundamentals. Both S&P 500 and Dow
Jones closed at new lifetime highs last Monday.
In the face of a mixed bag of economic news, and continued
uncertainty in overseas markets, Bullish traders remain at the helm
in shaping the market's path. However, on the other side of this
investor optimism lie traders and technicians who are increasingly
concerned with what the charts and economic indicators point to.
Market Crash in the Cards? 3 Stocks to Book
General Electric Company
) saw a spurt in trading volumes, climbing over 3.3% in less than a
week to $27.53 on June 9, and is currently trading close to its
52-week high. While technical analysts are applauding the sluggish
giant's sudden momentum and taking it as a sign of renewed market
vigor, history begs to differ.
Before discussing the significance of General Electric's rally and
what it indicates, let us see what the broader indexes
The S&P 500 has drafted its recent uptrend on extremely low
(and decreasing) volume in a backdrop of persistently low
volatility. According to Bloomberg data, average daily volumes for
the S&P 500 slipped to 1.8 billion shares last month, the
lowest since 2007, compared to 2.7 billion in 2012. Surging stocks
amid weakening breadth and volumes is a warning sign that has
preceded losses in the past.
Further, the rise should be supported by an increasing number of
stocks hitting new 52-week highs. Presently, the number of NYSE
components touching new 52-week highs has been steadily trending
lower, indicating lesser stock participation in the recent Bull
Run. A similar divergence pattern of 52-week highs among broader
stocks and the S&P 500 was seen in the run-up to the 2000 and
The surge in General Electric was accompanied by other industrial
conglomerates such as
Tyco International Ltd.
Honeywell International Inc.
), all of which touched new 52-week highs on June 9.
What Does GE's Rally Indicate?
In recent times, whenever investors have come around to bidding up
General Electric shares, it has generally been followed by the
culmination of a broad market rally with some kind of pull-back or
consolidation. It happened once in the end of 2013, when General
Electric's shares suddenly increased 5.6% on high volumes between
Dec 12 and Dec 31, eclipsing the 3.8% increase in S&P 500. What
followed was a quick five-week sell-off chopping 6% off the index,
while General Electric tanked 13%.
Similar instances were witnessed in 2012 spring and autumn as shown
in the chart below. While history does not really predict the
future, the conglomerate certainly displays a flair for abrupt
strong upward momentum just when the broader markets show signs of
The nation's economic output, measured by Gross domestic Product
(GDP), contracted 1% in the first quarter of the year, reflecting
the worst performance in over three years and deferring hopes for a
sustained growth pickup. Weak core retail sales coupled with
stagnant wages and higher-than-expected unemployment claims seem to
have left the U.S. economy susceptible to macro headwinds.
Additionally, the last earnings season depicted feeble growth, with
most companies providing negative guidance - a recurring theme for
over a year now. However, disregarding the temporary effects of an
unusually harsh winter, some analysts are confident of growth
bouncing back in the second quarter, pointing towards strong
consumer spending even in the backdrop of a contracting economy.
The Investment Community
Building up on the fragile technicals is the skepticism in the
investment community. Reflecting widespread risk aversion, global
money managers raised cash holdings to a two-year high in May, per
a recent survey conducted by Bank of America Merrill Lynch, the
investment banking division of
Bank of America Corporation
Another survey of 530 professional money managers, conducted by the
CFA society of U.K., offers an insight into the views of the
community that manages billions of pounds on behalf of pension
funds and households. The findings reveal that the number of
investors who believe that S&P 500 and FTSE 100 are overvalued
has reached its highest level at 49% compared with 39% just a
quarter ago. Only 16% of the respondents believed that there were
further gains to be made in the stock markets, significantly down
from 50% at the beginning of last year.
While the long-term expectations seem to have bullish overtones,
the present loss in momentum has hurt the market foundations. While
forecasting an immediate market crash might be stretching it a bit,
investors should be cautious of an imminent sell-off. The markets
look set to take a breather from the prolonged rally, so let the
economic and corporate fundamentals catch up.
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