I have been pretty consistently bullish on stocks for a year or so, maintaining that any dips we encountered were buying opportunities, and that the long-term upward trend would remain intact as long as both fiscal and monetary stimulus were being added to a recovering economy. I still believe that from a long-term perspective, but there are some signs that we could be headed for a pretty big dip right now, and I am looking in a seemingly unlikely place for confirmation or refutation of that view.
Throughout the bull run, other markets have been moving in a consistent manner too. The dollar has been declining, longer term Treasury yields have been climbing, and key commodities such as crude oil and copper have been recording significant gains alongside stocks. Over the last few weeks, there are signs of a possible trend reversal in all those markets. The dollar index (DXY) has bounced pretty hard off of a low just below 90, the yield on the long bond hit its high of 2.518% a week ago and had been falling ever since, while both crude and copper are hovering around significant levels below recent highs, $60 in the case of WTI and $4 for copper.
All of that points to a heightened awareness of risk in markets, and if that is maintained, stocks are headed for a rough couple of weeks.
One measure of risk appetite that is specific to equities is the market reaction to IPOs. Whether traders buy or focus on the risks can tell us a lot about their general mood, so there are a couple of debuts this morning that should be watched closely.
The first could be seen as a typical post-covid story stock. Diversey Holdings (DSEY) is a British company that manufactures and supplies commercial cleaning and sanitation products. That is almost the definition of a company in the right place at the right time and, if sentiment were as bullish as has been the case for the last year, it is one that you would expect to show serious strength for its U.S. debut.
The second is another stock that in bullish times would be in huge demand, albeit for a different reason. Vizio (VZIO) is a maker of TVs. Being a brand a lot of people are familiar with, that familiarity probably should really mean little in terms of the pricing of stock, but it usually does anyway. When people are familiar with a company, there is a perfectly reasonable assumption that it is successful, so high profile IPOs for companies with ubiquitous products usually attract buyers.
If either or both of these companies had gone public at almost any time in the last six months, you would expect to see them do as so many others have done during that time, increase their target range for the stock a few times and then price at the top of the new, higher range. Today, though, that isn’t what we are seeing. Both are priced at the bottom of their forecast range.
Now you could say that that is just a healthy dose of reality and that it is the sky-high valuations of the last few months that are the problem. You might even be right to say that, but those valuations are the result of the same confidence and embracing of risk that has driven stocks to new highs, even while the economic effects of the pandemic linger and questions surface about how quickly we will return to "normal."
That is why I will be watching early trading in both DSEY and VZIO closely today. In neither case will the early demand for the stock tell us anything about the long-term prospects for the company, but it will give us a clue as to the strength of appetite for risk in the market and that, in turn, will tell us whether what we are seeing is a blip in the bullish trend or a reversal with potential significance.
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