Stock Market Fireworks: A surprisingly positive pre-holiday Friday rally
WASHINGTON – Friday, major market averages seemed hell-bent on hitting new highs. Or at least that’s true in the case of the broad-based S&P 500, as CNBC noted on this, the final day of Wall Street’s pre-July 4 trading trading week. With the S&P ultimately closing higher for a seventh straight trading session, Friday’s 0.75% gain at the closing bell logged a surprisingly positive end to a nerve-wracking week. Though techs continued to suffer throughout the week, Friday’s stock market fireworks proved a welcome antidote overall. Including the tech-heavy NASDAQ. It actually closed up nearly 117 points. From CNBC, near the market’s closing bell:
“Stocks rose on Friday and the S&P 500 hit another record high after the June jobs report showed an accelerating recovery for the U.S. labor market.
“The broad market index rose 0.6%, while the tech-heavy Nasdaq Composite climbed 0.6% to hit its own intraday all-time high. The Dow Jones Industrial Average added more than 100 points.
“Solid moves by major tech stocks helped support the overall market, with shares of Apple and Salesforce rising by more than 1% each.
“The economy added 850,000 jobs last month, according to the Bureau of Labor Statistics. Economists surveyed by Dow Jones were expecting an addition of 706,000. The print topped the 559,000 jobs created in May.”
Happiness is… an upward bump for the beleaguered tech sector
The bump in the previously beleaguered tech sector is welcome indeed. Unfortunately, the big chipmakers, like Broadcom (NASDAQ:AVGO) and Micron Technologies (NASDAQ:MU) continue the slow bleed this sector began earlier this week. But the rest of the tech sector seemed eager to participate in Friday’s stock market fireworks.
All in all, ending pre-holiday trading with a nice up day would normally prove encouraging. Yet we remain skeptical. Trading on the day before a national holiday – in this case, Independence Day – is normally light. And with light volume can come dangerous stock market head fakes, where stocks can swiftly reverse themselves on the next holiday-delayed trading day. And with the market likely very overvalued at this point, even a positive day like today still makes us nervous.
Chart guru Carl Swenlin is nervous
It also makes DecisionPoint’s Carl Swenlin nervous as well. Addressing the S&P 500 specifically, Carl notes a key problem that looms at this market juncture.
“The normal P/E [price to earnings] range for the S&P 500 is 10 (undervalued) to 20 (overvalued), but the P/E spike in 2009 nearly pushed that range into oblivion. The current P/E of 45.89 is the third highest in history, but it is the highest ever reached during a market advance. (The P/E peaks in 2002 and 2009 were reached after major market crashes.) There are two factors that can cause the P/E ratio to rise: (1) rising price and/or (2) falling earnings. Currently, prices and earnings are rising, but prices are rising much faster.
“Overvalued means that people are paying too much for stocks based upon traditional valuation measures. The excess of overvalued markets can persist for years and is not a condition that requires immediate correction. Overvaluation is, however, a condition that can exacerbate declines because there is no intrinsic “value” present to incentivize potential buyers. Overvaluation doesn’t matter . . . until it does.”
And when will overvaluation actually matter?
Answer: Who knows? Which is what makes Carl, and this columnist, nervous, despite the week’s surprising pre-July 3 stock market fireworks.
The McClellan Oscillator showed a bounce at Thursday’s close that took that measure over the zero line of the X-axis. Which is mildly – VERY mildly – bullish. But not enough to establish a trend. Meanwhile, the Vix volatility index is settling lower and lower, meaning that traders are getting complacent again. That puts us in danger of a big, sudden spike upward and a potential market nosedive.
If all this tech-stuff is meaningless to the average investor, that’s fine. We use these measures here much in the way a soothsayer uses tea-leaves. These measures are indicators. These patterns give us historical clues as to the stock market’s next big moves. But, as always in the wonderful world of investing, there are never any guarantees. That might prove particularly true in 2021, with Washington’s ruling junta spending non-existent dollars like a collective drunken sailor. What happens when this bill comes due?
Being a nervous investor is usually a good idea
In short, longtime investors are always a little nervous. This generally keeps them on high alert. And, as they get a bit older, more conservative than usual when those tea-leaves don’t look quite right. That holds true even on a day like Friday, when exciting stock market fireworks can ignite irrational exuberance.
Since that’s the way they look right now, we’ve reduced a couple of iffy positions, thus keeping our portfolios about 30% in cash.
In short, rallies are nice for most market bulls. Like us, for example. But right now doesn’t seem like a good time to get over-extended, particularly when an all-Democrat Washington regime seems hell-bent on spending the US into oblivion. That’s always dangerous.
Meanwhile, assuming a positive 4 p.m. close on Friday, let’s all resolve go enjoy our July 4 Independence Day holiday. If nothing else, that will irritate the increasingly restive cadre of hardcore lefties that would love for this July 4 to be the last one we ever celebrate.
See you Tuesday. Or earlier if anything important breaks. Meanwhile, there are steaks and hot dogs to throw on the BBQ and adult beverages to consume. Enjoy. And stay safe.
—Headline image: Cartoon by Branco. Reproduced with permission and by arrangement with Comically Incorrect. Slightly re-sized to fit CDN format.