We had a pretty uneventful day in the stock market on Friday…as the market trading in a fairly tight range…on low volume and breadth that was not particularly compelling. The futures are trading higher this morning as we move into the last week of May…which tends to be a positive week for the market. This is particularly true for the days surrounding the long Memorial Day weekend…so the line of least resistance should be to the upside this week.
As we highlighted late last week, it has been impressive that the stock market has been able to fight-off another round of “forced selling” in one area of the broad marketplace…as the crash in the cryptocurrencies only created a very short-term dip in the stock market. With the bounce in those cryptos this morning (now that we’re out of the thinly traded weekend sessions), it looks like we won’t have to worry about another round of “forced selling” this week for that area. Thus, all of this bodes well for further gains over the very-short-term.
We continue to be much more cautious about the intermediate-term potential for the stock market, however. With valuations at extremely high levels…and with the most important catalyst that has given some justification for the sky-high valuations has changed in a significant way (as long-term interest rates have risen substantially this year)…it’s hard to see how the broad stock market can rally in a material way over the intermediate-term.
This is why we continue to believe that the market will remain a “stock pickers” and “group pickers” market for the rest of this year (and beyond). Of course, one of the groups that we have been VERY bullish on since late last September is the bank stocks. We did, however, say that we thought the banks could take a “breather” in mid-March…simply because it had become very overbought on a short-term basis. (After a 95% rally in just six months…a “breather” would be normal & healthy, we said.) Sure enough, the group did see a pull-back over the next month…and so we returned to our bullish stance in April.
The banks have bounced back nicely…and they are now testing their March highs. Therefore, if the KBE bank ETF and the KRE regional bank ETF can break above their March highs in any significant way, it’s going to be quite bullish…and should lead to another nice rally-leg for the group.
Both of these bank stock ETFs have made a series of “higher-lows” and “higher-highs” since September, and even though the March/April decline was the largest one we’ve seen since last fall, it still gave us another “higher-low”. Therefore, if it is followed by yet another “higher-high”….it’s going to give the bank stocks another momentum injection. That, in turn, could/should cause some institutional investors to rotate further out of the groups that have been lagging behind the S&P 500 so far this year…and into the groups that have been outperforming.
In other words, the energy stocks that are not the only ones that look like could get another burst of momentum (with another “higher-high”)……..Institutional investors can only hang-on to their favorite long-term holdings for so long…when other groups (that area ALREADY outperforming nicely) see another new break-out to another higher-high. If it looks like the energy and bank stocks are going to see another burst of momentum, these institutional investors will have no choice but to rotate further out of the groups that are weighing down their performance this year…and into the ones that are outperforming this year.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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