Longview Economics: Blow Off Top?
While investors have been transfixed on big-cap tech stocks over the past month, they haven’t been the market leader. Transportation stocks have taken off in recent weeks. So have mid-and-small cap stocks. The good news? That suggests a sector rotation that could mean a long-term move higher for stocks.
However, it’s also a sign that markets may be in a late-stage rally. That occurs when investors buy into stocks on the feeling that they’ve missed out.
By moving towards what looks cheap and piling money in, the market risks a blow-off top. Investors looking to trade in today’s market could see more opportunities on the sell side.
That’s because the short-term rally has moved faster than the economic data. And investors are getting overly bullish, with risk appetites heading their highest levels in nearly a year.
Another sign of that is the high ratio of call buying. That indicates that traders are looking on further market upside and are ignoring downside risk.
With a higher risk for a pullback ahead, investors may want to take some short-term profits. Aggressive traders could even look for plays for a small market drop in the weeks and months ahead.
Bonds have already sold off slightly, another warning sign. That’s taken bond yields slightly higher, which may make for a reasonable short-term entry point that offers some safety now.