After gaining 9% in 6 days, the inventory market is approaching overbought territory, some merchants say
Is it time to reconsider this monster rally?
With the S&P 500 up 9% to an all-time high during the day in six trading sessions, many parts of the market are viewing it as overbought. Others agree but say it doesn't matter in this weird mix of election and vaccination news. Who is right?
It depends on.
On the bullish side, the technicians are all excited. Even ahead of Monday's promising vaccine news, Lowry Research, the oldest tech research company in the United States, believed that with last week's outbreak, "the latest buying opportunity is in the run from late March."
However, the extent of the rally in cyclical / value sectors is hotly debated. Banks are up 15% in the last six trading sessions, energy 15% and industrials 12%. Many are now trading on reviews that have not been seen in years.
Part of the problem – and the source of the disagreement – is that "value / cyclical" is a diverse group. Citigroup's Tobias Levkovich notes that there are three "buckets" of value stocks: financials, industrials and the "Covid-affected groups" such as travel and leisure.
The "Covid-affected groups" have been decimated. Delta Airlines, for example, which was $ 60 per share prior to the virus outbreak, recently traded at $ 30, closing at $ 36 on Monday. That's a rally, but it still has to go so far that the recent surge isn't an obstacle: "Any kind of solution to the pandemic really does bring its chances to life, and you see stocks are reacting significantly," Levkovich told CNBC.
But other sectors of value see valuations – and rallies – that matter. Bank stocks have also started to generate higher bond yields. Some bank stocks are trading many times higher than in recent years:
Bank P / E Forward Multiples: Multi-year highs
- US Bancorp 14
- JPMorgan 13
- Fifth third 12
- PNC 16
However, the biggest drivers were industrial companies, which had already improved as industry reps like ISM Manufacturing before the vaccine news came out. Monday's rally took many to new highs (Eaton, Corning, Dover, Ingersoll-Rand), taking these companies' forward multiples to areas they haven't seen in years:
Industrial P / E / Multiples: All at 10-year highs
- Honeywell 25
- Sherwin Williams 26
- Ingersoll Rand 25
- General Electric 25
- Deere 24
For Levkovich, who began his career as an industrial analyst, this is a sad fact for stocks in this space: "They always pay for them when they've squeezed profits. So the valuation criteria we look at and which were the most predictive forecast of the Share price performance still says that you want to be in these industrial conglomerates and that there are still opportunities to steer performance up. "
Don't tell the Wall Street bulls to worry about high P / E ratios. Fundstrat's Tom Lee is typical, "I think rating sensitivity is the wrong metric people should be. I think we could collect another 10% from here," he told CNBC.
This is an old-school trick on Wall Street: let multipliers go up because the prospect of an improving economy – and higher incomes – is the classic reason multipliers go up higher.
The only difference is that the market is at an all-time high and a lot of things that have moved within the value range have risen very quickly.
And in case the cops need more ammunition, you can always pull out the Federal Reserve, which is backing the markets, whether it's needed or not, as BMO's Brian Belski pointed out on CNBC: "I think stocks are going higher and I think the most important thing to remember – the Fed has basically signaled that we will be here for three years … this is a period of risk. "
Conclusion: Wall Street is already calculating a "normalization" of the economy in 2021. You can see this in the result of the S&P 500:
Profit estimates for S&P 500
- 2019: $ 162
- 2020 est: $ 136
- 2021 est .: $ 168
See? A complete winning round. Back to normal. It's 2019 again.
This reopening story had better be perfect.
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