Over the past two weeks, higher nominal and real interest rates like a sword hanging over the heads of technology stocks and the market as a whole, accounting for a quarter of the S&P 500 market capitalization of the five major U.S. technology giants FAAMG is particularly a risk, while at the same time, the “panic / euphoria model” shows the extreme euphoria of the market.
For this rare phenomenon, Morgan Stanley and Bank of America view differently.
Morgan Stanley: Short-term returns will be below average
Behind the mix of madness and risk, Morgan Stanley’s U.S. equity analyst Mike Wilson pointed out that 92% of the S&P 500 is currently above its 200-day moving average, signaling below-average returns in the short term.
Mike Wilson said.
“Historically, the index rarely breaks above this average level (it has failed to do so 98% of the time over the past 30 years). If history is any guide, we expect that the percentage of stocks in the S&P 500 breaking the 200-day average may be lower, which could be achieved through a stock price correction or a stagnation in stock prices while the moving average rises.”
Wilson’s backtest of forward returns for S&P 500 constituents at or above their 200-day moving averages found that 5-day, 1-month and 3-month forward returns were lower than in other periods, and in each case were highly statistically significant (p=0.00).
However, Wilson explains.
“Absolute returns are not necessarily negative; they are not negative in about half of the different return cycles, but they do fall below normal when the number of stocks above the mean is excessive, as it is at the current level.”
Bank of America: This is more likely to be a long-term bullish signal
Bank of America also noted the “rare event” of more than 90% of stocks sitting above their 200-day moving averages, saying.
“This has only happened five times since 1974, based on weekly data.”
The S&P 500’s sharp rise since last March has many investors worried about an extreme case of overbought. However, the four dates in history when more than 90 percent of stocks have been overbought all occurred after the U.S. emerged from recession – Sept. 18, 2009, Jan. 23, 2004, Jan. 7, 1983 and June 6, 1975.
However, the bank also noted that the overbought situations in 2009 and 1975 occurred after the S&P 500 made new all-time lows and even came out of a decade-long bull market after 2009, so the bank concluded.
“While market pullbacks are something investors take for granted, if history is anything to go by, it is unlikely that more than 90% of stocks sitting above their 200-day moving averages after a period of economic and market stress is a sign of a top, but more likely a long-term bullish signal.”
Just who is right, Morgan Stanley or Bank of America? The market may tell us the answer in a few days, we just have to wait and see.
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