Over the last week, I keep seeing/hearing that this is the most hated stock market rally ever. Give me a break. The people that think this is the most hated rally are those that have continued to indicate the market will decline to last year’s market lows, or that have missed a lot of the rally from the lows last year.
So now, people get louder that there’s no way the market can keep moving higher, and then it does. Then, investors that have missed out on the rally get the typical emotional distress and get the FOMO (fear of missing out), and start reluctantly buying back into the market. They start to hope for a pullback of 10% to “get back in”, but that deep decline doesn’t have to come, and they get even more FOMO and eventually capitulate to the upside. Just like they capitulated when the market was down a ton last year and they capitulated and sold because they couldn’t take more losses. Around in circles everyone goes.
I’ve mentioned before that I cover institutional investment managers and their investment strategies. I don’t remember talking to any manager that was overly bullish on the markets. I know retail clients were nervous last year and some became increasingly defensive as the markets sold off. Financial advisors were also recommending clients get defensive and move to income oriented investments and other perceived “safer” investments. Seeing this, I continued to reiterate that it seemed like everyone was defensive, which means there was potentially less selling to come to become even more defensive, thus a floor might have been under the financial markets.
Well, all we needed is lack of really bad news and time to heal some wounds, and sure enough, the market did not decline further and the S&P 500 is up around 20% from last year’s lows. Oops. Guess people shouldn’t have sold at the market lows last year.
Investors also forget that the market isn’t just made up of stock pickers or macro investors that rely on fundamental factors. There are short-term traders (trend-followers) that will try to catch trends in the markets. if the market is up, those traders get more bullish, which is what I think we have seen a lot this year. There are also short sellers that bet the market will go down. If the market moves higher and short sellers are losing money in that environment and want to cut their losses, they need to buy the market to reverse their short positions, which is another bullish factor for the market.
So you have FOMO investors buying the market, trend followers turning bullish and short sellers capitulating and reversing their shorts and buying the market. On top of that, NVIDIA, a semiconductor company at the forefront of artificial intelligence had indicated guidance that was well above analyst estimates, so anything related to artificial intelligence saw their stocks rally. This included Alphabet (Google), Apple, Amazon, Facebook and other technology-related companies to rally. Since these well-known technology companies make up a significant portion of the NASDAQ 100 and S&P 500 indices, those indices rallied significantly. THEN, there was an agreement on the debt ceiling and the U.S. avoided defaulting on its debt. This rally again put more pressure on FOMO, trend-followers and short-sellers to keep buying the market.
I just get so frustrated by professional investors taking such a short-term view on everything. I keep hearing from institutional investors, financial advisors and clients wanting to be “tactical” and trying to trade short-term opportunities. I guess I’d rather focus on the long term and take advantage of the short-term noise and mistakes of these so called “tactical” investors.
So now what? For those that rebalanced their portfolios when the markets were down last year, you should clearly have some winners, particularly in the growthier strategies you’re allocating to. If your growth stocks/strategies have grown to an allocation size above your target, consider rebalancing again, reducing your growth strategies back to target and reallocating to other areas that did not rebound as strongly. This could be in mid/small caps and more cyclical or value/income-oriented areas which have not rallied as strongly as growth stocks since last year’s lows. Rebalance. Simple.