The Daily Update - Renewed Highs Without Renewed Confidence

4 months (almost to the day) and the bear-market drawdown in the S&P 500 has been undone. In 2018, the S&P 500 fell a fraction over -20% between late September’s peak and what turned out to be a Boxing Day sale in equities. Apart from the +-5% whipsaw over three low volume trading days around Christmas, US equities have steadily clawed back losses to yesterday touch new highs of 2,936 following another run of strong earnings.

Despite the index at all-time highs, only 2.6% of the S&P 500’s constituents (13 of 505) are themselves at individual all-time highs, which demonstrates how the market has been driven up by a concentrated selection of performers rather than a broader based boom. Furthermore it has been the pro-cyclical tech and discretionary stocks that have outperformed with Twitter and Hasbro yesterday prime examples of this after rallying 15.4% and 14.2% yesterday on positive earnings surprises.

But volumes and sentiment towards equities have remained muted throughout. And even though the S&P 500 is now within spitting distance (2.2%) of the 3,000 milestone, there are few signs of the typical euphoria that would back claims of a stock bubble. As further earnings reports arrive in the coming days there’s every chance the index will soon tick over into the uncharted 3k level and beyond; but with these levels having been tested twice in 2018 only to fall -12% and -20% there again comes the possibility that a growing proportion of weak conviction equity-owners might jump ship at even a minor upset or pick-up in volatility.

If indeed lack of conviction is a factor that makes markets more vulnerable to shocks, then a ballooning monetary base (alongside stagnant growth in credit) helping drive stocks higher via the “TINA” (There Is No Alternative) trade, is just as viable a catalyst for expanding the proportion of light-footed asset owners – in much the same way as a good ol’ bout of mass greed speculative hysteria can. So although we find some broader assurance that there are few typical signs of bubble mentality we still see cause for caution towards equities that may yet still be vulnerable to tentative – somewhat involuntary – owners.

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