The differences in market returns have been like night and day—and sometimes literally so.
What do I mean? The
has had quite a rally off its March 23 low, but those gains haven’t been distributed equally based on the time of the day. The index has only gained about 6% from its open to its close, but it has gained around 23% from its close to its open, according to JC O’Hara, chief market technician at MKM Partners. On a practical level, it means that the S&P 500 has been opening higher and then not gaining much more.
Sometimes it’s dropped. That was the case this past week, another fantastic one for the market. The
Dow Jones Industrial Average
gained 3.8%, the
advanced 1.8%, and the S&P 500 rose 3%. It was the S&P’s best week since, well, last week.
Yet most of the gains occurred following big gaps higher at the open. In a Memorial Day–shortened week, stocks gapped up on Tuesday, Wednesday, and Thursday, but only Wednesday finished with the market higher than it opened. On Tuesday, the S&P 500 opened up 2.2%, but fell 1% to end the day up 1.2%, while the index turned a 0.4% gain at the open on Thursday into a 0.2% loss after President Donald Trump said he would announce a response to China’s new Hong Kong security law on Friday.
For a buy-and-hold investor, when the gains come probably doesn’t matter. In fact, it might even help sentiment as long-term investors turn on the TV in the morning, see that the market is higher, and go about their business, knowing that there probably won’t be any big losses to worry about that day.
“When you come in and your stock is down, it weighs on you,” O’Hara says. “Now when you buy, your positions are always positive.”
Yet market sentiment is starting to feel a little stretched. The percentage of bearish respondents in the American Association of Individual Investors survey fell to a 12-week low, though it continues to remain elevated relative to historical levels. Wall Street’s measures of sentiment reveal almost no bearishness at all. Citigroup’s Panic/Euphoria index, for instance, entered euphoria territory on Tuesday, while Société Générale’s sentiment indicator experienced its quickest shift from extreme risk-off to extreme risk-on in its history.
That shift in sentiment doesn’t mean a drop is coming, but it could leave the stock market more vulnerable to bad news. It isn’t an overstatement to call this market headline-driven, especially with so much of the economic data and earnings numbers made virtually meaningless by the coronavirus clampdown.
In fact, the S&P 500’s plunge from its February peak and then its rally off the March 23 low could be attributed to shifts in the news, says Lori Calvasina, chief U.S. equity strategist at RBC Capital Markets. The Federal Reserve’s actions, for instance, were a “huge driver” for the market’s bounce off its March 23 low, and continued good news about the reopening and the development of Covid-19 treatments and vaccines helped drive it even higher, with only a brief hiccup at the beginning of May.
Now, the U.S. is entering a news vacuum—one that may be filled by rising tensions between the U.S. and China. The back and forth between the two countries is not new, of course, but U.S. investors have ignored it to focus on news about vaccines and the staggered reopening of cities and states. Those narratives seem to have played out—it would take a real surprise on the reopening or vaccine front to lift the market—just as China announced a new security plan for Hong Kong. If the situation continues to get worse, the market could rediscover gravity.
“The market can handle a balance of good news and bad news,” Calvasina says. “But if we get into a vacuum and there’s only bad news, sentiment is fragile enough that it could push the market down.”
Just as worrisome is what has happened to Big Tech. Until recently, the Nasdaq had been leading the market higher. This past week, it lagged. Even worse, some of its biggest components suffered difficult weeks, particularly
(ticker: FB), which dropped 4.2% as it became collateral damage in the battle between Trump and
(TWTR), which fell 5.1%, over the future of social media.
For now, the Nasdaq might just be taking a rest as investors turn to cheaper, more economically exposed names. But with Big Tech such a huge part of the S&P 500—
(GOOGL), and Facebook make up 20% of the index—a stall could be problematic for the market.
“[The] reality is the high-growth areas represent such a large part of the S&P that if they finally pull back, they will overwhelm any bounce in value,” writes Jonathan Krinsky, chief market technician at Bay Crest Partners.
And that would surely lead to many sleepless nights.
Write to Ben Levisohn at Ben.Levisohn@barrons.com