Many have voiced their criticism towards the stock market rally of 2023, claiming that it is mainly focused on a handful of large technology companies.
However, according to Jonathan Krinsky, managing director, and chief market technician at BTIG, the recent addition of a few more stragglers is now worrying investors.
He points out that a benchmark for stocks that have gained popularity among investors through social media has increased by 10% over the past three days. This is in contrast to a decline of 1.6% in consumer staples stocks as investors are moving away from stocks considered safer options. GameStop, AMC Entertainment, and the now-bankrupt Bed Bath & Beyond are well-known stocks that have captured significant attention in recent years.
“In the past year and a half, when the MEME index has performed better than the Consumer Staples Select Sector by at least 10% within three days, the SPX index has been lower three and five days later out of 17 occurrences. On average, the return during those periods has been -0.83% and -0.68% respectively,” stated the note published on Tuesday, addressing the clients.
In the meantime, the performance over 20 days showed an average return of -1.45% and a median return of -1.6%. He mentioned that the last occurrence of such results was on February 15th, when the S&P 500 experienced a decline of 3.62% in the following three days after this indication.
it indicates a more balanced and healthy market. However, it also raises concerns about the sustainability and reliability of the rally. When weaker stocks experience significant gains, it may indicate excessive speculation and a lack of discernment among investors. Ultimately, while a market rally that includes lower-quality names can be a positive sign, it should be approached cautiously and carefully.”
Krinsky stated that this encompasses the heavily traded names and poor quality ones.
According to him, when we witness such a significant increase, particularly in comparison to a defensive sector like consumer staples, it is often a sign of people pursuing assets that have not yet experienced much movement but have the potential to move significantly. He suggests this usually occurs towards the end of the market trend, as shown by the data in the table below.
