Stocks Flounder? Follow This Asset to Gauge Risk

The S&P 500 has set 29 new records in 2024, reaching a new peak on Thursday. However, lower futures on Friday suggest it may not reach 30 this session.

Hopes for interest rate cuts and excitement over AI have fueled the bull run. Yet, there are reasons to be cautious, say the bears. The Nasdaq 100’s 14-day relative strength index has climbed to 77.5, surpassing the overbought threshold of 70. Additionally, the market is increasingly reliant on a narrow group of big-cap stocks, which are more expensive compared to their small-cap counterparts.

Doug Kass, founder of Seabreeze Partners Management, highlights several concerns. He believes corporate profit expectations are “unrealistic” and notes that stocks are overvalued relative to Treasury yields. Kass also warns of underestimated political risks, bullish investor sentiment, and potentially toxic market structures and investor positioning.

Ian Culley, investment analyst at All Star Charts, points to recent market fluctuations as a sign of ongoing instability. He suggests monitoring high-yield bonds for insights into underlying investor sentiment. According to Culley, the performance of the iShares iBoxx $ High Yield Corporate Bond ETF compared to the Invesco S&P 500 High Beta ETF and the Invesco S&P 500 Low Volatility ETF provides a clear indication of risk appetite.

“When investors feel comfortable buying high-risk bonds, riskier stocks with a higher beta outperform safer alternatives,” Culley explains. He adds that a breakout of the HYG above 78 would confirm a risk-on stock market rally.