After the quarter opened with gains, it became clear that the market would like to maintain its bullishness, at least for the near future. However, there are some questions about the stability of the bull market. The trouble is that there is a lot of hype surrounding the markets, and that may be their undoing.
Business Insider ran two articles over the past few days that explain this phenomenon. One discusses the overweight and over-traded stock market:
“Stock is 1.5x or more than its weight in the S&P 500 in the fund manager composite, and more than 35% of funds in the sample hold the stock.”
Such a massive overload has driven volume based growth rather than financially based growth. The danger of having this is that the stocks could continue to grow, but be priced several times higher than their true value. The bulls would essentially be running from solid base on which this recent market was built.
In their article, Business Insider points to several major companies such as Alphabet and Mastercard which are trading at a very high weight ratio.
Another point that gives this theory credibility is that the markets are at risk of a slide is a call made by Bank of America Merrill Lynch, also via Business Insider:
…the firm’s proprietary “Sell Side Indicator” — which monitors investor exuberance — is now nearly two standard deviations above its four-year average. BAML points out that it’s historically been a bearish signal when Wall Street gets extremely bullish.
Wall Street has been exhibiting these warning signs for the past few months. Two standard deviations means the market could be in store for a major correction in the coming times. Be sure to keep an eye on your investments and be sure to stay aware of any indicators that the markets could be coming down.
To read Business Insider’s article on Bank of America’s warning signs, click here.
To read Business Insider’s article on the 8 most overcrowded stocks, click here.
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