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Is This February Gonna Bring A 'Turnaround' Or Continuation Of Record Gains To S&P 500?

AInvestMonday, Feb 5, 2024 1:14 am ET
2min read

Since last October, the S&P 500 index has soared nearly 20%. However, the historical fact that February is the third worst month for the S&P 500 index over the past 30 years, only after September and August, has caused concern among investors.

Investors are worrying that with the latest earnings of major tech companies, the hype around artificial intelligence is put to the test. In addition, compared to historical levels, U.S. stock evaluations are still high, which reminds some market participants of the Internet bubble era.

Some of Wall Street's most optimistic people are increasingly worried that the investment enthusiasm that has pushed U.S. stocks to historic highs is signaling a reversal.

Analysis by Yardeni Research shows that in the week ending January 30th, a survey by Investors Intelligence showed the ratio of bulls to bears reached the highest level since mid-2021, and the stock market peaked in the following months.

Nick Giacoumakis, president of NEIRG Wealth Management indicated that some traders are betting that the Fed will cut rates as early as March and at most six times this year, but this scenario is totally unrealistic, and they are asking for trouble if they continue to buy large tech stocks at these prices.

Nonetheless, data shows that U.S. stocks are having a good start in February, with the S&P 500 index seeing its 13th weekly rise in the past 14 weeks, which has never happened since 1986.

Last week, strong earnings from Meta and Amazon boosted the market, while prior earnings from Microsoft, Alphabet, and AMDlowered expectations for artificial intelligence.

Jeffrey Hirsch, editor of the Stock Trader's Almanac, said that U.S. stocks tend to start high in February, but strong momentum usually fades around the middle of the month as investors take profits. He added that this is particularly the case if the stock market rallies after-tax loss gains in December of the previous year.

For sensitive investors, the latest dangers are from the Fed.

Last week, Federal Reserve Chairman Powell hinted that it is unlikely the Fed will cut rates in March. The unexpectedly strong U.S. non-farm payroll data for January, released last Friday, supported Powell's comments. After the non-farm payroll data was published, swap contracts showed the probability of a rate cut in March dropped to 20%, and the market no longer considered a rate cut in May a done deal.

For investors wanting to buy on dips, this sets off an alarm, especially considering the latest data from Deutsche Bank which showed that the total stock holdings of regulation and discretionary funds are at their highest levels since 2010. After fund managers bought a lot of stocks from November last year to January this year, the bullish tilt in the market raises questions: who else is buying stocks?

Nancy Tengler, CIO of Laffer Tengler Investments, says, I really hope we get a correction in the stock market soon. She plans to take advantage of any pullback to increase holdings in Palo Alto Networks, Microsoft, and Amazon.

While Nick Giacoumakis says he holds large tech stocks, which were the major contributors to most of the market's gains over the past year, he would not choose to increase his holdings due to their high valuations.

Data shows that the forward PE ratio of the U.S. Magnificent Seven - Apple, Alphabet, Amazon, Meta, Microsoft, NVIDIA, and Tesla- is 33% higher than the forward PE ratio of the S&P 500 index.

Jeffrey Hirsch pointed out that market sentiment may last for several weeks or even months before the market plunges significantly. He says that in 2021, for example, the ratio of bulls to bears in the Investors Intelligence survey of communication authors hovered at current levels during most of the year, while the stock market continued to climb.

Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.