The stock market is hovering around the all-time high of 5,000 for the S&P 500 (SPY), but there are signs that things may not be as bullish as they seem. Tech stocks are starting to give back some of their gains, with defensive stocks leading the market. This shift is not a positive sign for those expecting immediate market upside.
The recent 20% bull run that started in November has started to show signs of fatigue, making 5,000 a strong resistance level. The delay in expected Fed rate cuts, coupled with higher than expected inflation and a strong US economy, suggests that the market may struggle to see significant gains in the near future.
The Fed’s cautious approach to lowering rates in the face of persistent inflationary pressures indicates that 5,000 may remain a top for some time. A 3-5% pullback to around 4,800 is possible, providing a comfortable range for stocks to move within.
Sector rotation is also evident, with tech and communication services stocks selling off while more conservative sectors like healthcare, utilities, and consumer defensive stocks are performing well. Financials are also showing strength, rebounding from recent weakness.
While some may consider taking profits off the table, it’s important to remember that we are still in a bull market. Instead of selling, it may be wise to focus on unloading overvalued stocks and seeking undervalued opportunities. Industries like industrials, basic materials, and consumer cyclicals may offer more upside potential, along with smaller companies in the $1 to $20 billion market cap range.
For those looking for investment opportunities, the POWR Ratings system can help identify companies with consistent growth prospects and attractive valuations. With the market nearing full valuation, it may be time to shift focus to less well-known stocks with potential for growth.
Overall, while the market may face challenges in the near term, there are still opportunities for investors to make informed decisions and potentially outperform the market.