However, over the past week, there was a substantial jump in both benchmarks: 6.4% in the S&P 500 and 7.5% in the Nasdaq-100. Given the higher representation of « high-conviction » tech stocks in the latter, this is natural. After all, investors have been leaning on « tech » for over a decade now. However, there’s a fair-to-strong likelihood that this broad market recovery might not be sustained. Almost the entirety of the week-on-week rise was attributable to Friday’s big rally.

The idea that this rally will be sustained has precious few buyers in the industry: Wolfe Research, for instance, noted that this was due to deeply oversold conditions being disposed off (incidentally: this is a pretty fair summary for the last few rounds of « Friday bumps » seen in tech stocks as well). Wolfe Research continues to maintain an intermediate-term bearish outlook and states that the next phase would be driven by rising recession risks and downward earnings revisions.

This week will see a host of data being released, including May updates to home sales, the Personal Consumption Expenditures Index, the Purchasing Managers’ Index, Eurozone unemployment rates and inflation statistics. Furthermore, first-quarter GDP growth rate is expected to be finalized and there’s an expectation of the 1.5% contraction will be confirmed.

The Street is cautious and for good reason: minute improvements will likely not find a lot of takers for a sustained rally.

For those looking at Wall Street analysts’ ratings for many high-conviction stocks and wondering why many of them are still on « Buy », it bears noting that these ratings are derived from the company’s balance sheet and financials as opposed to the stock’s current valuation. Fund managers and prominent investors have voiced concerns about overvaluation in the U.S. equity market for almost 5 years now. Overvaluation divorces the stock’s performance from the company’s, with the latter taking outsized cues from the latter in the best of times and finding little purchase in the worst of times.

In Conclusion

The Street is wise to be cautious and so should retail investors. Given how inflationary concerns have still not been addressed, it would be a good time to consolidate and consider the situation carefully. For disciplined tactical investors wishing to capitalize on the churn evident now, this would be a good time to consider short-term leveraged/leveraged inverse instruments while the dust begins to settle.