Stocks don’t go up in a straight line, but it sort of feels that way since the Tariff Tantrum sell-off in April. The rally that ensued has lifted the market over 40% from the lows of spring. Along the way there have been some pullbacks, but all were short-lived. Yet each time stocks retreated pundits began sounding alarm bells of a bear market. We too have been looking for the bear, but it is proving rather elusive. Every dip is being bought up and when cracks emerge, they seem to be quickly repaired. Across the market we are seeing bull market behavior. For example, few weeks ago there was a mini banking scare when a midsize auto parts maker filed for bankruptcy and billions of dollars in bonds held by banks vanished as the assets plummeted in value. There was fear of contagion and shares in regional banks across the market fell in price. Jamie Dimon, head of JP Morgan further stoked fears when he said there is rarely just one cockroach. Nevertheless, the buyers stepped back in, and bank shares found support. This is not seen in weak or bear markets. We are seeing similar behavior in the homebuilders. Stubbornly high interest rates have been wearing on the housing market for a few years now, but even in this rough market shares in homebuilding stocks are roughly flat on the year. There will always be reasons to be fearful, but when the market is digesting bad news and still holding ground or marching higher that is usually a very positive indicator.
Looking past headlines promising of dangers ahead can be difficult, but price is the only thing that pays an investor and so far, prices have been moving higher this year. Furthermore, we are now entering the most bullish time of the calendar after gritting through what is historically a rough month. Comparing price action with seasonal trends helps us gage the sentiment in the market. When prices are supposed to rise and they do rise that tells us something but when they are supposed to fall and they rise that tells us a lot more (and vice versa). Other evidence suggesting we are in rally mode is the continued strength in “risk-on” assets. We determine this by looking at specific industry group ratios. This helps us determine the risk appetite in the market. One good ratio is high-beta stock performance to low-volatility stock performance. These groups often perform differently during different points in the market cycle. Historically, when high-beta stocks (ones that moves in the same direction but to a greater extent than the overall market) outperform their low-beta (low-volatility) counterparts, that is telling us that investors are willing to take on more risk. In weaker stock market environments or market downturns you see investors pulling money from riskier stocks and putting them into “safer” low-volatility industries like consumer staples. With the logic being that no matter what the economy is doing, people are always going to be buying things like toilet paper, soap, and toothpaste.
We can also test this by looking at a company like Tesla, one of the top holdings in Invesco’s high-beta ETF. It is on the verge of completing a massive base and breaking out to new highs not seen in almost 5 years. With a trailing P/E of nearly 300 this is not a fundamental or earnings story. This is a story of investors jumping in to take on more risk with the hope of outsized gains in an advancing market. High-beta investing being fashionable is not a bearish indicator.
One day the bear will show up, but before it does so in full force it will likely start making its presence known underneath the surface. As of now evidence is still in favor of the bulls.