- Major U.S. indices are rallying Wednesday after plunging for three straight days.
- Tech stocks are leading the rally.
- The bull market might be close to an end.
After plunging for three straight days, the U.S. stock market is rallying sharply on Wednesday. The S&P 500 and the Dow were up by about 2% at midday, while the Nasdaq gained near 3%. The stock market surged higher as tech stocks recovered some of the steep losses that pushed the Nasdaq into correction territory.
Tesla stock, which had its worst day ever on Tuesday as it dropped by 21%, rose more than 6% on Wednesday. Apple, which lost more than 6% in the previous session, soared by 5%.
These two stocks, along with Microsoft, Netflix, Amazon, Alphabet, and Facebook, lost $1 trillion in market value over the past three days. All seven mega-cap tech stocks bounced back on Wednesday.
Investors ignored a setback with a coronavirus vaccine and disappointing earnings news. AstraZeneca said an advanced stage trial of its Covid-19 vaccine candidate had been suspended due to a suspected severe adverse reaction in a U.K. participant. The Financial Times later reported that the trial was scheduled to resume next week, lifting AstraZeneca shares off its session lows.
The Stock Market Has Rallied Too Fast
Many on Wall Street believe that tech-sector weakness stems from fears that the massive surge in technology has pushed valuations to unsustainable levels. Even with last week’s pullback, the Nasdaq is up more than 60% from its March low.
Longtime hedge fund manager Stanley Druckenmiller thinks investors should be cautious as the market is currently in a mania fueled by easy monetary policy and investor speculation that will end badly in the coming years.
Druckenmiller said that the massive market rally is mostly due to the Federal Reserve. He noted that while the central bank did a “great job” in March cutting rates and launching unprecedented stimulus to support the economy, the market recovery that followed “has been excessive.”
Druckenmiller says the stock market is in an absolute raging mania. Watch the video below:
Michael Novogratz, a former hedge fund manager who is now CEO of Galaxy Digital, has been skeptical for months about how quickly stocks recovered from their coronavirus-era lows at the end of March. On Wednesday, a day before the Nasdaq’s pullback began, Novogratz suggested the market was “close to the end” of its massive rally.
Certainly, the bull market is not over yet. I do feel like we’re getting close.
A Rotation From Tech Stocks to Cyclical Stocks Has Begun
The information technology sector has been the best performing year-to-date, with a return of 22.85%. The consumer discretionary sector follows closely with a return of 21.13%. Energy is the worst-performing sector, with a return of -45.08%. Financials is the second worst-performing with a return of -20.15%.
Cyclical sectors could do better in the coming months as people sell mega-cap tech stocks to put more money in energy, financials, and materials.
Look for the bull market to continue [on] some sector rotation as people take profits in technology names and put more money to work in more cyclical parts of the market such as in the energy, materials, and financials sectors.
Tech stocks have rallied during the pandemic as the work-from-home trend is helping their business. As the economy reopens and Covid-19 cases are trending lower in the country, their higher valuation doesn’t seem justified. When a vaccine becomes available, we’ll likely see a more significant selloff among tech stocks, which will drive the market lower.
Since five mega-cap tech stocks account for about 25% of the S&P 500, the stock market will have trouble going higher even if investors put more money into cyclical stocks. We might see a bigger correction in the stock market before it makes news highs.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The writer owns shares of Microsoft.