What Will End First, Summer Or The Rally?

It may depend on what you consider to be “the stock market”

Tuesday, September 22 is the last day of summer. But in the era of Covid-19, the days, weeks and seasons tend to blend together more than they used to.

Still, Wall Street has many traditions, and we are in the midst of one right now. The “summer rally” may be a result of big-money traders and hedge fund managers taking time off in the lazy days of late August. Trading volume is down, and that allows those who remain to frolic with less of a headwind than they otherwise might.

Or, it could be that the pandemic is “less worse” than it was a few months ago. Or, that everyone is waiting to see what happens next. Or perhaps, we are just getting used to it. We can only guess what the true reason it.

More importantly, is this new “chill” state of mind for the equity market something that will last? After all, the S&P 500 has come all the way back from its March lows, and is now near its highest point of the year. Ditto for the NasdaqNDAQ+1.3%, and the Dow is within a few percentage points of its “ATH” (all-time high).

We know that this has not been a very even-handed summer rally. In fact, about half (5 out of 11) of the S&P 500 sectors are still down for the year. The same can be said for 19 of the 30 stocks in the Dow Jones Industrial Average.

European markets are still south for the year, and U.S. midcap, smallcap and value indexes are all still below water in 2020. The summer has gotten them up off the floor.

But the question now is, “was that that the tough part, and is it over?” Or, is the tough part coming this autumn and winter, when cold and flu and indoor season returns? It is hard to find solid clues when the S&P 500 just drifts upward, as it has consistently since late June.

We are hard-pressed to find any level of “value” in the broad market, based on our combined fundamental/quantitative/technical investment process. That would imply that a “barbell” situation may be at hand as summer ends and “fall” begins (the season, not the market direction).

The barbell scenario in this case revolves around the technology sector. From a chart standpoint, it would not surprise us to see tech lift higher for a bit longer, even if the rest of market’s gainers and losers netted each other out. We are not exactly going out on a limb there. That’s been the case for about a year now.

The other end of the “all-tech, all the time” scenario is one where the entire market moves together. In recent years, that has typically been during sharp declines. Advancing markets have tended to be more “rotational,” meaning that one or more sectors carry the load for a while, then others take over. Energy has a run, then its “defensive” sectors like consumer staples and healthcare, then back to tech, etc.

We suggest that all scenarios are on the table, but also that this casual tech-led drift is in place until something comes along to stop it. That may be more likely to happen when the season changes.

That is when we’d expect that the U.S. election, stimulus chatter, China-U.S. saber-rattling, and of course the pandemic to bring more clarity. With clarity comes a re-evaluation of where stock prices sit. They sit very elevated right now.

However, markets don’t tend to move off of their perch until something triggers a selloff. The key into September and beyond: watch carefully for signs that is happening.

Related: Why Many Stocks Are Down as S&P 500 Rallies