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S&P 500: Stretched But Rising?

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While a number of banks have highlighted uncertainty in the year ahead on account of the events unfolding in Israel as well as the deepening crisis in Ukraine, markets are generally expected to continue “as-is” for now on account of a variety of macroeconomic factors.

Market Trends This Past Week

Over the past week, crude oil (WTI and Brent) broke its downward trajectory with a quick hike mid-week, following which prices have been holding steady at a little over the $90 mark over the weekend.

Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

Earlier deflationary trends – a byproduct of forward-looking recessionary concerns impacting consumption and driving down demand – were somewhat firmed up due to potential supply disruptions in the future. However, overall concerns aren’t very high.

The past week also recorded a rare and extreme upward streak among U.S. arms manufacturer stocks, which also had fairly recessionary downtrends. Over the past week, U.S. military stocks gained nearly $30 billion in market capitalization – with Lockheed Martin, Northrop Grumman, L3Harris, Raytheon and General Dynamics leading the charge.

However, it bears noting that stock analysts are calling this a momentary blip: there don’t seem to be long-term growth drivers for the sector.

Markets have been largely positive over the past week. In the S&P 500, the Top 25 stocks by momentum outperformed the index +0.57% vs +0.45%.

The majority of the index change was wrought by tech stocks, which was amplified within the Nasdaq-100: the Top 25 list outperformed the index +0.51% vs +0.15%.

While the oil outlook and the present direction of the market might seem contradictory, this is not the case. A prime factor behind the market’s overall market performance has been what Bank of America – in a note dated October 6 – called the “greatest bond bear market of all time“. Bond funds saw $2.5 billion in outflows till the Wednesday of that week due to yields on 30-year Treasuries rising above 5% for the first time since 2007. The current loss in 30-year bonds from the peak in the market in July 2020 to now far outpaces that of any previous bear market, with buy-ins into bond being termed a “humiliation trade”.

However, the bank says there’s no capitulation: Treasuries funds continued to see inflows of $4.6 billion in that week albeit with a preference for shorter-term paper due to which yields on 2-year Treasuries fell 9 basis points.

The overall effect on the market has been extremely poor equity breadth, with pile-ons into select stocks to balance out portfolios now overloaded with increasingly unmarketable long-term bonds. High-yield “junk bonds” have also been taking a beating since these select stocks are implied to be more survivable in a high-rate environment than issuers of junk bonds that are more sensitive to high interest expenses.

Even the Bank of England’s Financial Policy Committee (FPC) meetings on September 26 and October 5 noted thus in its summary released on October 10, “Given the impact of higher interest rates, and uncertainties associated with inflation and growth, some risky asset valuations appeared stretched”. In particular, the FPC noted that a deterioration in the global economic outlook, further increases in risk-free interest rates, or further interest rate volatility could lead to sharp reductions in asset prices – with U.S. dollar-denominated corporate bonds and U.S. technology equities being specifically vulnerable – and further tightening in financial conditions for households and businesses.

In Conclusion

Overall, market trajectories indicate an underlying impression that the Middle East and its current crisis is essentially “factored out” of market estimations for the most part. While U.S. equity markets might look like they’re doing well, several “leading” stocks are increasingly approaching “overheated” due to market flows with no significantly meaningful macroeconomic indicators for the upside. Periodic waves and troughs can be expected, as seen over the past several weeks. Caveat emptor.

Professional investors looking to amplify the relatively weak trajectories might like to consider SP5Y, an Exchange-Traded Product (ETP) that delivers 5X the daily returns of SPY, the “SPDR S&P 500 ETF Trust”.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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