The stock market's rebound from its August correction doesn’t necessarily signal bigger gains to come.
That’s the warning from investment strategists who fret that weak industries like energy and materials are leading the 8 percent bounce in the past couple of months.
“If breadth and leadership is weak into rallies and/or groups that were market laggards become market leaders ... these are warning signs,” Doug Kass, president of Seabreeze Partners Management Inc., said in a Twitter post.
This month, energy stocks are up 10 percent, materials by 9 percent, and industrials by 7 percent, compared with a 5 percent gain for the S&P 500 stock index. Those industries had been laggards because of weak oil prices, slowing demand in China and the expectation that the Federal Reserve would raise interest rates for the first time since 2006.
The S&P 500 index of the biggest publicly listed companies hit a record of 2,135 on May 21 before sliding by 12.4 percent three months later as oil prices weakened and investors worried about China’s economic health.
In the past, the worst three sectors have typically outperformed the broader market six months after a correction or a bear market, according to a report by Sam Stovall, U.S. equity strategist for S&P Capital IQ.
The rally needs to include support from the broader market, not just industries that are vulnerable to macro risks such as energy and industrials, David Bianco, strategist at Deutsche Bank, said in a note obtained by
MarketWatch reporter Wallace Witkowski.
Energy stocks are now too expensive despite the rebound in oil prices from an August lows, Bianco said. Oil prices would have to recover to $65 a barrel in 2016 for energy stocks to sustain a forward 12-month price-to-earnings ratio of 15 times, MarketWatch quoted him as saying.
November West Texas Intermediate crude rose 2.1 percent to $48.09 a barrel by mid-day on Oct. 13.
Strategist Michael E. Lewitt said the stock market is overvalued and ripe for steeper declines as the global economy weakens.
He forecast that the third-quarter earnings season, which began last week, “will be lousy” and will lead companies to focus on their debt instead of planning new rounds of supportive stock buybacks.
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“It is also a bad sign that we are starting to see bubbles burst in serial fashion — the latest being biotech stocks,” he said in the October issue of his
Credit Strategist newsletter. “Those who still own the more speculative parts of the market like biotech and social media should get out while you can.”
Lewitt forecast the market benchmark will end the year at 1,875 to 1,900, compared with its current level of about 2,017.
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