Wall Street rally may be starting to fizzle

New York, Aug 21

Some market gurus are starting to worry the summer rally on Wall Street may be starting to fizzle, after stocks quickly lurched from oversold to overbought, said a media report.

Gene Goldman, chief investment officer of Cetera Financial Group, explained that stocks are likely headed for a pullback, even though the economy is in better shape than many Americans realize, Market Watch reported.

"There's been plenty of great news but the market needs a little bit of a pause. We've moved a little too fast, too quickly right now," Goldman said.

To support this view, he pointed to a handful of reasons why Friday's slump in stocks might continue into next week, and possibly longer -- even though he remains bullish on stocks over a longer time horizon.

Cyclical sectors outperformed as stocks rallied in July and early August. But that trend appeared to come to an end this week, as defensive sectors re-took the lead.

"One sign that investors are getting nervous is cyclicals underperforming defensive sectors, and we're starting to see that now," Goldman said, Market Watch reported.

Over the past week, consumer staples stocks and utilities were two top performers among the S&P 500's 11 sectors.

Rising bond yields are another sign that the rally in stocks could be about to turn, Goldman said.

Higher Treasury yields can pose a problem for stocks because they make bonds a more attractive investment by comparison.

Rising Treasury yields and softening inflation have helped drive the US dollar higher, creating another potential headwind for stocks.

A strong dollar is generally associated with weaker stocks, since it erodes foreign earnings of American multinationals by making them worth less in US dollar terms, Market Watch reported.

Another reason cited is crypto sold off sharply on Friday, leading some to wonder whether stocks might be next.

"Another sign of a market pause is weakness in crypto. It's a clear sign of a risk off trend in the market," Goldman said.

Bitcoin fell about 9.5 per cent on Friday, while ethereum, the second-most-popular cryptocurrency, shed about 10 per cent, according to CoinDesk.

Another reason to question the rally in stocks is that there seems to be a disconnect between equity valuations and corporate earnings expectations.

In a recent note to the bank's clients, Citigroup US Equity Strategist Scott Chronert said that the risk of a decline in corporate earnings heading into 2023 could create a "valuation headwind" for stocks.

"We would say that tactically selling into further strength is justified," he said, Market Watch reported.