April 20, 2021

Stocks are booming, but traders are having a harder time making money

Traders on the floor of the New York Stock Exchange. Source: NYSE This is a…

Traders on the floor of the New York Stock Exchange.

Source: NYSE

This is a very powerful rally. The combination of surprisingly strong economic reports and even more surprisingly strong earnings reports is pushing broad swaths of the U.S. stock market to new highs.

Even the technicians who chart momentum are impressed.

“The vast majority of NYSE stocks are in intermediate-term uptrends, independent of short-term pullbacks and volatility,” Michael N. Kahn of Lowry Research, the oldest technical analysis service in the U.S., wrote in a note to clients.

Of course, the market hit new highs in January and February, but this, time it’s different. Previous new highs in January and February were greeted with some hand-wringing: It was mostly big-cap tech stocks that were forcing the markets higher.

Not this time.

The rally has broadened out, big time. Far more stocks are advancing than declining. Nearly one-fourth of the stocks in the S&P 500 and the NYSE Composite Index are at new highs. Recently, laggard groups like utilities, health care and REITs have been outperforming prior leaders like technology and industrials.

Value is at a new high. Growth is at a new high. Big caps are at new highs, midcaps are at new highs. The small-cap Russell 2000 is lagging slightly, 4% off its high, but no one seems to be complaining too much.

The good news is that a major breadth advance is bullish for the markets.

The bad news is — well, traders aren’t sure what the bad news is, or whether the old rules even apply.

Everything is going up

One feature of the market this year is that if one sector lags (like technology), other sectors come along (like energy, banks or industrials) that continue the rally, so the S&P stays on mostly an upward trajectory.

But now, everything is going up.

“The net of it all is that against the drop-dead good technical numbers, it has been hard to lose money, at least a lot, but not all that easy to make money,” Frank Gretz of Wellington Shields said in a note to clients, noting that when everything is up, it’s hard to make money as a trader rotating in and out of stocks: “Now the only thing running consistently is the S&P 500.”

That sounds like an odd problem: We’re running out of places to rotate into. But for active traders, it’s a serious issue.

“There’s no Covid discount anymore,” said Peter Tchir, head of macro strategy at Academy Securities. “There’s no obvious sector where it looks like the rest of the market has ignored the space. I’m not sure if we should just be 50% in cash and just figure out what gets mispriced in the next week or two.”

Earnings will be the big test

The Fed problem is going to return