The S&P 500 closed at a fresh record above 7,750 last week after working through a rough July for momentum stocks, including the forced liquidation of a leveraged hedge fund. Strategists including Ned Davis Research's Tim Hayes say some conditions still look overbought and overowned, even as investors turn to Wednesday's Consumer Price Index report for the next signal on rates.
The S&P 500 rallied to a fresh all-time high above 7,750 on Friday, one of three record highs it set last week, after spending nearly three months churning in a 3% range following July's momentum-stock selloff.
A hedge fund's forced unwind
That rally followed the liquidation of hedge fund Situational Awareness after its leveraged bets on AI hardware unwound — the kind of forced selling that CNBC's Mike Santoli says often marks a market low. The semiconductor sector, the center of the momentum trade, retreated 25% from its highs, with steeper losses among memory-chip leaders.
But that drop may not have cleared the excess. Jeff DeGraaf of Renaissance Macro Research, who called the momentum trade a bubble in the spring, calculates that $100 invested in the long-short tech-momentum strategy at its June peak is now worth $61; the average path of past busts would take that to $41 within a year, after a short-term bounce.
Strategists warn of topping signals
David Snyder of Journey 1 Advisors has grown focused on the possibility that the secular bull market that began in 2009 is entering its final phase, according to CNBC. Ned Davis Research's Tim Hayes points to similarly cautious signs: his Secular Bear Watch model shows the market as overbought, overowned and overvalued, conditions he says also preceded prior secular tops, though "The report is not indicating that a secular bear has started…"
Focus shifts to Wednesday's inflation test
Futures were little changed Monday: S&P 500 contracts added 0.1% and Nasdaq 100 futures rose 0.4%, while Dow Jones Industrial Average futures slipped less than 0.1%.
Federal Reserve officials remain divided on rates, Yahoo Finance reported, as they weigh an oil shock from the Middle East against a surprisingly weak jobs report from Friday. Wednesday's Consumer Price Index print will decide whether that calm holds or whether renewed inflation pressure reopens the case for a September rate hike.
Sources: CNBC, Barron's (snippet-based), Yahoo Finance
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