S&P 500 surge: bull trap in plain sight?

The SPDR S&P 500 ETF Trust Fund NYSEARCA: SPY is trading at new highs, but as the sharp pullback on February 13 showed, the rally may be showing signs of flagging.

The market went back into rally mode on Valentine’s Day, as investors decided to give stocks some love. But the previous session’s pullback, fueled by warmer-than-expected inflation data, indicated some fragility.

Market bulls might want to take a look at what’s really going on:

For starters, the Magnificent 7 stocks that led the 2023 rally aren’t what they once were, at least as a group. Such stocks and their returns in 2024 are:

To put these numbers into context, technology stocks, as tracked in the Technology Select Sector SPDR Fund NYSEARCA: XLK, have returned 5.34% this year. Not all of these stocks fall into the technology sector, but it still offers a good indicator of the performance of these rapidly evolving innovators.

Naturally, a new group of companies has stepped into the lead. In addition to Nvidia and Meta, which will lead the S&P 500 in 2024, the other five top performers and their returns are:

While the outperformance of Nvidia and Meta Platforms signals that AI stocks continue to grab investment dollars, other investment themes are taking on greater importance. These include obesity drugs, in the case of Eli Lilly, and cybersecurity for Palo Alto Networks.

In the case of Disney, investors are convinced that the company is finally turning things around after a lackluster performance.

Juniper and Catalent are on the rise as acquisition targets for Hewlett Packard Enterprise Co. NYSE: HPE and Novo Nordisk A/S NYSE: NVO.

Half of the S&P 500 stocks in the red

However, these are continuations of existing themes: HPE is acquiring Juniper to help the company expand further into the cloud networking arena, and Novo Nordisk is adding Catalent to expand capacity for its weight-loss drugs.

It’s common for new stocks to take the lead in a new calendar year, so that’s not a cause for concern in and of itself, but some other things are: For example, as of February 14, about half of the S&P 500 companies are trading in the red of the year.

It’s always worth taking a look at financial stocks to get an idea of ​​the internals of the market. The top performers in the industry are all insurance companies, such as Brown & Brown NYSE: BROTHERW.R. Berkley Corp. NYSE:WRBProgressive Corporation NYSE:PGRTravelers Companies Inc. New York Stock Exchange: TRV and Allstate Corp. NYSE: ALLamong others.

This is an unusual turn of events and it is significant. When insurance companies lead performance in the financial sector, it often indicates conservative investment sentiment.

Investors look for stability and dividends

Insurance stocks are considered defensive due to stable cash flows and long-term obligations. When these stocks outperform, it could suggest investor concerns about economic uncertainty, pushing them into safer assets.

Insurance stocks are generally reliable dividend payers due to stable cash flows from premiums. This is an attractive feature in a volatile or uncertain market.

Regional banks once again a problem

Another part of the current market story is focused on the financial sector: regional banks are once again in the crosshairs as exposure to commercial real estate worries investors.

This is a more systemic problem than the collapse of Silicon Valley Bank in 2023. Many regional banks have large exposure to commercial real estate, a sector that is struggling for a variety of reasons. This has the potential to cause widespread ripple effects.

Additionally, energy stocks lag the broader market performance, as factors including falling oil prices, overcapacity and geopolitical concerns put downward pressure on oil stocks.

This is another factor that investors should consider in a context of exuberant indices rising to new highs. It’s not that a market collapse seems imminent, but overly exuberant bulls should use caution and focus on areas of the market showing strength, such as AI stocks, weight-loss stocks, and insurance stocks.

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