Pandemic Traders Are Resurfacing

We’re encountering some strange signs of froth in a few not-so-dark corners of the market in the aftermath of the late 2023 melt-up rally.

Sure, the averages have soared off their lows and are teetering on new highs. But most stocks are beginning to churn as the spell of December’s disbelief rally begins to fade. Now, we’re entering a seasonally weak stretch for the stock market as Q1 of an election year historically brings choppy, sideways conditions. And, as Goldman Sachs notes, February has been the second weakest month for the Nasdaq over the past 40 years.

Could these data points align with what we’re seeing in recent market action as we wrap up January trade?

As the unflappable mega-caps continue to prop up the major averages, let’s check in on the other stocks that aren’t shooting higher every day:

• Small-caps are lagging after breaking out as potential new market leaders in Q4. The Russell 2000 is down more than 1% year-to-date, while the Nasdaq 100 has gained more than 4.5%.

• Growth names are taking a beating. Tesla Inc. (TSLA) has fallen from grace, breaking from its Magnificent Seven brethren after reporting disappointing earnings. It’s down 25% just this month. Meanwhile, tech-growth bellwether ARK Innovation ETF (ARKK) is also underperforming by a wide margin, down almost 9% year-to-date.

• The VanEck Semiconductor ETF (SMH) is starting to sputter after trading at nosebleed levels just last week. The sector is finally losing steam following an ugly earnings tumble from Intel Corp. (INTC). Even the most optimistic tech junkie would admit that these impressive stocks could use a break here…

While stocks aren’t triggering any terrifying “sell everything” moments, it’s not difficult to envision the averages hitting a rough patch – especially as some familiar faces from the Pandemic Bubble reappear on the airwaves.

“Cathie 2.0” Gives Innovation a New Name

My trusty market hype-o-meter is flashing a red alert as growth-stock pushers return to pump their favorite holdings.

Just last week, Morgan Stanley’s Sherry Paul put on a PR clinic during a CNBC appearance where she attempted to describe growth investing criteria by referencing the “price-to-innovation” ratio.

No such metric exists, of course – a fact that Paul clarified as she continued to spout her investing wisdom. Still, all this innovation speak gives me 2020 flashbacks. After all, these buzz-metrics were pioneered by the famous Cathie Wood. It’s all part of the playbook! Just rattle off some outrageous price targets and you create a powerful FOMO factory to help your funds vacuum up more Main Street money.

As you might expect, Paul’s “price-to-innovation” brouhaha elicited plenty of groans on social media. But I’m more interested in the timing. Remember, growth stocks are struggling this year. Many of these names attempted to break out of big bases during the fourth quarter melt-up rally. Yet many of these moves didn’t stick…

Could these false breakouts lead to more chop and/or downside action in the weeks and months ahead?

It’s possible – despite whatever “price-to-innovation” metrics they’re concocting out there…

The Return of Davey Day Trader

Not to be outdone, Barstool Sports founder Dave Portnoy is back in action as “Davey Day Trader” on social media after scooping up shares of Spirit Airlines (SAVE) just before the stock took a 25% nosedive on news that the JetBlue merger plans were starting to crack.

You might recall the rise of Davey Day Trader and his green hammer during the peak of the pandemic lockdowns. Portnoy was in the trenches every morning, going live on social media to sling message board stocks and tout his favorite holdings, always with the disclaimer that he’s a gambler – not an investor or advisor.

Well, Portnoy is diving back into the markets headfirst with the same swagger, rebooting his Davey Day Trader sessions to stick it to the “suits” and the “shorts” as he chases one hot stock after another.

Portnoy is incredibly entertaining – and probably much more calculated and strategic than he admits on his live shows. The fact that he perceives there’s a large audience hungry for meme stock content hints that we’re seeing some wide-eyed speculators return to the markets following a bear market hiatus. AMC and GameStop might be dead and buried, but it’s clear the speculative money is starting to churn now that the 2022 bear market is fading into the past.

Again, timing is the issue here. If there’s one thing we know about the crowd, it’s that everyone always seems to get excited at the wrong moment. These same speculators were throwing in the towel and selling every stock in sight in late October. Now, they’re loading up on meme stocks and growth names following a historic melt-up rally. It’s the perfect time for the market to humble the herd.

It’s starting to get weird out there. We need to keep our thinking caps strapped on tight!

Stocks continue to chop along this week as we cruise into the heart of earnings season. Household names litter the list of companies reporting, with a significant chunk of the surging mega-caps announcing numbers ahead of the weekend. Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), Amazon (AMZN), and Meta (META) are just a few of the big boys attempting to wow investors.

Then, there’s the Fed meeting minutes hitting the tape Wednesday afternoon. Plenty to distract investors heading into what could be a pivotal week as the calendar flips to February.

Don’t get fooled by the hype…