The irrational trade has taken hold in markets.
"We view the recent rally as irrational and believe it was mainly driven by systematic inflows and short covering, but these drivers are likely running out of steam," JP Morgan strategist Marko Kolanovic wrote in a new client note.
Kolanovic said he thinks the S&P 500 has at most 5% upside left in it in the near term, with downside risk at 15% or more if a recession forms later this year — as many Wall Street pros project. He believes investors should be raising their cash positions and allocating more to defensive fixed-income trades.
The closely followed strategist looks correct to brand investors as behaving irrationally.
The latest retail sales report was underwhelming for the second straight month. Sales were pressured across the board, specifically among higher-priced items like appliances.
Consumer confidence has also weakened as inflation fears have ticked back up.
March employment gains slowed month on month as layoffs at big tech companies such as Amazon (AMZN) and Meta (META) took their toll and companies hire more cautiously as the economy cools.
All of this new economic data comes about a month removed from a banking crisis that led to busts for Silicon Valley Bank and Signature Bank. UBS (UBS) has purchased rival Credit Suisse in an effort to prevent a financial system contagion event.
Earnings out in the last week from JP Morgan (JPM), Citi (C), Wells Fargo (WFC), and Bank of America (BAC) have shown more measured spending by consumers on debit and credit cards.
How has the market responded to these apparent negatives to sales and profits for companies? As if everything was just A-OK in Corporate America and the economy.
Last Friday, the CBOE Volatility Index (^VIX) — a.k.a. Wall Street's "fear gauge" — saw a new closing low for 2023 relative to the S&P 500. Year to date, the VIX has dropped 24%.
The move in the VIX marks a clear sign of investor complacency on risk.
As for individual stock moves, blind bullishness been the name of the game for the often go-to risk-on trade known as FAANG (Facebook/Meta, Apple, Amazon, Netflix, Google).
Since March 1, Meta shares have climbed 27%, according to Yahoo Finance data — the top-performing FAANG component. The worst-performing FAANG component since March 1 has been Netflix (NFLX), with a still solid gain of 7% in its own right.
On the year, the Nasdaq Composite is up 16%, the S&P 500 is up 8%, and the Dow Jones Industrial Average has added just less than 9%.
"Bottom line, sentiment matters in the near term, and extreme bearish sentiment following the banking failures has helped this stock rally continue. However, sentiment has improved substantially. So while we’re not yet at levels I’d consider a caution signal, we’re not very far away, either," said Sevens Report Reseach founder Tom Essaye.
Strikes this writer as irrational behavior.
Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations or anything else? Email brian.sozzi@yahoofinance.com
Read the latest financial and business news from Yahoo Finance
