Fly Me to the Moon

Artemis, shmartemis! Yes, the recent Artemis II flight to the moon and back was a wonderful testament to American technology. And, following a series of national blemishes, the mission provided our country with a much-needed boost in pride. But it can hardly hold a candle to the moonshot the stock market has witnessed over the last few weeks. Consider that the launch of the Artemis II mission came at roughly sea level. In contrast, stock market averages were way under water for the year when the nascent rally began. Stocks had to begin their flight from the crater created by the February/March market decline.

The Artemis II mission set many records over its 10-day flight, including taking Americans farther from earth than any human had ever been. For its part, the stock market has also been chalking up some records of its own. Both the S&P 500 Index (SPX) and the NASDAQ Composite Index (COMP) hit new all-time highs on three successive days last week. Even the Russell 2000 Index of small-cap stocks (RUT) managed to climb into new high ground on Friday. But that’s not exactly earth-shattering. In recent years, new highs for the major indices have come far more frequently than full moons. However, here’s one for the books: On Friday, COMP posted its 13th consecutive up day. That’s its longest such streak since 1992. COMP has had three consecutive weeks with gains of more than 4%. SPX has three straight weeks with gains of more than 3%, which apparently has happened only twice before, in 1982 and in 2020.

From its low near 6317 on March 30, SPX has gained 12.8% in 13 sessions. That index, which was showing a year-to-date (YTD) loss of nearly 8% just three weeks ago, is now up about 4% YTD. COMP has been even more impressive. Its telemetry shows that the index gained almost 7% last week and is now up 17.7% from its March 30 low (20,795). Talk about escape velocity! RUT is up 15.4% over the last 13 trading days and is now up a bit more than 12% YTD.

You don’t need a degree in aeronautics to know that much of the thrust behind the market’s rocket ship ride has been from hopes that the war with Iran is coming to an end and the Strait of Hormuz will soon be open. In fact, headlines to that effect led to a couple aborted launch attempt, gap-up openings in the midst of the March sell-off. Lower energy prices, regardless of the cause, will be bullish for stocks in the coming months. Traders have been willing to jump the gun and rush back into stocks at the slightest hint of good news, knowing that if they wait for the news to be finalized, they’ll be too late. A lot of hope for actual good news has already been priced into the market. We’ll need to see some actualization of those hopes to power any future gains. The concern going forward is whether the stratospheric rally will be justified or, in the absence of more good news, that stock prices will succumb to the gravitational pull of reality.

The energy sector, which rallied (while most other sectors declined) in March due to the spike in crude oil prices, was the big loser last week as crude prices tanked. It ain’t rocket science. The group with the best trajectory was the rebounding technology sector. Big recoveries in the beaten down software and semiconductor stocks propelled the S&P Technology Sector Index to an 8.22% gain for the week. That sector has gained a little more than 18% over the last 13 sessions from its late March low, and also reached a new high on Friday. One index of the Magnificent 7 stocks has been over the moon in the last three weeks. As a group, those mega-cap stocks have soared nearly 20% in 13 sessions, though there were a couple down days in the mix. The rejuvenation of those stocks was a big help for the technology sector but also helped the consumer discretionary sector (+6.66%) and the communication services sector (+4.52%) to big gains last week. Companies in the orbit of benefitting from lower energy costs (cruise lines, hotels and travel sites) were also noticeable beneficiaries.

Three weeks ago, in my Eagles-themed article “I Guess Every Form of Refuge Has its Price,” I wrote, “In the current volatile environment, trading is thinner, and big intraday moves both up and down will be more frequent. Those moves will almost always be triggered by overnight news from the Middle East and/or presidential rhetoric.” While those thin markets were a curse as the averages trended lower, they have been a blessing over the last few weeks as the market rebounded.

The market’s current strong upward momentum would normally provide some comfort that any short-term retracements would be well contained. But the steep upward trajectory of the rally has left a vacuum in its wake. That suggests that the thin-market, high-volatility trading could continue in spite of the upward momentum.

The inherent tactics of some of the market’s popular strategies contribute to the tendency for trading to get thinner and self-perpetuating during periods of heightened volatility. One such group is computer-driven, high frequency traders, whose activity tends to dampen volatility under normal circumstances. But as volatility increases, those traders must decrease the size of their trades, eliminating some of the cushion they normally provide. An entirely different strategy, risk parity funds, start with a target level for the overall volatility of their portfolios. If the volatility of one of their asset classes increases, then they must reduce the size of that asset class in their portfolios. So as stock market volatility increases, these funds are forced sellers of some of their equity holdings.

Those risk parity funds, by their nature, have contributed to the sense of rushing out, the rushing back in that the market has recently witnessed. As stocks begin selling off for whatever reason, market volatility increases, and risk parity funds must sell stocks, which exacerbates the decline, increasing volatility and compelling more risk parity selling. When volatility ultimately begins to decline, these funds become forced buyers of stocks.

A third strategy, trend-following, contributes to that same piling-on effect and may be especially apparent in a “V bottom” scenario like the market experienced a year ago and again over the past two months. These funds use mechanical technical factors to determine when to jump onboard a developing trend and when to add to positions as the trend continues. They are as likely to short stocks in downtrends as they are to buy in uptrends. As the market averages began to decline in March, trend followers were forced to reduce long positions, contributing to the selling. As the decline continued, they began shorting stocks and increased shorts as the averages spiraled lower. When the market suddenly reversed higher a few weeks ago, they were compelled to cover shorts, then open and increase long positions as the rally continued.

Over the next two weeks, it’s possible that earnings and guidance news could eclipse the Iran war news. We’re coming into the two biggest weeks of the new earnings season. The consensus expectation is for 2026 earnings per share for SPX to increase by 13% to 15%, though those growth forecasts are notoriously conservative. The technology and energy sectors are responsible for the majority of the recent increases. Probably even more important than the first-quarter results will be the guidance on future performance. That could be especially impactful for companies with exposure to higher energy and transportation costs.

Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market