By Joseph Adinolfi
Some market gurus are starting to worry that the summer rally on Wall Street may be starting to fizzle, after stocks lurched from oversold to overbought.
Gene Goldman, chief investment officer of Cetera Financial Group, explained that stocks are likely headed for a pullback, even though the economy is in better shape than many Americans might recognize.
“There’s been plenty of great news, but the market needs a little bit of a pause. We’ve moved a little too fast, too quickly, right now,” Goldman said in a phone interview with MarketWatch.
To support this view, he pointed to a handful of reasons that Friday’s slump in stocks might continue into next week, and possibly longer — even though he remains bullish on stocks over a longer time horizon.
Defensive sectors back in vogue
Cyclical sectors outperformed as stocks rallied in July and early August. But that trend appeared to come to an end this week, as defensive sectors retook the lead.
“One sign that investors are getting nervous is cyclicals underperforming defensive sectors, and we’re starting to see that now,” Goldman said.
Over the past week, consumer staples stocks and utilities were two top performers among the S&P 500’s 11 sectors. As a result, the Consumer Staples Select Sector SPDR fund /zigman2/quotes/200697959/composite XLP +0.54% , an exchange-traded fund that tracks the sector, has risen 1.9%, while the Utilities Select Sector SPDR Fund /zigman2/quotes/206645117/composite XLU +0.65% gained 1.3%.
On the other hand, the two sectors putting in the worst performances were cyclical sectors. materials and communications services. The Materials Select Sector SPDR fund /zigman2/quotes/204467551/composite XLB +0.74% was down 2.4% for the week, while the Communications Services Select Sector SPDR fund /zigman2/quotes/204079482/composite XLC -0.20% shed 3.1%.
Bond yields are rising
Rising bond yields are another sign that the rally in stocks could be about to turn, Goldman said.
Higher Treasury yields can pose a problem for stocks because they make bonds a more attractive investment by comparison. Stocks and bonds often moved in unison to start of the year, as expectations of tighter monetary policy from the Federal Reserve rattled both assets.
But that dynamic appears to have shifted in August. Treasury yields turned higher earlier this month and started rising before stocks hit a rough patch late this week.
The yield on the 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -0.35% increased 35 basis points since Aug. 1, and it climbed 14 basis points since Monday to 2.897%.
Bond yields rise as prices fall, and Goldman and others on Wall Street are now waiting to see if stocks will follow bond prices lower.