These Warning Signs Point to Overheating Stock Market Momentum – The Motley Fool

0
62

Investors have always loved a bull-market run, and even under less than perfect circumstances, the stock market has often obliged with amazing moves higher. We’re going through the likes of that right now.

Even though major market benchmarks were mixed on Monday, there was still a lot of momentum-driven investing going on in individual stocks. Such large moves higher can come with very little in the way of new information about the fundamental business prospects for a company, and that’s a sign of just how upbeat market participants are right now. It could be an indicator of rising stock-market frothiness that could overheat in the future.

A sparkling lightning-bolt shape in orange-red against a black background

Image source: Getty Images.

How the stock market fared Monday

The Dow Jones Industrial Average (DJINDICES:^DJI) and the S&P 500 (SNPINDEX:^GSPC) pulled back from their recent record highs with mild declines. However, the Nasdaq Composite (NASDAQINDEX:^IXIC) continued to move to new records.

Index

Percentage Change

Point Change

Dow

(0.49%)

(148)

S&P 500

(0.19%)

(7)

Nasdaq Composite

0.45%

56

Data source: Yahoo! Finance.

Running out of explanations

Usually, when a stock posts a significant rise, there’s a reason. It might not always make a lot of sense from a long-term investor’s standpoint, and it might not even be in the direction that you’d expect. But there’s typically at least a conceivable idea supporting the move.

However, that’s starting not to be the case anymore. Consider some of today’s big winners:

  • Tesla (NASDAQ:TSLA) continued its amazing rise, climbing another 7% on Monday. That pushed the electric-vehicle manufacturer’s market capitalization above the $600 billion mark. However, with no new news about the company, Tesla’s gains seemed to be driven solely by past upward momentum and the looming addition of the automaker’s stock to the S&P 500 index.
  • Newly public Palantir Technologies (NYSE:PLTR) soared 21% on Monday, adding to its recent gains. Investors pointed to a contract that the data-software specialist won from the U.S. Food and Drug Administration. However, it’s hard to figure out how a $44 million contract could justify a stock move that added more than $9 billion to Palantir’s market cap.
  • Virgin Galactic Holdings (NYSE:SPCE) was higher by 18% after rescheduling a test flight that had been postponed earlier. To put the move in perspective, the postponement only sank the stock by 6%. The stock is now up more than 60% since then.
  • Special-purpose acquisition company Social Capital Hedosophia Holdings II (NYSE:IPOB) climbed more than 18% solely by announcing the ticker symbol it will have following its pending merger with real estate disruptor Opendoor Technologies.

To be fair, investors often overreact to relatively small pieces of news. However, those positive responses seem to be getting larger — and they tend to favor certain stocks that are more popular than the typical company.

Is there cause for concern?

When you see signs of frothy markets, it’s always tempting to take drastic action. However, that’s almost always a mistake. Even if market participants are being irrational, there’s no guarantee that things will get more reasonable in the near future. Bull markets often run much further than anyone anticipates, even after fundamental signs would point to the need for a pullback.

The better approach is simply to take a look at your portfolio and make any minor shifts that seem warranted. Moreover, making sure you have some cash available to pounce on the inevitable correction whenever it comes can make you feel more prepared when the stock market‘s exuberant move higher finally comes to an end.

LEAVE A REPLY

Please enter your comment!
Please enter your name here