The stock market rally of 2023 has faced criticism for its concentration in a handful of major tech companies. However, recent developments have given rise to a new cause for concern among investors. Jonathan Krinsky, managing director and chief market technician at BTIG, has highlighted the emergence of a few other lagging stocks, which could potentially exacerbate the issue.
Notably, an index of meme stocks, which have gained popularity among investors thanks to social media, has experienced a 10% surge over the past three days. In contrast, consumer staples, considered a safer investment option, have witnessed a 1.6% decline as investors pull back. Iconic meme stocks such as GameStop (GME), AMC Entertainment (AMC), and the now bankrupt Bed Bath & Beyond (BBBYQ) are some of the most prominent examples.
Krinsky shared his observation with clients in a recently published note. He pointed out that whenever the MEME index has outperformed the Consumer Staples Select Sector over a three-day period by a margin of 10% or more, the S&P 500 index has subsequently experienced lower performance three and five days later on 12 out of 17 occasions. The average return during these periods has been -0.83% and -0.68%, respectively.
Furthermore, when analyzing the 20-day performance, the average and median returns were -1.45% and -1.6%, respectively. Interestingly, the last instance of this occurrence was on February 15th when the S&P 500 fell by 3.62% in the following three days.
Krinsky warned that the recent surge in lower-quality stocks rallies presents a double-edged sword situation. While it is encouraging to see broader market participation, including the rise of heavily shorted stocks with lower overall quality, it often signifies a chase after assets that have been stagnant but hold the potential for significant movement.
He advised, “When we witness such a substantial surge, particularly in comparison to defensive sectors like consumer staples, it typically signals the tail end of the rally. The table below provides evidence of this trend.”
Read: Why investors gamble on shares of bankrupt companies — Bed Bath & Beyond, for example
