When investors look at the big players on Wall Street, hedge funds and investment banks, they are not the so-called winners because they have sources of information that most retail traders have to network for years to obtain. They are winners because they can use information through strategies that increase their odds ever so slightly over the long term.
While retail investors don’t have access to all of this information, they do have ways to replicate some of the key strategies used in these funds and on the trading desks at big banks. One of these is the simple concept of long-short equity, otherwise known as relative value. Relative value is, no pun intended, relatively simple, because asset classes and stocks will eventually converge and diverge at levels that often provide the best trading opportunities.
Today, it is level SPDR S&P 500 ETF Trust NYSEARCA: Spy Compared to the level of represents the entire stock market iShares 20+ Year Treasury Bond ETF NASDAQ: TLTWhich means a more expansive maturity bond market. This is important to know because, at today’s levels, diversification would call for a potential correction in the stock market or a similar breakout rally in bonds. That’s what these scenes could mean for some of the biggest names out there.
Are the top S&P 500 stocks facing a potential pullback risk?
SPDR S&P 500 ETF Trust today
(as of 12/6/2024 ET)
- 52-week range
- $456.29
▼
$609.07
- Dividend yield
- 1.15%
- Property under management
- $638.55 billion
According to S&P 500 ETF WeightsThe two most widely used indexes are stocks Apple Inc. NASDAQ: AAPL And NVIDIA Co. NASDAQ: NVDAWhere most of the exposure is Technology field. Be that as it may, these two names have recently been in some disappointing news, giving importance to the diversification of stocks and bonds today.
Warren Buffett has been selling Apple stock for more than two quarters, and recent earnings in other computer companies such as Dell Technologies Inc. NYSE: Del has shown investors that current demand for electronics is declining.
Then NVIDIA is being accused as the semiconductor industry comes under more financial scrutiny, eg Super Microcomputer Inc. NASDAQ: SMCIOne of NVIDIA’s biggest customers. Whether these two developments pose a threat to the S&P 500 is debatable.
However, considering where the stock market trades today in relation to bonds, it looks like the index needs to adjust, which could pose a risk to these two stocks, which are among the top performers in the index. are large and, therefore, most exposed in this regard. .
Recently, analysts at Barclays reiterated their underweight rating on Apple stock, this time lowering their price targets. Only $184 per shareFrom where it trades today, it calls for a net downside of 23%. While analysts are not brave enough to go against Nvidia, its CEO Jensen Huang Yes, because he has been selling the stock since June 2024.
Maybe these measures are a precaution against current stock market levels, but one thing is certain: a big move is coming soon, as hedge funds are probably seeing it today.
SPY vs. TLT: Examining the Overextended Relationship and Its Market Implications
This phenomenon does not happen often, but when it does, market forces usually quickly correct the inefficiency. Over the past 12 months, the relative strength index (RSI) between bonds and stocks has indicated the same trend, leading to a stock market pullback.
While the ratio (the S&P divided by the bond ETF) goes up, the RSI goes down in a divergence, which is a technical setup for a textbook correction. The same pattern has existed for a few weeks, and now that the stock market is struggling to break the highs from last week, new buyers are waiting for better prices.
This is where the risk comes from for the most prominent names in the S&P (Apple and NVIDIA). Assume that new buyers are found only when the ratio corrects itself as demanded by the RSI. In that case, there would be no momentum to lift and carry the market.
iShares 20+ Year Treasury Bond ETF Today
(as of 12/6/2024 ET)
- 52-week range
- $87.34
▼
$101.64
- Dividend yield
- 3.93%
- Property under management
- $57.83 billion
On the other hand, as the iShares 20+ Year Treasury Bond ETF has underperformed this ratio, investors can safely assume that considering a bond allocation is a way to diversify against potential pullback risk in stocks. , especially now that markets are digesting the potential. Effects of Trade tariffs and inflation.
Investors can also use this ratio and its RSI indicator to detect potential dips that may present an opportunity to buy back into some of their favorite names in the market. These are the things that professionals look for and some of the tools that can be adopted to reduce some of the potential risks that come with investing in the stock market.
Before you consider the SPDR S&P 500 ETF Trust, you may want to hear this.
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While SPDR S&P 500 ETF Trust currently has a “Hold” rating among analysts, the top analysts believe these five stocks are better buys.
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