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Wall Street Veterans Warn of Stock Market Pause Ahead of Rebalancing

The stock market is headed for a major rebalance with the addition of Tesla Inc. (NASDAQ: TSLA) in the S&P 500 and the rebalancing of major indices. The rebalancing act is poised to trigger elevated volatility levels as fund managers are forced to add Tesla into their portfolios. Whether the rebalancing act will trigger another rally even as indexes remain at record highs remains to be seen.

Indices Rebalancing

The stock market has been on autopilot for the better part of the year, with investors ignoring valuation concerns to continue pushing stocks higher. However, there is growing concern that the overall stock market could be nearing a breather after months of blockbuster rallies.

A new survey indicates fund managers are underweight cash for the first time since 2013. The average cash levels in funds are at 4%, the lowest level, which could trigger a sell signal in the broader stock market. In the past, whenever cash levels were this low the S&P 500 return was negative.

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Stock Market Bullishness

However, amidst the sell signal, it is still hard to find managers that are bearish. Fund managers continue to buy stocks in the hopes that the COVID-19 vaccine will help revive the battered global economy as well as corporate earnings. With many investors indicating that the global economy is in an early cycle phase, the bullish momentum in the stock market looks set to continue.

The Nasdaq Composite S&P 500 and the Dow Jones Industrial Average are showing no signs of slowing down. The Indexes continue their record-setting paces as investors remain bullish about the stock market outlook.

However, the unbridled momentum is already starting to cause anxiety in some quarters. Some Wall Street veterans believe a healthy pullback is imminent to help cure the elevated valuation concerns. While this is not a go out and sell everything, investors should be cautious as there could be a pause in the upside according to Canaccord Genuity Group Chief Tony Dwyer.

Ruchi Gupta

Ruchi Gupta covers various beats from finance to technology and from lifestyle to hobbies. She has an MBA in Finance. Ruchi enjoys writing on celebrities and political news. She likes traveling and exploring places.

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