Is a Momentum Meltup Straight Ahead? Breadth Reaches New High as Takeover Fever Simmers on Wall Street.
The stealth game unfolds. When no one is looking, the big banks are busy working.
If you’re wondering what could push stocks higher, consider a wave of mergers and acquisitions as a credible answer.
No one is openly buying into this rally but momentum is building and we could be in the early stages of a stock meltup as the big banks work their latest stealth operation on Wall Street – a takeover frenzy.
Market sentiment says the rally has come too far too fast. Yet, money continues to move into stocks as traders who’ve missed the rally are playing catchup. As a result, the major indexes are within reach of their all time highs, and the market’s breadth has broken out to a new high signaling the potential for higher prices.
Contrarian investors look in areas of the stock market being avoided by the crowd. Everyone is focused on tariffs, geopolitics, and reasons not to own stocks. Yet, while no one is paying attention, under the radar, someone is buying stocks while the big banks seem to be working quietly on mergers and acquisitions.
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Takeover Fever Simmers
You’re probably shaking your head, saying to yourself: “we’ve heard this all before.” And you would be right. There are always rumors about takeovers and mergers, and just as often little materializes. But, as I noted here, over the last week, there have been three mergers involving publicly traded companies and at least one between two mid-size privately held homebuilders in Texas.
Dick’s Sporting Goods (DKS) bought Foot Locker (FL);
Apollo Group (APOL) bought Landsea Homes (LSEA);
Charter Communications (CHTR) bought privately held Cox Communications; and
Privately held Texas homebuilders Scott Felder Homes merged with privately held Olivia Clarke Homes in order to expand its market share in the Dallas-Fort Worth area.
All of the transactions share one characteristic. The buyer is using the recent bear market’s price decline to buy worthy rivals at a discount while expanding their market share.
Which Groups are Attractive?
In reality, after a bear market, value rises in most sectors of the market, and takeovers often follow. But here are some interesting areas to consider in this market.
At the top of the list is the homebuilders (ITB). This group is selling at nearly ten times earnings with most of the companies remaining profitable and exhibiting decent profit margins during a tough market. Factor in the fact that demand remains high and supplies are tight and you’ve got the right environment for big guys to take out smaller guys at bargain prices in expectations of rapid returns when the market improves.
The iShares U.S. Home Construction ETF (ITB) has likely seen its worst levels for the cycle. And the LSEA takeover seems to have brought some interest back into the group. I’ve just added new names to my homebuilder group in the Weekender Portfolio.
A second group to keep an eye on is the oil and exploration (IEO) sector. That’s because as oil prices remain near their recent lows companies are looking to expand their reserves in preparation for a rebound in prices in the future. Because of the leverage, which is inherent in this sector, smaller companies are vulnerable when oil prices fall. Yet, they still have reserves and equipment which is attractive to their larger rivals. The iShares U.S. Oil & Exploration ETF (IEO) is testing its 200-day moving average. A move above this key resistance level, especially if oil prices remain low, would be suggestive that the takeover rumor mill is grinding loudly in the sector.
If you’re looking for a more macro approach, consider the smaller stocks, such as in the iShares Russell 2000 ETF (IWM). This ETF owns a wide spectrum of small companies which offer potential value to larger companies seeking to increase their market share in an environment full of bargains. A move above the 200-day moving average would suggest that money is moving aggressively into small stocks.
If you’re looking for a more direct approach you may consider a pure merger and acquisitions ETF. One is the AltShares Merger Arbitrage ETF (ARB). This is a thinly traded ETF, which sports a steadily rising price chart which suggests that the fund managers have excellent insights into the M&A info pipeline. You can look into the ETF’s holdings here if you’re interested. The list features lots of companies no one has ever heard of, which means that they are likely underpriced and profitable, thus attractive for being taken over.
Bottom line:
There are no guarantees that any M&A wave will materialize. Yet, we saw three deals between publicly traded companies and at least one merger between two privately held homebuilders last week. That’s the first such development in quite a long time. It’s even more meaningful if you consider that mainstream investors are ignoring the value in areas such as the homebuilders and the small stock universe.
There are no coincidences.
Liquidity Watch – Liquidity Rebounds Giving Stock Market a Boos
Liquidity improving and the stock market is likely to benefit. The latest reading, May , 2025, of the Fed’s National Financial Conditions Index (NFCI) came in at -0.51 compared to the prior week’s -0.45 but still off the very loose conditions we saw in February. But we’ll take it. Negative numbers signify ample liquidity. Yet, the nearly 10-plus basis point rise over four weeks is cautionary and at least partially explains the general weakness in stocks.
Sentiment Summary – Greed Readings are Worth Watching
The CNN Greed/Fear Index (GFI) closed last week at 71, just below the Extreme Greed area. As a result, a bit of caution is warranted, although sentiment readings can be early in predicting a trend change.
The Composite Put/Call Ratio closed at a neutral reading of 0.73. The index P/C ratio closed at 1.03. Both are neutral and are reassuring since they suggest investors are still cautious.17.24
The CBOE Volatility Index (VIX) closed at 17.24 well off its recent high above 50, confirming the wall of worry is gone and that calm has returned to the markets. VIX rises when traders buy large volumes of put options. Rising put option volume leads market makers to sell stock index futures to hedge their risk and leads markets lower. A fall in VIX is bullish signaling lower put option volume, eventually leads to call buying which is bullish as it causes market makers to buy stock index futures raising the odds of higher stock prices.
The S&P 500 (SPX) is well above 5750 and looks headed for 6000. A move above 6000 almost assures a retest of the recent highs.
The bond market remains range bound.
Bond Yields Hold Steady
The bond market is breathing a bit easier as both the CPI and the PPI came in much cooler than expected. Fed Chairman Powell is still talking tough on inflation and may not ease interest rates anytime soon. But the situation remains fluid.
The U.S. Ten Year Note yield (TNX) is still trading between 4.3 and 4.5% with the 200-day moving average providing support.
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NYAD Delivers Breakout - All Clear Signal Materializes
The New York Stock Exchange Advance Decline line (NYAD) delivered the long awaited new high signaling the “all clear” as stocks return to a long term uptrend.
The Nasdaq 100 Index (NDX) continues to power higher toward 22,000 and perhaps its recent highs. Both the ADI and OBV line suggest money is aggressively moving into the large cap technology stocks.
The S&P 500 (SPX) is closing in on 6000. If SPX moves above this key round number level, it may make an attempt toward its old highs.
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