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Blistering Nasdaq momentum is approaching dot-com escape speed

In a year of hysterical markets things could get even weirder.
Image: Jeenah Moon/Bloomberg

It’s one thing for stocks to bounce violently after losing a quarter of their value in a month, as they did in March. It’s another thing entirely to keep doing it after soaring back to record highs. And yet that is what’s happening with the biggest US tech shares, which just notched one of their best weeks of the recovery period.

In a year of hysterical markets, no fact is weirder than this: that halfway through 2020, the Nasdaq 100 Index is not only back in positive territory, but is headed for an annual gain that ranks with its best of the last two decades. Much more than survive the pandemic lockdown, the largest American companies are seeing their advantage widen drastically as a result of it, with investors flocking to anything with size and stability.

“This virus has brought forward those companies’ businesses by two and three years,” said Gary Bradshaw, a portfolio manager at Hodges Capital Management in Dallas. While the juxtaposition with the economy is surprising, “you’re buying the best growth companies on the planet in a very low-interest rate environment.”

The Nasdaq 100 tacked on another rousing weekly advance to end more than 600 points above the level where the Covid crash began. A measure of the gauge’s velocity relative to that of the broader S&P 500 just surpassed its dot-com highs.

Very few saw this coming. Back before coronavirus rattled the globe, when things made sense, Wall Street was sure that when the bull market crashed its first casualties would be high-valuation technology stocks. Reality didn’t play out that way. Rather, the group’s strong balance sheets and automated, stay-at-home characteristics acted as insulation from the worst of this year’s declines.

Investors are growing more attached to megacaps, not less. Before a 0.6% gain Thursday, the Nasdaq 100 had climbed more than 1% on the first three days of the week, a streak not matched in over a year. It ended the four days up 5%, a percentage point more than the S&P 500’s advance. That came as Covid cases and hospitalisations continued to rise in the US, leaving reason to question the pace of the economic recovery and how long recent progress may last.

As the second half of the year begins, tech’s stellar returns are getting hard to ignore. Bucking a broad equity decline, the Nasdaq 100 is up 18%, leaving the rest of the market in the dust. At 21.5 percentage points, the tech-heavy gauge’s performance gap relative to the S&P 500 is the widest at this point of a year on record.

Naturally, skeptics say these darling stocks have gone too far too fast. Certain momentum indicators support that. The rally has pushed the Nasdaq 100 way above its 200-day moving average, with the premium approaching 20%, a level of exuberance that coincides with the market’s peak in February.

“It’s amazing — investors are just willfully putting money, continuing to plow into large cap tech despite all of the regulatory concerns from the US, Europe, China, despite all of this,” said Yousef Abbasi, global market strategist at StoneX. “It’s gotten so disconnected from fundamentals it’s hard to have that real conversation.”

If you widen the lens and go back 20 years, another milestone was also reached this week: the Nasdaq 100’s relative performance to the S&P 500 surpassed its 2000 height. Depending on one’s view on the market, interpretations of that achievement will differ. To the doubters, the sight alone brings flashbacks to the dot-com crash.

In the eyes of tech faithful, however, it’s a strong case for staying bullish. Just consider the amount of money that tech titans like Apple Inc. and Microsoft Corp. make now versus then. In the year just before the internet crash, companies in the S&P 500 Information Technology Index earned combined profits of roughly $50 billion. Last year, the total was $240 billion.

So while the Nasdaq 100 has come back to its heyday relative to the broader market, the underlying earnings power is almost five times as big as it was 20 years ago. That’s part of the reason Hodges Capital Management’s Bradshaw continues to hold on to some of the largest names in his portfolio, including Apple, Microsoft, Amazon.com Inc. and Facebook Inc.

“These companies are growing earnings, growing revenues and continue to grow cash flow at a faster clip than most other companies,” Bradshaw said. “This is not like the Internet bubble in March of 2000 when we had the big bust. Because back in the day, many of those companies were just burning through cash left and right.”

Believers got a scare last Friday, when the group popularly known as the Fang stocks — Facebook, Amazon.com, Netflix Inc. and Google parent Alphabet Inc. — dropped more than 5% in the worst session since the depths of the Covid crash. Now those losses have been completely erased. The amalgamation of internet stocks rose 7.6% in the holiday-shortened week to a record high, the best week since April.

But even amid the gains, there were hints of concern. After 12 straight sessions in which a measure of 30-day implied swings in the tech-heavy gauge traded at a discount to the equivalent for the S&P 500 — the second-longest such streak since 2011 — the relationship between the two reverted back to what’s normal.

Usually, the Cboe NDX Volatility Index (VXN) trades above the Cboe Volatility Index (VIX), with an average spread of three points over the last five years. But that gap has shrunk in 2020 to a third of that size, as investors rushed into megacaps and technology stocks for their perceived safety through the coronavirus crisis. This week, the Nasdaq 100’s fear gauge held above the classic VIX in every session.

“I’m a little concerned about the entire market’s pace of gains, but the Nasdaq especially,” said Tim Courtney, chief investment officer at Exencial Wealth Advisors. “When you look at the valuation of large growth to, say, the rest of the market, or large value or smaller companies, it is definitely getting back into that range of the 2000s.”

© 2020 Bloomberg

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I would really not be surprised if we later figure out that there is some kind of monster algorithmic trading scheme behind this run. Fundamentals do not make sense.

One day we need to change away from algorithmic ultra fast trades. Make the minimum holding period on any position 30 days and we will see the difference between investors and gambler-traders.

The financial media warns us against ponzi schemes, and yet they are the first to fall for the biggest ponzi scheme on earth!

The Nasdaq did recover in terms of the fiat currency, but not in terms of real currency. We help the reserve bank to pull the wool over our eyes because we don’t like the reality. The market is crashing in real terms, but rising in nominal terms. Just wait until you have to exchange your Facebook shares for fuel, housing, food and electricity and then come back to me to tell me how much money you have made.

If you want my attention, then tell me what Microsoft or Berkshire Hathaway did in terms of gold. Even the dogs on the exchange rise in terms of fiat currencies.

“It’s amazing — investors are just willfully putting money, continuing to plow into large cap tech despite all of the regulatory concerns from the US, Europe, China, despite all of this,” said Yousef Abbasi

Yousef – maybe ask the Fed about the money they printing and where it has flowed to?

Wrote a comment earlier that seems to have vanished. Anyway herewith try again.

This market might have had a blistering advance after lock down panic even to new highs on the NASDAQ and seem totally detached from reality – but is it? For context:

1. The FED balance sheet is redlining in the insanity zone.
2. It was near zero in the early 90`s and took decades accelerating on 2008 crash to $1T. Then just 10 years to go to $3T. Now the off the chain move from $3T to $7T+ in just 3 months!!!
3. Like Draghi they are trapped – a small 5% contraction in their balance sheet in the week ending 5th June, saw a 2000 point plunge in 36hrs on the DOW – 11th/12th, followed by a 2000 point rebound 15th/16th June.

When you consider the blistering performance from this perspective, well it is worrying. Then we have the momentum traders and the Robin Hooders climbing aboard, it makes sense and of course the banks and hedge funds are riding this.

Shorts we established at end of May through early June, we closed within 2 days at 25,220 on the DOW. What we thought might take several weeks, was done in 36hrs!

My macro economic view point – am still waiting for latest FED balance sheet. However, we have been scaling back into shorts above 26,400 on DOW and have been taking our first shorts on NASDAQ at recent ATHs on the FAANG group like stocks and Tesla. As in March there are serious negative divergences building on the markets, which usually means the BIG money are taking opposite positions. We are long Gold at the moment but expect a temporary high around the same time as the Nasdaq this month. New gold highs are not reflecting in the large cap gold stocks.

Timing. We expect highs for the rebound on DOW/SP500 and new ATHs on NASDAQ if they not in place already, to take place in blow off fashion between now and ideal timing would be 15th/ 16th July. Option expiration is the 17th and likely a very volatile day. I will be back at MAX short by that time with tight stops. For the ZAR we could see 16.50ish give or take in the next 2 weeks, maybe. But expect a 20+ print before the year is out.

Levels – new lows for the DOW going into end Sept/ early Oct. Maybe even the NASDAQ. So yes a very hard down in markets coming in my opinion, sustained and into October – then we expect a grind along the lows with a wait and see attitude until November 3rd election results. A note volatility will be off the charts.

The trigger – it can be any number of things. However, the trigger will likely come as an unwanted but required small contraction by the FED, maybe just not expanding any further will be enough.

We have just ended a 3mth up cycle rebound from the March lows, which appears to be stretching into July. We are now set up for an accelerated DOWN cycle into October. The catastrophic economic effects of the lock down will start to hit home really hard shortly, maybe a trigger could be a bank failure. Government support starts to end in USA and UK at end of July, so much larger scale lay offs will now be announced on a daily basis as we head into month end. Violent civil riots will get worse as we head into the year end and get exceptionally bad near elections not just in the USA – the Dems want/ need mail in ballots. Also the fear of the much flogged SECOND WAVE, if it looks like a 2nd lock down might be in place for the Northern Hemisphere winter, then pasop.

Some clients ask what if the FED keeps their foot on the gas, what if they start direct stock purchases. Firstly they have physics to deal with and the law of diminishing returns. The day they announce a $5T intervention and nothing happens, watch out below. Then think about what that entails. A stock market at new highs or at current levels would guarantee Trump the presidency. Hell at the moment he even tweets the new highs in the Nasdaq. The FED is supposed to be non political (yeah sure). Anyway i am sure they are already getting flack from some quarters. Direct FED stock purchases would need confirmation from the Dem controlled House – do you think Pelosi would gift the 2nd term to Trump, by ensuring stocks exploded to the upside – i think not.

For those of you that missed the 36hr flash crash in June, you have a rare opportunity to load up in my opinion on the short side going into the next week or 2. I would be all in by the 17th.

Last comment also comes regularly from clients – the VIX. Some that trade it, always look for that guaranteed trade. After sub zero oil. We were asked if a short on the VIX above 85 was a guaranteed big money winner. No it is not. Yes the VIX cannot go below zero, however, the often misconceived upper limit is not 100. Running some figures through our model, it is possible in extreme moves such as black Monday, for the VIX to reach 150/ 200+. It might only be for a day or 3 – but margin calls could be brutal.

Lets touch base again on markets in 6 weeks or so. These are my opinions only and i might be totally wrong. Whatever happens hold on tight, i believe we are in for a wild ride over the next 6 months.

what should (rationally) the S&P be at in your models?

My view S&P at minus a third is where selected shares are investable

We have been in a 11 year bull market from lows of around 6500 to nearly 30000 on the DOW.

We have seen a very rare outside year reversal to the downside – something i have not seen in an index in my life time. But this a new world of FIRSTs. Even this fraudulent pandemic is a first.

To be honest we have no working model based on fundamentals and earnings that we are using – we have literally tossed them. We have the unprecedented manufactured event that has been forced upon the world. Destroying supply and demand. A new world of extremes. The models will work again when the dust has settled – but i do not believe we have seen the extreme results yet of what they have done. That still lies ahead of us unfortunately. When we have passed the peak of this disruption a new world will emerge and the old world market leaders will have been replaced in many instances. Sea changes are taking place.

New behemoths are emerging like Amazon. Old bricks and mortar are adapting or dying. The DOW represents the old world for now, hence the yearly outside reversal to the downside, whereas the NASDAQ did not achieve the same.

In my opinion this is a market that can be traded on math and technicals only. Look at your weekly, monthly and quarterly charts and the typical averages, they still reflect mass human psychology as do the fibonacci retrace etc. As and when old support levels crumble look for the next levels.

Valuations are meaningless in a world descending into chaos. When we get past the first wave (i am not talking about Covid 19) – we can see where we stand.

There are some great opportunities emerging. This was inevitable, it has just now happened at warp speed. What to watch out for:

– coming collapse in sovereign debt, EU first, the repo crisis was the first sign, interest rates will start to rise – the FED is buying corporate debt because they are desperately trying to keep the system intact, hence there open swap lines into the EU
– Rapidly collapsing confidence and mistrust of governments and politicians – after the coming correction in gold this should start to manifest itself as the price starts to accelerate upwards to new all time highs
– just when you think the equity markets are gone beyond repair, i believe this is when everyone will be caught off guard. As the sovereign debt crisis loses control and exploding yields in government debt become a daily occurence
– where does this money go? Not into government debt that is collapsing, so the US treasuries will no longer be a place of last resort
– the money i believe will flee into the private sector which is the equity markets – that is why i believe after the coming equity rout – we will see new highs in US equities
– however, this will be with a stronger dollar and a stronger gold price at the same time
– This is macro stuff out 2 years from now
– into 2022 this is what we see, but the covid fraud can make us revisit this dozens of times and adapt
– after 2022, will once again be the ultimate short in equities and a large scale move into commodities, not because of a bull market based on fundamentals but on the need for tangible assets and security

So no real fndamental value model but a bigger picture, try and build reserves on the way down and then invest into the opportunities as they emerge. Volatility will be off the charts for some time.

End of comments.

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