To The Moon

During the weeks ending the 10th and 17th of June, both the S&P 500 ($S&P 500(.SPX)$) and the Nasdaq-100 ($NASDAQ 100(NDX)$) closed around 5% down week-on-week. With respect to the S&P 500, this has happened only 7 times since World War II ended and none of those were particularly good times. 

As of the week ending on the 17th, every single sector's 50-Day Moving Average Spread (as a %) was trending often in excess of 10%.

50-DMA Spreads are simple tools to display long-term recurrent trends in stocks

While every sector's price was downtrending on a Y-o-Y basis, energy, utilities, consumer staples and health care sectors were particularly oversold. These sectors particularly attract investor interest in inflationary/recessionary times but investor interest has grown outsized, with little remedy apparent to ease the pressure.

Overselling is possibly going to spread to other sectors

After the mainstay of the U.S. economy shifted from wide-base manufacturing and ancillary services to "tech" in the nineties, the latter had enjoyed substantial investor attention over the past couple of decades or thereabouts. As a result, both commentary and coverage of the "tech" sector had leaned heavily on growth potential for investors, particularly as more and more retail investors trooped into the marketplace.

"Tech" is a significant part of the S&P 500 (with it gaining even more prominence in the Nasdaq-100). However, as a whole, over a year till the week of the 17th, the Trailing Twelve-Month PE Ratios of the S&P 500 (which calculated as a proportion of each stock's individual PE Ratio) has reached historic lows.

The drop in PE Ratios is currently greater than during the tech bubble collapse as well as th Financial Crisis

Now, over the past week, reports have emerged that the number of mortgage applications in the U.S. (a key indicator of "societal" health in terms of spending) has been falling. Despite the Fed Rate hike (as covered in the previous article on oil ) being rather modest so far, this is an additional cause for concern. 

US homeowners seem to be walking away from the overheated real estate market

However, over the past week, there was a substantial jump in both benchmarks: 6.4% in the S&P 500 and 7.5% in the Nasdaq-100. Given the higher representation of "high-conviction" tech stocks in the latter, this is natural. After all, investors have been conditioned to pile into "tech" over the past decade. However, there's a fair-to-strong likelihood that this broad market recovery might not be sustained: almost the entirety of the week-on-week rise was attributable to Friday's big rally.

The idea that this rally will be sustained has almost no buyers in Wall Street: Wolfe Research, for instance, noted that this was due to deeply oversold conditions being disposed of (incidentally: this is a pretty fair summary for the last few rounds of "Friday bumps" seen in tech stocks as well). Wolfe Research continues to maintain an intermediate-term bearish outlook and states that the next phase would be driven by rising recession risks and downward earnings revisions.

This week will see a host of data being released, including May updates to home sales, the Personal Consumption Expenditures Index, the Purchasing Managers' Index, Eurozone unemployment rates and inflation statistics. Furthermore, first-quarter GDP growth rate is expected to be finalized and there's an expectation that the 1.5% contraction in the US economy will be confirmed. 

The Street is cautious and for good reason: minute improvements will likely not find a lot of takers for a sustained rally. 

For those looking at Wall Street analysts' ratings for many high-conviction stocks and wondering why many of them are still on "Buy", it bears noting that these ratings are derived from the company's balance sheet and financials as opposed to the stock's current valuation. Fund managers and prominent investors have voiced concerns about overvaluation in the U.S. equity market for almost 5 years now.

Overvaluation divorces the stock's performance from the company's, with the latter taking outsized cues from the latter in the best of times and finding little purchase in the worst of times. 

In Conclusion

The Street is wise to be cautious and retail investors should be so as well. Given how inflationary concerns have still not been addressed, it would be a good time to conslidate and consider the situation carefully. For those wishing to capitalize on the churn evident now in tactical trades, this would be a good time to consider the $LS 5X LONG SPY ETP(SP5Y.UK)$ and the $QQQ5 for a +5X daily-rebalanced exposure to the S&P 500 and Nasdaq-100 on the upside and the $QQ3S and $SPYS for a -3X daily-rebalanced exposure to the same on the downside.

NOTE: I also write about on global business, markets, Asia (+ India), culture, trends and how they tie in together on https://sandeeprao.substack.com where I cover each subject with no nuance absent in any single media source generally provides. I dig deep into a topic whenever it becomes interesting to do so.

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