You’re at the movie theatre. You sat through 10 minutes of cinema trivia and 20 minutes of trailers. After a half-hour, the lights finally go down. It’s “feature presentation” time.
The names of the studios and their logos come and go in rapid succession. Then: White letters on a solid black screen. A news anchor reads them, above static: “Stocks edged higher in volatile trading as investors considered the potential for a deadly respiratory illness to spread, even as China moved to contain the outbreak…”
More static. Silence. Then a fade-in to the desolate remains of a once-bustling metropolis. Maybe it’s London. Maybe it’s New York. Maybe it’s Paris. A somber voiceover: “It started in Wuhan. The government said it was contained. Within two weeks, the shelves were empty. By the third week, bodies were piling up in the streets. On the fourth week, the last news broadcast cut out. By week five, there was no electricity”.
We’re kidding, of course.
But after the last three days, it’s hard to read market wraps from the main financial media outlets without imagining how the copy would sound as an intro to a zombie apocalypse movie. The bit above is actually from Bloomberg. Here’s the full quote:
U.S. stocks edged higher in volatile trading as investors considered the potential for a virus that emerged in China to eventually dent economic growth. Oil tumbled on concern the market is oversupplied. The S&P 500 Index ended the day up less than 0.1%, lifted by gains in technology shares and positive earnings reports but held back by concern that the deadly respiratory illness could spread, even as China moved to contain the outbreak.
The truth is, nobody knows whether the mysterious new coronavirus which has dominated the news cycle this week is really “contained”. By almost all accounts, it will get worse before it gets better, and when it does, markets will shudder. That may or may not trigger an actual “pullback” in bulletproof US equities, though. We may not even get a “dip” that’s worth buying.
But you’ll note from the bit above that tech outperformed again. Wednesday marked the ninth session in 11 of outperformance.
Carrying on about the new tech bubble feels like beating a dead horse with everything we’ve written on the subject this month, but as that simple visual underscores, this is a case where posthumous equine abuse seems warranted.
The Nasdaq 100 is up 5.2% in January. If you round up December and November to the nearest tenth, this is the fourth straight month during which big-cap tech has rallied 4% or more.
Here, for reference, is what happened the last four times the 14-week RSI on the S&P Info Tech index reached 82:
As a reminder, that “nasty” call from Canaccord is a tactical one – their overall tilt is bullish with a 2020 SPX target of 3,440. The problem is simply that things have run too far, too fast.
“History has shown that either a long-duration consolidation period or a nasty pullback can help relieve market excesses, and we have evidence the move higher in Tech has created the type of environment that generated temporary corrections in the pre-dotcom era”, the bank said this week, on the way to suggesting that once the shakeout is done, it would make sense to put the “offense back on the field” once there’s “a resolution of the extreme overbought level of the major market indices”.
The point is that even those who are bullish for fundamental reasons recognize the potential for a swoon. And everyone seems to agree on where things are the most stretched. The latest edition of BofA’s Global Fund Manager survey has tech and growth as the most crowded trades by a mile.
“Long US tech and growth” garnered 50% of the responses. The next closest on the “most crowded” list was long US high grade bonds, at just 19%. Short vol. managed to capture 14% and long USTs 11%.
The same survey found a net 2% of investors saying they’re currently taking higher than normal risk levels. That, BofA’s Michael Hartnett pointed out on Tuesday, is “the largest risk appetite vs. benchmark since Mar’18”.
On Wednesday morning, we spent a few minutes documenting the extent to which more and more metrics suggest both pros and retail are maxed out, although we included an obligatory caveat to acknowledge that you can always find measures which seem to say there’s plenty of scope for re-leveraging from investor cohorts that have missed the proverbial boat. Somewhere, there’s always “money on the sidelines”, it seems.
Even amid the warnings, you don’t hear much in the way of shrill cries. BofA’s Hartnett, for example, stuck with the same line in the fund manager survey as he did in a note last week. “We stay irrationally bullish risk assets until peak positioning and peak liquidity incite a spike in global bond yields and the ‘big short’ opportunity”, he wrote Tuesday.
As for our cinematic contagion thriller, masks and hand sanitizer are selling out in China, with reports of hour-long lines at drugstores.
Bloomberg sounds an ominous tone in yet another passage that would be right at home in the opening monologue to a feature film. “China took dramatic measures Thursday to stop the spread of the virus by halting travel from Wuhan, the city of 11 million at the center of the outbreak”, the latest in a series of breathless updates reads. “Outbound flights and rail service from the city have been suspended, as well as travel by bus, subway and ferry [while] public gatherings through the holiday period have been forbidden”.