In FOMO Versus FOVA World, Nomura’s McElligott Says It’s ‘Long The Stuff That Can Grow’

“Long the stuff that can grow without a hot cycle versus short economically sensitive names”, Nomura’s Charlie McElligott writes, in a Tuesday note, describing the current market zeitgeist.

Colloquially speaking, investors are torn between FOMO (“fear of missing out”) and FOVA/FODU (“fear of viral apocalypse”/”fear of depression undertow”).

Perhaps the simplest way to illustrate the situation is by reference to big-cap tech versus everything else. The former is gunning for new record highs – “come hell or high pandemic”, apparently.

It’s easy to simply call tech a bubble – again. It was certainly in bubble territory earlier this year, when the 14-week RSI (among other measures) hit levels not seen in decades, and now here we are back in positive territory for the year in the presence of a pandemic and despite the worst economic slump since the Great Depression.

QQQ – the Nasdaq 100 ETF – closed with a market cap in excess of $100 billion for the first time ever last week.

You’re reminded that just five stocks (MSFT, AAPL, AMZN, GOOGL, FB) now account for over 20% of market cap, a figure that exceeds the tech bubble peak.

Apparently, the five horseman of the new tech bubble are more powerful than the four horseman of the literal, real-world pestilent apocalypse.

McElligott observes that when you take a look at US equities index options, you find that this week, for the first time since February, both SPX/SPY and QQQ net Delta and Gamma are positive. “The ‘net delta’ position in Nasdaq [is] extremely long at +$11.5 billion, which is a 97th %ile rank since 2014”, Charlie says.

A historical analog of QQQ Delta >95th percentile suggests incrementally negative returns out to 12 months, but notwithstanding that, McElligott notes that his tactically bullish call on the US equities ‘1Y Price Momentum’ factor into the summer is “raging on, as investors continue to reward ‘duration sensitive’ longs”, where that means the Nasdaq, secular growth, min vol and defensives, versus shorts and underweights in anything perceived as “economically sensitive” – so, cyclicals, value and high beta.

While you may have seen a headline (or two or three) about Charlie being “bearish”, that’s actually not entirely accurate. As I detailed last week in my extensive (and scrupulous) assessment of his summer outlook, he did say that his sense is “lower across the summer months”, but he also said the following:

I then expect heightened potential for a “risk-on” Oct-Dec period to follow thereafter.

It seems that the obvious trade the market is putting-on again so far in May and ahead of the Summer is a resumption of the “Everything Duration” dynamic within Equities–long Bond Proxies (Sec Growth and Def / Min Vol) vs back again short Cyclicals / Value / High Beta as a preferred hiding-spot / comfort-blanket–as such, I’d likely prefer to express this “Momentum” view than an outright “bearish Equities” one.

He reiterates that on Tuesday, noting that “playing ‘Momentum’ from a factor market neutral perspective is a ‘cleaner’ way to express [any] sentiment downshift… than attempting to play for outright downside at the index level”.

This is why the nuance is important, and why you have to make sure you drill down into the details, rather than just following headlines.

“It will remain challenging to get a massive index down move as long as the Tech heavyweights are performing like this, with such persistent investor sponsorship”, Charlie goes on to say Tuesday, driving the point home.

(Nomura, BBG)

Of course, that doesn’t mean he’s “bullish” either. Rather, it means precisely what he said last week, which is that with all the blood squeezed from the proverbial stone in terms of what he colorfully described as a “get constructive again starter kit”, the market could be bereft of tailwinds at a time when earnings revisions are likely to deteriorate further and macro realities begin to set in.

And so, here we are back in a familiar position: Faced with a broad market that’s being propped up by a handful of big-name tech behemoths, even as the fundamental backdrop is deteriorating.

We’ve been here before. In fact, this has been the regime for years. The “slow-flation” environment has consistently favored the “stuff that can grow without a hot cycle” (as McElligott puts it) along with myriad other equities expressions tethered to the vaunted “duration infatuation” in rates.

It helps that the “stuff that can grow” is also the “stuff” that fascinates retail investors, who are always willing to give the likes of Apple, Amazon, Facebook, and Google the benefit of the doubt.

You can’t really blame investors for that. While their business models aren’t immune to COVID-19, the tech titans have a stranglehold on all aspects of our digital existence. These monopolies permeate nearly every facet of daily life. And for millions upon millions of Americans, digital life is the only kind of existence that’s possible right now.