Here we go again.
It’s probably fair to say that the pro-cyclical rotation witnessed earlier this month was another head fake. That doesn’t mean it won’t reemerge soon (with a vengeance even), but for now, we’re right back to the same, old familiar dynamics in terms of the curve and market leadership in equities.
There is perhaps no better example of this than the Nasdaq 100, which is outperforming both the S&P and the Russell 2000 on the week (bottom pane). Within the Nasdaq Composite, just 62% of stocks are trading above their 50-DMA, down sharply from levels seen a few months back (top pane).
These are the kinds of stats that raise alarm bells about breadth and the top-heavy character of a rally which saw Apple breach the $2 trillion market cap milestone this week.
“Another 10% rally in Apple’s shares will make it as valuable as the Industrials, Consumer Staples, and the Russell 2000”, JonesTrading’s Mike O’Rourke marveled, on the way to noting that “more than 90%” of the $1 trillion in value Apple has added since first breaking the $1 trillion ceiling two years back is attributable to multiple expansion.
“Less than two-thirds of Nasdaq Composite members are up this month”, Bloomberg’s Heather Burke noted on Thursday, adding that “Apple has been responsible for over one-quarter of gains and a combined Apple, Tesla, Amazon, and Microsoft almost 40%”.
Comparing the Nasdaq 100 to its equal-weighted counterpart shows the former outperforming for four consecutive weeks. “Level the playing field and the true weakness shows itself”, Bloomberg’s Andrew Cinko frets.
“Right on message with the recent US rates stabilization and bull flattening, we have now seen [our] US Equities ‘1Y Price Momentum’ factor rally +14.8% off of last Tuesday’s lows, led by ‘Secular Growth'”, Nomura’s Charlie McElligott says. “The rally has now largely ‘reversed the reversal'”.
As ever, it’s not clear if this is good news, bad news, or neutral. Earlier this month, I suggested that due to the massive weighting of the titans, the idea of cyclical value taking the baton may have been rendered almost nonsensical.
Here’s the question: what if a sustainable rotation isn’t just elusive, it’s actually impossible? Food for thought.
Note that things have the potential to get “interesting” (so to speak) starting next week.
“The $Gamma seen in QQQ options remains rather ‘extreme’ at 87.3%ile as we have rallied violently to upper strikes, which in conjunction with 99.3%ile $Delta and now an expected 58% of the Gamma rolling-off after this Friday’s expiration makes the case for potentially ‘binary’ price-action next week with a catalyst in either direction”, McElligott went on to say Thursday.
That doesn’t have to be bearish. It just means the door is open to wider trading ranges, for better or worse.