Parallels

The Nasdaq touched another new record Tuesday, as a variety of dynamics (both fundamental and technical) conspire to push tech shares inexorably higher.

Apple’s market cap pushed through $2.3 trillion, which, as a reminder, means the company is more valuable than the Russell 2000, which sports a market cap of $2.233 trillion. Zoom took off on a 90° angle, enriching CEO Eric Yuan by more than $5 billion in the process.

Tech stocks are “crashing up”, as it were, in what Nomura’s Charlie McElligott described as a self-fulfilling prophecy.

Read more: Explaining Tech’s Upside Summer Crash

From a wider angle, it’s worth reiterating that we’re currently witnessing one of the most spectacular rallies in history, both in terms of scope and especially velocity.

There are some parallels with historical rebounds, but in most cases the comparisons are skin-deep, at best.

“This rate of recovery is very similar in speed and scale to the rebound in 2009, but this is about the only comparison you can make”, SocGen’s Andrew Lapthorne wrote, in a Tuesday note.

He went on compare factor performance in 2009 to what’s transpired over the course of the post-COVID surge.

“2009 was all about a recovery in beaten up stocks, with a long/short price-to-book strategy delivering 88% in the period post the market low point”, Lapthorne said, adding that while “the losers rebounded, price momentum and high vs low quality strategies suffered as their short legs bounced back sharply”.

In 2020, it’s a different story (figure below). “Yes, we have seen some violent daily swings in Value vs Quality performance, but any trend in factor performance has proved short-lived”, Lapthorne went on to remark.

Meanwhile, you’d be inclined to think that some of the cash coming off the sidelines (see 14 consecutive weekly outflows for the biggest short-duration Treasury ETF, for example), would find its way into popular equity index products.

In that context, it’s worth noting that SPY has seen five straight months of outflows.

Those of you keeping track of recent developments might be inclined to suggest that fund flow data is less relevant than it once was. I talked at length about this in “‘So Bearish, I’m Bullish’“, and I’ll recycle a bit of the language (and analyst quotables) here.

We live in a world of Robinhood traders run amok and bored sports junkies substituting zero-commission day-trading for the over-under. This action doesn’t show up in fund flows, but rather in single-stock trading and petty options dabbling. That, in turn, has knock-on effects.

“The larger multi-month theme of ‘Robinhood-esque’ speculative buying in short-dated, deep OTM Calls continues to iterate my common refrain that Gamma hedging is the most important flow in the market, with the convexity of said short-dated ‘lottery ticket’ options creating an ‘all-or-nothing’ binary-options market behavior into weekly expiries, seen in these increasingly exponential ramps in names like TSLA”, Nomura’s McElligott remarked.

JPMorgan has discussed this in the context of generational preferences. “The older cohorts of the US retail investors’ universe tend to invest in equities via equity funds [while] the newer cohorts including millennials prefer to invest directly in individual equities”, the bank’s Nikolaos Panigirtzoglou wrote, in a June note, adding that “the weaker flow picture in equity funds suggests older generations of US retail investors have been so far more cautious on equities than the new generation as they have preferred to deploy their excess liquidity to bond funds to perhaps take advantage of the value that still exists in credit”.

That trend has continued, with inflows to credit funds still approximating a veritable tsunami up through last week.

Now that I’m eyeballing a longer-term visual, it looks like the last time SPY saw five straight months of outflows was in 2009. Maybe there are more parallels with the post-GFC trade than I thought. It’s funny how these pieces sometimes end up writing themselves into a perfect conclusion.