While consensus seems united around the notion that buying any and all dips in equities is as good a “strategy” as any in an environment where policy support is perpetual and the “state of exception” (i.e., the suspension of price discovery) is seen as at least semi-permanent, there are still unresolved questions around the sustainability of a rally spearheaded by cyclical value.
In the simplest possible terms: This is new territory. Tech, and other manifestations of secular growth, have led the way higher for so long that many younger market participants can’t remember a time when things were any different. The cohort of market participants who can honestly say they were actively trading when bonds weren’t in a bull market is small indeed.
So far (i.e., post-election), benchmarks have been able to grind higher, hitting new record after new record even as bond yields surged and the Nasdaq 100 fell into a mild correction. But, again, the sustainability of this brave new market zeitgeist is questionable.
“Nasdaq / QQQ’s continue to be the epicenter for how broad index movement could get weird,” Nomura’s Charlie McElligott said Tuesday. The discussion is technical, but that short quote is just as applicable in a broad sense as it is in the more narrow context of positioning extremes.
McElligott noted that $Gamma is extremely negative at just 3.8%ile and with this ‘extreme’ negative $Gamma in QQQ, we see Dealers increasingly moving into ‘short Gamma vs spot’ territory as well.”
One of April’s defining characteristics was an abatement of the bond selloff in the US and an attendant recovery for tech.
The simple figure (below) gives you a sense of things. Tech outperformed small-caps handily last month — it was the first meaningful outperformance since September, when the summer 2020 tech melt-up finally buckled under its own weight.
Just two sessions into May, and things are getting a bit wobbly for tech again, even as bonds have proven remarkably resilient in the face of a veritable deluge of upbeat economic data in the US.
According to a Nomura gauge, tech sentiment has plunged. “Following what had been a strong recovery in April for the Tech sector and ‘Secular Growth’ (aided by the stabilization in USTs and relative bull-flattening off the extremes of the March Rates selloff / bear-steepening), our Nomura Sector Sentiment analysis shows that WoW, we have seen Tech sector sentiment collapse (again),” McElligott said Tuesday, noting that the sector gauge dropped from an 85.1%ile score just a week ago to 53.9%ile Tuesday.
This is a (potential) problem for two reasons. First, the data stateside is likely to come in even hotter from here, potentially reigniting the rates selloff and/or catalyzing another rotation in favor of cyclical value. Second, big-tech just turned in blockbuster earnings and it doesn’t seem to have mattered, at least not when it comes to catalyzing any kind of dramatic “reminder” rally (i.e., “Don’t forget: These are the stocks you have to own because irrespective of today’s macro zeitgeist, tech is the future.”)
With the FAAMG cohort still dominating the index (SPX) and comprising an outsized portion of top-line growth (figure below), it’s far from clear that the passing of the proverbial baton will go smoothly.
McElligott underscored the point. “As usual, it looks like the connection between legacy ‘duration proxy’ Tech sector / ‘Secular Growth’ is the risk into the next two months of ‘peak’ US economic data base-effect, with this week’s heavy US data slate culminating in the critical Friday NFP, which is expected to be a WHOPPING +++ print.”
Still, as long as bonds take it all in stride, an acute selloff in tech may be averted. As BMO’s Ian Lyngen and Ben Jeffery put it Tuesday, “if the myriad bond bearish factors brought to bear thus far throughout 2021 have failed to recast 10- and 30-year yields to an even higher range on a sustainable basis, we struggle to envision what could.”
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