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Megacaps

Is the Market Deluding Itself with a Soft Landing Fantasy?As markets surge against expectations, many are starting to believe that the impossible might unfold. The unusually low fund allocation to equities reflects a market sentiment plagued by fear, yet mega caps are continuing to rise against expectations, making some investors feel left behind. With GDP figures beating expectations and headline inflation plummeting, markets are now starting to believe the soft landing narrative. Can the Federal Reserve, after decades of economic engineering, finally dodge a recession? The bond market remains skeptical. When the yield curve inverted, everyone thought a recession was imminent. However, many overlook the lag between the onset of the inversion and an actual recession. Depending on historical context, a recession can either hit while the yield curve remains inverted or much later, once it has normalised. Thus, relying solely on the yield curve as a recession indicator can be misleading. Nevertheless, history has consistently shown that a recession follows the inversion at some point. However, the human psyche is notoriously impatient. If a predicted event doesn't manifest promptly, the market tends to discount its possibility. Remember, most people buy at tops and sell at bottoms. So, the real question isn't whether a recession will happen, but rather when. Why and When Could a Recession Happen? The Federal Reserve holds significant influence over this timeline. As long as interest rates hover around 5.5%, the recession clock ticks faster. With headline inflation plummeting (orange line) and inflation expectations paralleling this descent (blue line), we must understand what caused inflation initially to gauge where it's headed. The inflationary surge was mostly driven by the excessive expansion of the money supply. Examining the first derivative of the US money supply (M2) shows a rapid expansion followed by a subsequent decline. Comparing the growth rate of the money supply (yellow line) with the CPI year-over-year (orange line) reveals a 16-month lag. If this lag remains consistent, there's significant potential downside to inflation. Yet, the Fed continues to hike rates, despite projections of disinflation and deflation. This is because the Fed's job isn't to predict the future, but to respond to current data. Indicators showing a robust labor market and elevated Core PCE caution against prematurely reducing rates. It would be wise for the Fed to await signs of weakening in these indicators before contemplating rate cuts. This could potentially take a while to materialise, especially since unemployment doesn't seem poised to weaken in the immediate future. Unlike previous business cycles, the current situation stands out due to the Job Openings and Labor Turnover Survey (JOLTS) data. There remains a significant number of job openings for every unemployed individual. This bolsters the resilience of the labor market, making rate cuts less probable. Furthermore, the Core Personal Consumption Expenditure (PCE) - a lagging indicator - remains historically high and resilient. Powell has emphasised the Fed's intent to avoid repeating the same mistakes made in the '70s, suggesting we should expect higher rates for longer in order to permanently get Core PCE to 2%. He's also highlighted the relative ease of stimulating the economy out of a recession compared to raising rates, implying it might be more straightforward for the Fed to rein in Core PCE by inducing a recession. Similarly, the government can't afford the risk of the Fed raising rates later on. Considering the government's dependency on low-cost borrowing to manage interest payments on existing debts, higher future rates could pose a big challenge. Fortunately, the Fed uses the Reverse Repo (blue line) as a strategic tool to bypass any potential liquidity crisis until they are able to finance the government's balance sheet (orange line) with cheap debt once again. Given that interest expenses are nearing 1 trillion USD, the Fed will inevitably have to cut rates to zero and initiate Quantitative Easing (QE) in the future. Remember, the sole limitation to Keynesian economics is inflation. Hence, it's logical for the Fed to avoid risking a resurgence of inflation. In essence, a recession might be essential for the Fed's future assistance to the government. Deciphering the Stock Market's Puzzle Despite Powell's frequent emphasis on a 'higher for longer' stance, the market remains skeptical. This is alarming, especially as the full implications of a 5.5% rate haven't been fully experienced by the economy. Once they manifest, job openings will plummet, unemployment figures will surge, and the 'soft landing' illusion might crumble. Historically, such scenarios are common when real rates reach unsustainable levels. Fortunately for investors, there seems to be room for the AI bubble to continue. Markets typically peak about a month before a sustained increase in unemployment. Hence, forward-looking unemployment indicators like job openings, initial claims (blue line), and continued claims (orange line) are crucial for those wishing to divest before a potential market downturn. In the current scenario, it might be wise for investors to stay away from higher-risk assets like small caps and cryptocurrencies. Historically, these haven't performed as well as mega caps during liquidity crunches. Investors might want to reconsider taking on additional risks unless there's a sustained surge in global liquidity (yellow line). Conclusion: A Time for Caution and Opportunity In conclusion, even though a recession seems inevitable, mega caps may continue their upward trend until the labor market reveals signs of distress. Therefore, it's crucial for investors to closely watch leading unemployment indicators and central bank balance sheets to ensure they're well-positioned for both the upcoming market downturn and the subsequent recovery. Disclaimer: This article is intended for informational purposes only. It is not intended to be investment advice. Every investment and trading move involves risk, and you should conduct your own research when making a decision. Past performance is not indicative of future results.
NASDAQ:NDX
by QuantitativeAlpha
Smalls B4 MegasIn both 08 crisis & pandemic crash, small caps consistently going up for several months were the proof that the bears were done. That has not happened yet for this recession! Notice small caps are at best going sideways, & starting to trend further down, while ^RU50 Mega caps (like XLG) think the worst is behind them & Bulls saying don't miss the party. But it's not the end of the Bear market. If Main street is still struggling, & we know & see it is all around us, then Wall street is just having a minor rally that will smack them back to reality soon enough. Momentum doesn't lie, so watch the Volume & trends!
AMEX:IWMShort
by UnknownUnicorn39070801
2
The rotation from MegaCaps to SmallCaps is in FULL swing.Disclaimer: This chart shows how Non-Nasdaq100 Companies have fared vs Nasdaq100 Companies. I personally interpret this as the "SmallCap vs MegaCap Index". The recent days have been incredible. We're witnessing the probably strongest rotation from MegaCaps to SmallCaps the market has ever seen. 🙌 As some of you might now from my previous ideas - we've been in a bear market for a year , starting on February 11 2021: That bear market seems to be at an end now while the bear market for MegaCaps is just getting started 🐻. Trial number 3 seems to be successful - other's have miserably failed, like this one in August: While MegaCaps have tanked, normal stocks have rallied 🚀: Disclaimer: The chart you can see above is the Nasdaq Composite Index ( IXIQ ) cleaned of Nasdaq100 companies (to the best of my knowledge). It's definitely a good time to be out of ETF's and be in individual stocks that have reasonable valuations as compared to most US MegaCaps. As always, let me know your thoughts. 🤯
TVC:IXICLong
by The_Silen
We've been in a huge bear market since February - nobody noticedEver wondered why your stocks keep going down although US Indices are at an All Time High? Here is (most likely) the answer! I've managed, with some degree of inaccuracy, to extract Nasdaq100 companies from the Nasdaq Composite Index . This basically represents all stocks on the Nasdaq Exchange excluding Megacaps and SuperLareCap stocks. The result is truly mindblowing - We've been in a huge bear market since February. During the last week, normal stocks have crashed with intensities not seen since the Corona Crash. 🔥 Disclaimer: The ratios used in the formula are just guesses - Tradingview doesn't provide any Index/Stock Exchange Market Cap data (yet). With those I could figure out the exact formula.
TVC:IXIC
by The_Silen
14
The bottom for SmallCaps might be inWe might be in the midst of a trend reversal for a rotation that has been going on since March: Megacaps and SuperLargeCaps have been going higher, while everything from SmallLargeCaps to NanoCaps has been on the decline. We've had many days recently where indexes seemed to go higher when the majority of stocks seemed to decline. That was, because we've seen huge increases in MegaCaps and SuperLargeCap companies recently, which have used so much money on the market that many, if not most SmallCaps have litterally have "their blood drained". Analyzing the 2,5Y Forward P/E and P/S rates of MSFT & AAPL and adding a little bit bonus for small debt/equity(MSFT) and a little malus for high debt/equity(AAPL) I have come to the conclusion that they're trading roughly 100% over market average valuation for this kind of analysis. Now, considering the fact, that both these FAANG giants are quite expensive at current valuations and seeing most SmallCaps trading significantly below market averages one starts to wonder when a trend change might be in. The answer is: probably now. Or soon. Subtracting Nasdaq100 Index( OANDA:NAS100USD ) (that tracks only the top100 companies of the NASDAQ exchange) from the Nasdaq Composite Index(that includes all Nasdaq listed companies) You're left with a quite unique picture: How Non-Index-Nasdaq-Companies are trading vs Nasdaq100 companies. This, in theory, can be mostly translated into how SmallCaps are faring vs MegaCaps and SuperLargeCaps. As you can see, we have been on a decline for months, with quite a consistent trend resistance (the yellow line). We're also trading near 03/2020 (Corona crash) & 09/2020 (Major Tech correction) lows. We seem to have broken the Trend resistance (but better wait for real confirmation on Monday/Tuesday) All of these facts lead me to believe the bottom for SmallCaps is in and MegaCaps and SuperLargeCaps are ahead of a major correction. Let me know your thoughts! :)
TVC:IXICLong
by The_Silen
2