Market's have gotten off to a rough start especially the tech sector. In a recent post I mentioned how it was suprsing to have seen the NASDAQ held up so well in 2021 despite the bloodletting in the speculative unicorn tech stocks which had paralells to the 2000 bubble bursting by which the NASDAQ eventually gave up the ghost in the last 3 months of 2000. Could it be that now we are seeing the same type of fallout happen in tech and that the 2000 paralell is actually still in tact? There's some strong evidence that suggests this could be the case but there's still some notable holdouts, the biggest one being that it was a collapse in tech earnings which ultimately did in the sector which was the result of over-investment in the telecom. If you look at the tech leaders of today , the FANGS, they each are dominant players in their respective spaces which aren't nearly as interconnectd as the tech leaders in 2000. The latest selloff in the tech space had been directly a result of the spike in longer term government bond yields thanks to a hawkish Fed pivot early in the year. This resulted in rug pull which was amplifed because of of poor sentiment positioning conditions which I noted in my last post. There's some signs that sentiment positioning is improving however. According to BOA, global fund mangers have significatnly cut back on their tech exposure this month, in fact, they have the most underweight tech since Dec 2008! And what did they pile into? Financials of course, which has been the second strongest performer, energy being number 1. Financials too are now getting hit. Now, it's one thing to dump tech because of poor fundamentals i.e. earnings but it's another to do so simply based on the yield of the 10 year s going from from 1.5% to 1.85% . Of course, the fear is that it's yields are going to go even higheer. At first this sell-off looked feels knee-jerk in nature and it so happened at time when the market was vulnerable in the ST due to poor positioning/sentiment. But now there's so much calls for the Fed to "do something" in order to stop inflation and that of course means aggresive rate hikes. No wonder the market is spooked. But the sad thing is, the Fed is not the main cause of inflation (aside from housing) and they can't fix it other than by creating a recession. The inflation is being caused by supply contraints and excessive government spending. Raising rates abruptly can tank the economy and therefore demand. Sure, that will curb inflation but not by addressing the actual underlying cause. That's like getting gangreen on your toe and cutting off your entire leg to treat it.
On a bigger picture perspective, there's definatley things to be concerned about in 2022. We have a hawkish fed that will be raising rates sooner than what had been expected just a few weeks ago. One of the risks I mentioned earlier when discussing the expectations for 2022 was for a revising of rate hike expectations to the upside. The Fed is being hawkish at a time when some forward looking indicators of global growth and therefore inflation will be slowing. That clearly puts the risk of a policy error much higher. The amount of fiscal stiumuls is also not going be as much as last year but it's not going to be abruptly taken away either, however, that's still an incremenatl detractor to growth. So it definatley feels like the market is walking on a tightrope here and 2022 could be a hangover hear as stimulus is being pulled back. Earnings ultimatley will be the deciding factor longer term but because valuations are historically so high, along with margin debt, it might only take an modest amount of monetary and fiscal tightening to create a big market decline. If earnings don't implode, once the market sniffs out the end game to the Fed's tightening, things will settle down and the bull market can resume. I can't give the bulls the benefit of the doubt on that. At best, it would appear that a drawn out trading range can hope for during the next 6-9 months. It seems probable we will see something worse. There was too much excesses last year, more so than I had orignally thought. This chart of global fund flows is scary. It seems unlikely this can be unwound without a major correction if not crash. Look at that last peak in 2018 which was a bad year.
The latest rotation of value into growth has been quite vicious lately. Last year we had a back and forth market between value and growth and they basically preformed the same. This year value is clearly ahead so far. Is the back and forth rotation from value to growth indicative of a changing of a the guard wherby value will become the dominant style? It sure that way. There's a lot of evidence that suggests it could be value's time to shine. For about the past 10 years growth has trounched value, with about double the peformance. The last time growth had such a dominance was in 1990s, from 1995-2000 in particular culminating in blow-off peak of the dot com mania. We very well could have whitnessed a blow-off COVID mania with disruptor/unicorn tech stocks and crypto being the bubble that burst.
You can see that the recent value outpreformance last year was a headfake but now it's threatening to break out to the upside. You can also see how back in 2000 a similar pattern occured. Energy and commodities were the largest drivers of the value back then. Will they be again this time? We know the narrative for Energy i.e. oil and gas has been one of secular decline due to the rise of electric veichles but we have shunned energy development for so long and now it's payback. In the ST however it does appear that chasing energy here is not prudent as others appear to be doing right now. Bullish sentiment on energy is quite high. DSI for crude is 92. OPEC is expected to increase supply in Feburary and gas inventories are high.
Bottom line is that I am officially market agnostic if not bearish for this year. I will not be giving the bulls the benefit of the doubt which means I will be tactical and not just stay the course when the market hits overbought conditons. The market sure looks sickly at this moment. Let's see if sentiment surveys and fund flows tommorow finally show signs of capitulation. Tech earnings are slated in the comming weeks. If we finally get some capitulation and energy prices back off we could get a nice snap back rally. The only reason I'm not outright bearish is because we still did not get all the classic signs of a secular bull market top which is inverted yield curve, investor greed and rosy optimism in general. This makes me think that no matter how bad this year gets, it may be salvagable and just turn out to be another nasty correction in an ongoing bull market but I'm not holding my breath on that.
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