Last Monday, we gave capitulation day its due respect. Capitulation day aside, the Options360 Concierge Trading Service grabbed some long positions in the SPDR S&P 500 (SPY) and IBM (IBM). This was in anticipation of an oversold bounce. I once again think that this rally’s coming during what’ll be a longer downtrend rather than a low.
Granted, this past week’s rally has been swifter and larger than I anticipated. The Invesco Nasdaq 100 (QQQ) has soared some 8% in the past four trading sessions; the best stretch since March 2020 lows.
The initial burst was powered by a bounce in the most beaten-down stocks — the profitless/disruptors we’ve discussed so frequently — which remain in a bear market and probably won’t revisit their 2021 highs for years to come, if ever.
However, once again what’s really propping up the indices are the handful of mega-caps that we can now call “MAGA” or Microsoft (MSFT), Apple (AAPL), Google (GOOGL), and Amazon (AMZN). Netflix’s (NFLX) huge drop last week officially broke the original FANG gang.
Last Thursday, AAPL and MSFT delivered strong earnings with both stocks popping some 8%, which helped lift the QQQ up 3% on the day. Friday saw strong follow-through on heavy volume and 8-1 positive breadth. Likewise, Monday and Tuesday saw bullish action as the buying seemingly shifted from short-covering dead cat bounces to real buying as month-end inflows got put to work.
This morning, the market gapped higher on the heels of a strong earnings report from GOOGL, and their announcement of a 20-for-1 stock split, leading to speculation it will be added to the Dow, which lifted the other MAGA names with it. Basically, these behemoths have become safety stocks as the companies amazingly manage to grow revenues at a 40% clip; despite their size. Or, one could say that due to their size as they continue to take market share or acquire smaller players. Tonight, Facebook and AMZN report, and we’ll see if they can carry their weight.
However, what’s making me cautious today is that once again breadth is turning negative, and at midday, the QQQ also did the same. The biggest losers are once again those profitless/disruptors.
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I’m thinking that the shift from a decade of the Fed’s ‘free money, to draining liquidity and raising rates, shouldn’t be underestimated. But, like a large ship, it’ll take time to fully come about and be priced into the market.
Similarly, just as investors remained scarred for years after the financial crisis, it’ll take time before people relinquish the ‘buy the dip’ mentality. The nine true bear markets in the past 100 years— where the market declined over 30% — lasted an average of 21 months. But, within that nearly two-year period, they had an average of seven distinct rallies of 7%-plus. As mentioned, we just enjoyed an 8% rally over the past week. If nothing else, this shifted indicators from deeply oversold to overbought in near-record time.
The big question when it comes to measuring the market by the major indices is how will the MAGA names trade from here on out. Yes, given their growth they trade at a reasonable valuation of around 30x forward p/e. But that is still nearly double their p/e ratios from 2010-2016. Since then the zero rate policy and Fed liquidity injections became a fixture of the market. That’s about to change.
As I tried to show in a prior article, first they came for the SPACs and hyped IPOs, then they came for reopening plays, then they came for payment platforms software/cloud..will they now come for MAGA?