A Wall Street expert says the dramatic shift in stocks last week reeks of investor complacency — and warns that many favorite trades remain vulnerable to losses
- The popular momentum trade that involves buying market winners and selling losers suffered its largest one-day outflow in over three decades last week Monday.
- This dramatic shift marked a departure from stocks geared towards working from home, and reflected investors' excitement about an effective vaccine.
- But Peter Tchir, the head of macro strategy at Academy Securities, says complacency abounds because numerous risks stand in the way of a return to normal.
- "I think we should expect market weakness to be the main theme because rates, risk, and run-offs are all likely to weigh on the equity market here," he said.
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While the S&P 500 was touching new intraday highs last week Monday, another historic record was breaking beneath the surface.
The momentum trade — which bets on the market's winners and against its losers, and has mostly favored large technology stocks for several years — suffered its largest outward rotation since at least the mid-1980s, according to JPMorgan.
Investors bolted into economically sensitive cyclical stocks following the news that Pfizer's COVID-19 vaccine was more than 90% effective in a large study. The premarket announcement capped off a weekend that brought some closure to the US election as major television networks called it in favor of Joe Biden.
Although these two headlines brought investors some much-needed relief, one strategist says the news has amped up a sense of complacency about what happens to the market next.
"Right now, I'm a little bit bearish on the near-term because I think there's too many hurdles for the market to cross and everyone got a little too bullish in the past week," said Peter Tchir, the head of macro strategy at Academy Securities, in a Bloomberg Radio interview.
Tech, rates, and run-off risks
He further observed in a recent note that big and small investors who were cautious about the market in the run up to the elections are now eager to make bullish calls about the next couple of months.
But it is not just the exuberant sentiment of the punditry that has him concerned. He pinpointed three risks that serve as a reality check to the bulls at best, and at worst, portend a market sell-off in the near term.
The first was that investors — including the online retail traders who took markets by storm this year — may be losing their appetite for big tech.
One proof point he observed beyond Monday's vicious rotation was that the Nasdaq 100 peaked on September 2 while non-tech-heavy indexes have advanced towards records. Many of the Nasdaq's tech components were tethered to the work-from-home trade that thrived earlier this year.
"While more difficult to see, since part of the bearish view is based on the rapid rise in COVID cases, expect WFH stocks to underperform," Tchir said. He added: "Positioning is extreme and you can only buy so many exercise bikes or do so much online, and the hope of a vaccine will also play a factor."
Secondly, Tchir expects Treasury yields to continue to rise and eventually pressure the growth stocks that benefitted from low interest rates.
Last week, the 10-year hit 0.97% and was at its highest since March. Tchir sees the benchmark yield eventually rising to 1.25% because some form of fiscal stimulus may be in the offing and because the Fed is cautious on expanding its already massive balance sheet.
Lastly, the elections are still not over, believe it or not. Two runoffs in Georgia that are slated for January will determine whether the Senate tilts Democratic or Republican — and they'll consequently shape what Biden is able to achieve through Congress.
Until these all-important races are finalized, Tchir says investors will find it challenging to make big bets on the basis of additional stimulus.
"I just don't see how we're going to get meaningful stimulus before then," he said. "And there are so many uncertainties. Although I firmly believe we will get that infrastructure spending, there's a lot to go on before then."
For those who want to stay invested, Tchir says the "return to normal trade" should prevail over the work-from-home theme, in line with the historic momentum rotation last week Monday. In terms of specifics, he pinpointed small-cap and value stocks as attractive parts of the market. Financials should benefit because the housing market is strong, he added.
"Having said that, I think we should expect market weakness to be the main theme because rates, risk, and run-offs are all likely to weigh on the equity market here," he concluded.
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