Hello friends,
Post the Japanese Yen carry trade crash a couple of weeks back, markets across the globe have been stuck in secondary corrections of roughly 8-16% depth, with a few exceptions (e.g. China, which is in an established downtrend). Lately we’ve seen a uniform but often low-volume drift of indices back near the old Highs (e.g. SP500, SP500 equal-weight, Nasdaq-100, NY-Composite in the US, Stoxx600, AEX, N100 in the EU), again largely led by blue-chips and mega-caps while small- & microcaps are lagging.
The “Great Rotation” has not happened yet – large- & mega-caps led by the Magnificent 7 keep heading the way while smaller-cap more risk-on segments of the market remain laggards. It is very unusual that the same names keep leading cycle after cycle, but in previous concentrated market tops (e.g. the “Go Go” years, the Nifty Fifty, etc.) investors could not rely on the Fed put – which we might see yet again soon.
SP500 (SPX) and STOXX 600: Notice the expanding volume on the selloff and the anemic volume in the bounce back to old Highs:
While European and US Manufacturing appears to be stuck in somewhat of a slump, Services as a group appear to be expanding and in better waters, some of them leading the market (e.g. Utilities, Healthcare, especially biotech & pharma in Europe). As consumer and producer sentiment is down in the dumps, markets are reacting in knee-jerk fashion to unemployment-, inflation data, industry surveys and the now ‘celebrity’ Fed’s idiotic in-between-FOMC-meeting speeches.
While the yield curve is looking to uninvert, Sahm’s unemployment heuristic has been triggered – both recession indicators, the latter of which bears an almost 100% recession predictive capability (rise of unemployment rate by >0.5% over its 12m Lows). There’s been significant corporate layoffs not just in 2023 but also 2024, and consumers and small businesses have become extraordinarily thrifty after a historic episode of currency devaluations, seen in contraction and bearish sentiment. Small business drives the economy, and the latest quarters of GDP growth appear to have largely been driven by government spending and price increases rather than organic growth (US nominal GDP growth from Q2 2020 to Q2 2024 grew 43.8%, while real GDP grew only 20.4% – a ludicrous spread).
However, there are no major signs of financial stress in the bond markets, in fact quite the opposite. And let’s not forget – the equity markets are making local and global Highs, and have been doing so despite negative economic sentiment for the last almost 2 years. They are forward-discounting, large-cap centric, and established trends tend to stay in motion. It might need some stronger point event to turn them, e.g. the upcoming sell-the-news rate cuts expected in September (US), the US elections in November, paired with more or less rate cuts in the EU and potentially soon-to-shift financial liquidity in Japan.
Whatever the case, we need to trade the markets as they come. Hot areas right now are clearly the healthcare and utility industries – leading stocks are NRG, VST, CEG (US Utilities), RNA, DYN, LBPH, ADMA (biotech US) and ZEAL, GUBRA, XVIVO (pharma/biotech/healthcare EU). Another leading group is Scandi O&G – check out Reach Subsea ASA, DOF Group ASA or Beerenberg AS (not shown here). Also Rheinmetall (RHM) is staging an interesting consolidation, for those so inclined. I’m also short a bunch of weak consumer discretionary issues, but a clear long/short bias is still not discernible from market action.
The markets remain difficult to asses, however opportunities exist in the leading groups. Stay alert, manage risk, and stay in tune with what the market is offering.
So long,
TGS