“Scientists and mathematicians are trained to dig below the surface of the chaotic, natural world to search for unexpected simplicity, structure, and even beauty.”
— Gregory Zuckerman, The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution
This week’s piece is a bit more technically-focused than usual so it will be lighter on words.
Tactical Thoughts: Gold versus Gold Miners
The chart below is of the ratio of the VanEck Vectors Gold Miners ETF to that of gold (the continuous futures contract, using end of day prices). A rising line indicates gold miners outperforming gold.
Outside of a brief period of outperformance in 2016 and up until recently, gold miners have significantly underperformed gold since the financial crisis. Gold miners have a lot of catching up to do gold. Tactically, however, they look ripe for a pull back. Those with gold miner exposures, wanting to maintain precious metals exposures, should, we think, rotate some of the exposure into the commodity.
Technical Damage: Tech Versus the Rest
Only four times since the start of the US equity bull market, in March 2009, has the NASDAQ 100 Index fallen so far, so quickly as it has done in the most recent sell-off. Notably, however, the sell-off has been limited primarily to large-cap tech stocks, and not across the US market.
The first chart above is of the number of constituents within the tech-heavy NASDAQ Index above their 50-day moving average. The second chart above is of the number of constituents within the broader S&P 500 Index above their 50-day moving average.
Unlike in March and in the fourth quarter of 2018, the drop in the number of S&P 500 companies trading above their 50-day moving average is far shallower than that in the number of Nasdaq constituents trading below their 50-day moving average. Moreover, if we stripped out the tech names from the S&P 500 Index, it would be even clearer that the sell-off outside tech was hardly noticeable.
Whenever the leading stocks of a bull market long running stock sell-off more than the rest of the market, one must sit up and take notice. However, given the notional amounts of options written on single tech names, irrespective of whether it was driven by a ‘whale’ such as Softbank or retail pyjama traders, we are not overly concerned. Moreover, looking at the broad US market, we see the recent sell-off as healthy and commensurate with the market having become stretched given the liquidity dynamics.
The two charts above are of the number of constituents of the NASDAQ and S&P 500 indices making new highs less those making new lows.
The run-up prior to the recent sell-off was so strong that very few stocks across both indices have recorded new lows — and most that have, probably have done so for idiosyncratic reasons.
Possibly the recent moves are early signs of rotation out of tech and into other sectors. While there is reason to be sceptical, there are sectors such as housing and real estate development that warrant increased exposures.
Housing, typically leads the market particularly at turning points, is booming in the US. Low interest rates, a re-calibration of our work lives away from the office and migration away of gateway cities, such as New York City and San Francisco, is leading to an acceleration in housing activity. If pace of activity sustains or accelerates further, there will be spill over effects into other parts of the economy such as:
1. Conspicuous consumption — houses in cheaper markets are larger and can be filled with more ‘stuff’
2. Automobiles — germaphobes are like to avoid public transport and a prerequisite to living in the suburbs is having an automobile
3. Manufacturing — someone must make all that ‘stuff’ people want to buy
Recent data releases such as the purchasing managers’ manufacturing index, Redbook retail sales, auto sales, all appear to be validating the above. Moreover, payroll numbers and initial jobless claims are all indicative of the improving state of the US consumer.
The US equity bull market still has legs.
Thank you for reading!
This post should not be considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.