FANG’s $61 Billion plunge makes today the “largest on record” – Bloomberg

Let’s talk about volatility… All-time lows from December 2006 just hit in VIX day after Thanksgiving on one of the lightest trading days of the year … And three days later a vicious rotation takes place from tech giants/momo/growth plays into value stocks like retail, packaged goods, media, transports, small caps and banks. VIX itself was only up 7% today while SPX was flat. Still, it’s a start.

My Latest Article with SeeItMarket: Forced Selling highlighted the growing risks. There was not even an indication in premarket activity of impending Forced Selling in QQQ SMH XLK or the Viscious Rotation that would result in IYT XLP XRT XLI XHB XLF KRE. Next SPX?

US indices closed at new all time highs on Tuesday. The gain was so strong that SPX closed 25% above its Bollinger Band width. This is rare. There have been only 5 similar instances since 2009. None marked an exact short-term top in the market, but all preceded a fairly significant drawdown in the week(s) ahead. Risk-reward over this period was very poor. The Fat Pitch

Although I am not a raging bull on small caps this late in the economic cycle, I realize that tax reform, a lower corporate tax rate, a stronger U.S. dollar, and rotation from high PE tech giants to lower PE value plays is better for the market health if we create a two-way market based on fundamentals that drive stock prices higher not sentiment. Just saying. I think it’s possible this theme of outperformance from underperformers will win in 2018.

Put another way, my trading colleague @bamatrader recently tweeted his thesis on small caps and it’s worth considering:

Small Cap value was up 20+% in 2000 when NDX crashed 40%..

Tech is so overvalued.. and if other areas start to grow faster.. FANG PE average should drop 20-40%..

Again every one of these 5-7 major TECH stocks,. business SUCKS if you compare it to stock.. 10-20% growth is HORRIBLE if your PE is 50-60..

The logic is clear that Tech is oversubscribed; ‘rotation’ talk has made the rounds today: XLK -2%, XLF +2% and so on. But why are they ‘rotating’ before the benefits of those tax cuts? One answer: most expected the bill to fail! But now that it looks likely to pass the full Senate, money is moving. And if tax cuts are not priced in, there could be massive selling of tech, especially if US dollar spikes and with it volatility.  I am not excited about buying financials or small caps ‘up here’ but I have been buying for months oversold retail, apparel and automotive ‘Value Swings’. I added a grocery store today!

China plays like BIDU and BABA were also down big today from 4-7%. I mentioned this theme of China deleveraging in prior posts:

Bloomberg: China is stepping up a deleveraging campaign to make long-term growth more sustainable, at the risk of curbing short-term growth if the consequences prove disruptive. On the other side of the equation, some are concerned the reform moves won’t do enough to get rid of moral hazard. It all adds to the challenges that will greet China’s next central bank chief. And it explains why China is seen in some quarters as one of the top two major risks for the global outlook now.

 

My expectation moving forward: I expect volatility to explode higher in much the same way that today NVDA had panic selling (-7%) or M had panic buying (+7%) today. As China deleverages into 2018, so too will US stock portfolios, and yes, even before tax benefits apply. My thesis was simple moving into the Tax Reform Vote: volatility picks up either way as we likely bought the rumor and now get to sell the news. But selectively. That means the a potential Tech Bust will fuel the Viscous Rotation back into Value. And with that, think of how Passive Investing Funds will react next year as Active Investing picks up! Yes, Value is so old it’s new. Dust off your fave value plays!

Final Thought: Markets top when things look best and more to the point, large funds may want to lock in those out-sized, good looking gains in large tech for end-of-year statements, not risking the “pennies in front of a steamroller” sentiment. That’s smart, especially as the new year brings into focus a new FED, China deleveraging and potential for more than just the FAANMG sell off.  We may be playing into a long-time tradition where small cap stocks outperform big-cap stocks in what’s known as the January Effect.  But over the past 30 yrs, traders have began to get a “jump” on the pattern and moved it forward in time – to the point where the January Effect now takes place in mid-December. This year, it may have started even earlier.

Happy Trading,

Samantha