Weekly Recap – Week of November 17-21

This week we saw more rotation out of Technology, consumer cyclical/discretionary, and energy funds flowing into communication and healthcare.

Friday was a rally day across the board risk-on, still, healthcare received the bulk of the inflows with LLY hitting the $1 trillion milestone on the back of their oral GLP-1

Longer term, 1-month performance we can see the impact of the sell off in AI with a 5.8% decline in technology and a further decrease in consumer discretionary. According to BoA’s November fund-manager survey, global investors are very overweight commodities and equities with cash holdings dropping to 3.7%. This is a contrarian indicator, as the smart money runs out of side-line cash, they have no more to invest without utilizing margin leverage.

One thing to note on with the 1 month performance is the decline in both consumer defensive/staples and consumer cyclical/discretionary. This indicates stress on the household. Usually we would see staples rally or hold steady while discretionary declines as households shift spend from discretionary to staples. A decline in both indicates a reduction of spend in both categories. This could be resulting from government shut shutdown earlier this month. However, I think the bigger issue was a reduction in consumer confidence. The shutdown affected very few people in terms of wages. TSA and ATC the two big groups had a hiccup in their paychecks, they were all guaranteed salary if they worked. SNAP benefits were largely offset by charitable spend by non-profits supporting those with reduced food expenditure. SNAP is a supplemental program though the media portrayed SNAP as being the ONLY source of funds for food for many Americans. Federal contractors were put on hold if they weren’t already paid for services. The reported reduction in job openings (for jobs people are looking for and are qualified for.) increased media coverage of job cuts (usually corporate positions within organizations who allegedly over-hired during COVID many, many years ago), mortgage rates, and inflation rates. There are many indictors out there of financial distress on the average American which leads to reduced consumer confidence and an innate desire to hoard cash, which is 100,000% better than doom-spending.

Unrelated, but still related regarding cash: Meme stocks rally hard first because retail has large cash holdings and unused margin. Retail can very easily push a company from a 300m-500m market cap to a few billion rather easily, as price rallies, anyone who was short will cover as well thereby pushing prices higher. A few billion dollars on the side line can very easily move a small/medium cap stock.

For the mega market, namely big tech, big pharma, big industry, (the crowded names) these retail trader’s have very minimal, if any, impact. Fund managers with a cash holding of 3.7% have very little dry powder left to push prices higher. I think we’ll continue to see a sell off in the broader market and a rotation out of the very richly priced equities. Big tech will continue to command high profits and high valuations given their product offerings, but the richness of their PE’s combined with future expected earnings power are very well baked in. Any little chink in the armor will exacerbate the sell-off.

Below we the DOW, SPX, and NSDQ. Markets have started selling off from their highs. Thursday started off with a premarket rally which led to a very steep decline then a nice reprieve on Friday.

I am looking forward to a better week. Many accounts I follow in the FinTwit have been complaining of a lack of opportunity this month and I tend to agree, whereas we do not specialize in small cap shorting like many do, the clean participation of traders and investors has not been there. Stocks have been trading erratically and choppy. I prefer to see cleaner charts, and more even participation.