Don't Be A Piggy
Drifting into the July OpEx with positive market gamma, you can see clearly below that Tech represents the largest inflow.
BofA warns the top 7 stocks:
1 … drove 73% of S&P 500 gains in 1H, each up 90% on average in 1H
2 … have a market capitalization of roughly equivalent to half of US GDP
3 … trade at a Price to Trailing Earnings (P/E Trail) ratio of ~40x. The S&P 500 Ex-7 trades closer to 15x
4. … is expected to represent all US corporate earnings growth and then some in 2Q – a 21% YoY gain vs. a 10% YoY loss for the rest of the S&P 500
5 ... TMT represents 8% of US GDP, 17% of S&P EPS and 40% of S&P market cap
Bernstein weighs in with the obvious: Mega-cap Tech is extended into earnings.
"The sector is now at its highest relative valuation to the market, a 54% premium, for the past 45 years, ex dot com. Earnings have been upgraded, but that looks priced in. Particularly for some of the mega-caps like Apple, Microsoft, NVDA & ORCL." Bernstein
Semis have also run hot and DB says the AI rush has limited upside now:
The SOX has rallied strongly into 2Q reports, similar to the situation a quarter ago, on investor optimism about an impending cyclical fundamental bottom and a robust, AI-driven recovery.
However, the optimism seems to be already factored into the SOX's performance (up nearly 50% YTD and outperforming the S&P 500 by ~30%)...
The number of companies poised to reap near-term financial benefits from AI tailwinds is limited (such as NVDA, and to a lesser extent, AVGO, MRVL, and AMD), which could make delivering the anticipated recovery more challenging.
Basically, the Tech FOMO has likely seen funds - CTAs, mutual funds, etc - fully exposed versus massively underweight beginning of the year.
Also a KEY consideration is that there are fewer funds who can buy the top tech stocks given the % of concentration risk. This is why, in part, Jr Tech has rallied off the May lows.
Having said that, I still like TSLA and AMZN as swing long "catch up" plays in the megacap space.
And I still like QQQE Nasdaq equal weighted play.
And I still expect SPX to tag 4545 and QQQ into 386.50 - with SpotGamma pointing out the 390 open interest of size.
Interesting to note:
The volatility crush is pricing very small moves for the earnings season.
The bar for earnings has been lowered so ** should ** be easier to beat, but...DataTrek reminds:
US Big Tech stocks are, on average, trading only 2 percent higher than Wall Street analysts’ consensus price targets. This suggests that a raft of downgrades are coming unless these companies beat expectations in the current earnings season.
Don't forget VIX seasonality: July typically marks a low for the year.
WE'VE HAD A FABULOUS RUN IN JR TECH, VALUE AND DASH-FOR-TRASH past few months in addition to the MEGA CAP TECH CONCENTRATION.
It really would be prudent to trim, add time, protect.
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