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“It is myopic to base sweeping change on the narrow experience of a few years.” – Antonin Scalia
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
Futures are getting off to a sluggish start this morning. US equity futures are lower as investors take a step back and assess whether sentiment towards equities has gotten a bit too giddy. Bank of America’s Fund Manager survey showed an increase in allocations to US equities, specifically in tech where exposure to the sector reached its highest level since August of 2020. That’s a far cry from November 2022 (right near the bear market lows) when sentiment towards the sector plunged to its lowest level since the Financial Crisis. The current reading in the percentage of funds overweight tech is at the highest level in more than three years, although that level also corresponds to the same range it hovered at for most of the period from 2010 to 2020 (see chart here).
The only two items on the economic calendar today were the NFIB’s Index of Small Business Optimism, which came in weaker than expected and fell below 90 for the first time since last May, and January CPI. Economists were expecting headline CPI to rise 0.2% m/m and 2.9% y/y, while the core reading was expected to rise 0.3% m/m and 3.7% y/y. On all measures, the January CPI came in ahead of expectations, so the widely expected drop below 3% in the headline y/y reading will have to wait at least another month. As you would expect, equity futures have added to their pre-market losses (S&P 500 down 1%), and bond yields are spiking as the 10-year yield tops 4.27% hitting its highest level since early December.
Yesterday looked like another one of those days where semiconductors were going to rip higher and close at new highs again. Early on, the SOX traded 1.7% higher to another record high, and Nvidia (NVDA) even pulled ahead of Amazon (AMZN) as its market cap briefly eclipsed $1.82 trillion. In just 29 trading days this year, NVDA has seen its market cap increase by $600 billion. $600 billion! That’s more than the market cap of all but eight companies in the S&P 500, including Tesla (TSLA)! Maybe traders sobered up from the Super Bowl parties and took a second to think about just how much $600 billion is, but at around lunchtime, the enthusiasm dried up. By the close, NVDA was flat, and the SOX erased all its early gains and finished down on the day.
Semis are an extremely volatile sector, so a reversal like Monday’s can pop up at any time, but they’ve been somewhat uncommon over the last three years. The red dots in the chart below show each time that the SOX hit a 52-week high intraday but then reversed lower finishing down on the day and more than 1% from the high. Outside of one occurrence in July 2021, every other since has come in bunches and shortly before a moderate to severe sell-off in the sector. With futures down sharply this morning, could yesterday’s reversal be another prelude to a sell-off?
While these types of reversals have recently been followed by a shaky performance from the SOX, from a less myopic vantage point, they have occurred at all different points in the cycle. Leading up to the peak in early 2022, there were several occurrences in the two-plus year period beginning in October 2019, and before that, there were several other extended runs where these types of reversals were sprinkled throughout, and the SOX didn’t miss a beat. There were other times, though, in the early 2000s when similar reversals occurred right before a moderate to severe sell-off. All of this is a long-winded way to say, that just as, or more often than, these reversals signaled a significant pullback, they also turn out to be meaningless.
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