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ARK INNOVATION ETF: TRACKING NASDAQ'S DOT-COM BUBBLE BURST? (1348 EDT/1748 GMT)
Cathie Wood's ARK Innovation ETF remains on the back foot. And according to DataTrek Research co-founder Jessica Rabe, the ARKK continues to underperform the NASDAQ’s dot-com bubble meltdown during the early 2000s.
Using Refinitiv data, here is a recreation of a DataTrek chart showing the comparison of ARKK's percentage change since its February 2021 all-time high and the NASDAQ's percentage change following its peak in March 2000:
Rabe notes that ARKK generally tracked the NASDAQ’s 2000/early 2001 experience but diverged from that pattern to the downside over the last month and a half, as tech stocks deal with increasingly aggressive and tighter monetary policy – whereas the Fed was cutting rates at this point in 2001.
Rabe says that Wednesday is the 317th trading day since its all-time high and ARKK has fallen 72% since its peak in February 2021. Over the same timeframe in 2000 – 2001, the NASDAQ was down 58 pct from its March 2000 high.
As she sees it, from the NASDAQ’s 2000 peak to its 2002 bottom, the index declined by 78%. If ARKK continues to broadly follow that result, she says its low would be at $34. With a close around $41 today, that would imply nearly 20% further downside from here.
However, Rabe sees important differences between ARKK today and the Nasdaq in the early 2000s.
ARKK, she says, is an actively managed, and very concentrated portfolio with large weights in many speculative tech names, such as Roku, Zoom, Coinbase, Block and Teladoc.
Against this, the NASDAQ Composite is a passive and much more diversified portfolio that held many high-quality and established tech stocks (for example, Microsoft, Apple, Amazon, Intel and Qualcomm) in the early 2000s.
Consequently, Rabe warns ARKK may trough at lower levels on a percentage basis and rebound more slowly than the NASDAQ in the early 2000s because it does not own as many large, seasoned companies.
"Whether or not TDOC and SQ make it through the next decade is a harder call than MSFT or AAPL in the early 2000s."
NOW’S NOT THE TIME TO SHORT GROWTH, WELL FARGO TURNS NEUTRAL ON “STORY” STOCKS (1215 EDT/1615 GMT)
Investors wanting to pile onto the bear train in growth stocks may have missed their chance, with most of the weakness likely priced in, at least for now, according to Wells Fargo.
The bank advised investors to avoid or take short positions on “story” stocks heading into 2021 and “we have debated internally how/when to step off of this bearish call. We think that time is now,” analysts including Christopher P. Harvey said in a report on Wednesday.
While Wells Fargo says it continues to view “story” stocks negatively for the long-term, the effects from higher real interest rates and the re-pricing of duration have largely played out, the analysts said.
Inflation expectations have also dipped, with breakeven rates on 10-year Treasuries falling from recent peaks. “We view these moderating inflation expectations as incrementally positive for Growth stocks,” Wells Fargo said.
The analysts said that sentiment has reached a near-term extreme, and that many growth investors are trying to recoup year-to-date losses by now being very aggressive with short trades.
“To a degree this is a rational decision. Some have no choice but to try that "Hail Mary" trade(s) – or face possible unemployment. This suggests to us that negative sentiment is now a trailing indicator,” Wells Fargo said.
“There is a time and a place for everything. The time to short high-fliers was most of 2021, when the average 10yr real rate was well below -100bps vs. the current +25bps,” the bank added.
Sell-side equity analysts have also been cutting their forecasts, a possible contra indicator, while individual investor sentiment, as measured by difference between the American Association of Individual Investors (AAII) Bull and Bear weekly indices, is at its lowest level since March 2009.
“Historically, these very-negative readings have roughly coincided with local market bottoms – i.e., buying opportunities,” Wells Fargo said.
MAKING SENSE OF SECTORS (1103 EDT/1503 GMT)
With markets at their most volatile in some time, Jonathan Golub at Credit Suisse crafted a roadmap to give his take on where investors should land in equities. He has some favorites.
Golub's recommends keeping four sectors overweight. Don't look on Wednesday, because its down 4% after Target's grim results, but this includes consumer discretionary .
He notes a YTD drop of ~26%, the deepest in the market with all subgroups also lagging. Its price-to-earnings ratio (P/E) of 21.9, marginally above its historical average, but excluding mega-cap stocks Amazon.com, and Tesla, the P/E is 16.3.
Also overweight is energy with a YTD return outperforming S&P by ~60%, and subgroups outperforming by 35%+, the highest 2-year (2022-23) EPS CAGR of 34.2%, the strongest revisions, and lowest P/E of all sectors.
For industrials: he cites 28.3% EPS CAGR growth expectations for 2022-23, or 17.5% ex-Airlines, with double-digit growth in each subgroup with recent negative earnings revisions all attributable to Boeing.
Materials boasts an attractive valuation with the group trading well below its 10-year average, and expected 2022 EPS growth of 21%, though it's seen falling by 5.7% in 2023, with a massive 32.7% drop in metals and mining. Without that subgroup growth would 2%.
His two market weight picks are communication services and technology. Comms has a YTD return of 25%, a projected 2022 EPS decline of 2.4% but an expected 14.6% rebound next year. As for tech, down 22% YTD with every subgroup lagging the market and P/Es for 4/6 subgroups above 10-year average, EPS revisions have trailed the market for all groups
He suggests keeping financials, healthcare, REITs, staples and utilities underweight.
Financials he notes have projected 2022 EPS decline of 10.4% due to reversal of prior year provisioning, strongest buybacks, attractively valued. For healthcare, he cites a substantial decline in COVID related activity leading to a life sciences EPS decline but he notes that pharma, biotech trade at larger than normal discount and have strongest ROEs.
For REITs, he sees valuations across all subgroups appearing rich except retail and office. Staples of course has outperformed the S&P by 15% YTD according to Golub despite below-market 2022 rev/EPS growth expectations with valuations rich except tobacco.
Last but not least, utilities have outperformed the market by 15% YTD despite weak annualized Rev/ EPS expectations for 2022/2023, and trading that the high end of valuation range.
WHAT TO OWN IN EUROPE TO WEATHER THE DOLLAR STORM (1059 EDT/1459 GMT)
Citi sees the dollar rising further in the coming weeks and while that should be a drag on risk assets and European equities, some companies should be able to weather the storm.
Even though Europe usually lags Wall Street when the greenback rises and the economy slows, European stocks with high overseas exposure, positively correlated to a weak euro-dollar and defensive earnings are a good hedge, according to the U.S. bank.
This screen -- which has over 30 names including Deutsche Telekom, Nestle, Campari, Bayer and Novartis -- is overweight healthcare and consumer staples and it has risen 4% this year relative to the market, it says.
“Reprinted with permission of Citi Research. Not to be reproduced.”
HOUSE COOLING PARTY: HOUSING STARTS, BUILDING PERMITS, MORTGAGE DEMAND (1046 EDT/1446 GMT)
Data released on Wednesday confirmed that the housing sector's COVID-era block party is over, and market participants survey the detritus left in the wake of its rousing success.
Groundbreaking on new U.S. homes inched down 0.2% last month to 1.724 million units at a seasonally adjusted annualized rate (SAAR), according to the Commerce Department.
The number came in 2.3% below the 1.765 million units SAAR analysts expected, owing to a sharp downward revision of the March print.
Building permits, considered an advance housing indicator, slid by 3.2% to an above-consensus 1.819 million units SAAR from the prior month's upwardly revised number.
The declines echo the plunge in homebuilder sentiment seen in the NAHB Housing Market index released on Tuesday, which slid to its lowest level since the brief COVID shock in the spring of 2020.
As the dust settles from the pandemic-driven suburban stampede, spiking home price growth, materials scarcity and rising mortgage rates are yanking the dream of home ownership from under the feet of many potential buyers, particularly at the lower end of the market.
"Elevated input costs and shortages remain headwinds for builders," writes Rubeela Farooqi, chief U.S. economist at High Frequency Economics. "Rising mortgage rates that crimp demand will also likely be a constraint for building activity going forward."
Farooqi provides a tidy segue to our next bit: data from the Mortgage Bankers Association (MBA) showed demand for home loans plunged 11% last week.
The average 30-year fixed contract rate, tracking benchmark Treasury yields, took a breather from its uphill climb by shedding 4 basis points to 5.49%.
Still, that amounts to a 2.6-percentage-point rise since just the first of the year, a trend which has proved to be a mortgage demand buzzkill.
Applications for loans to purchase homes and refinance existing mortgages tumbled by 11.9% and 9.5%, respectively.
"Prospective homebuyers have been put off by higher rates and worsening affordability conditions," says Joel Kan, associate vice president of economic and industry forecasting at MBA. "Furthermore, general uncertainty about the near-term economic outlook, as well as recent stock market volatility, may be causing some households to delay their home search."
Overall, mortgage demand is down 55.9% from the same week a year ago.
But while building permits and mortgage applications are among the more forward-looking housing market data, offering clues as to where the sector might be a month or two down the road, the equity investors set their sights further down the road.
While the Philadelphia SE Housing index and the S&P 1500 Home Building index had the broader market eating their dust in the first year or so of the pandemic, over the last 12 months, they have well underperformed the S&P 500:
Still, it must be said, when rebased to the nadir of the COVID crash, the HGX has still outdone the SPX.
Here's a dashboard of various housing market indicators, which together form a mosaic depicting a sector on the wane (click to enlarge):
Wall Street is in the throes of another risk-off session, with all three major U.S. stock indexes deep in red territory in morning trading.
Consumer staples and discretionary stocks , as well as economically sensitive transports, are among the morning's biggest losers.
A TARGET ON THE MARKET'S BACK (0957 EDT/1357 GMT)
Major U.S. stock indexes are lower early on Wednesday as a rally in growth shares fades and downbeat results from retailer Target Corp added to worries over surging inflation.
Indeed, Target's Q1 profit halved and the company warned of a bigger hit to its margins due to higher fuel and freight costs. With this, its shares are losing around a quarter of their value, which puts them on pace for their biggest one-day slide since the stock market crash of 1987's Black Monday.
Meanwhile, all major S&P 500 sectors are red with consumer discretionary taking the biggest hit. The SPDR S&P Retail ETF is down more than 5%, and on pace for its worst day since February 2, 2021.
Transports are another especially weak group. The DJT is falling more than 3%.
That said, it's not a universally red day as clean energy stocks are showing some green. The WilderHill Clean Energy ETF is gaining more than 1%.
Here is an early trade snapshot:
SHORT TECH, LONG ENERGY (0932 EDT/1332 GMT)
If there is one trade that's working well this year, it's Short Tech and Long Energy as markets position for rising rates piling even more pressure on highly valued stocks.
And price action today in Europe is reflecting that quite nicely. The STOXX Oil and Gas index is leading gainers and surging to a new three-year high, up 1.8%, while at the other end of the spectrum is the STOXX Tech, down 1.8%.
More broadly the MSCI World Energy is now up 80% from the record low levels it was hovering at last year relative to the MSCI World Technology, boosted by the war in Ukraine overextending a rally in crude oil prices.
No wonder then that the latest BofA survey showed investors holding the biggest tech "short" since August 2006, while staying long on energy and commodities.
NASDAQ COMPOSITE: RIPE FOR A WARMING TREND? (0902 EDT/1302 GMT)
The Nasdaq Composite has rallied 3% off its May 12 closing low, as it attempts to prove its strength is more than just a bear-market bounce.
Meanwhile, one measure of the Nasdaq's internal strength has been in a deep freeze. That said, conditions may be ripe for a significant warming trend:
Last Friday, just two trading days after the Nasdaq's May-12 closing low, the Nasdaq New High/New Low (NH/NL) index fell to 3.9%, or its lowest level since a 3.6% reading on March 26, 2020. The March 26, 2020 print occurred just three trading days after the market's March 23, 2020 pandemic-crash low.
Back in March 2020, the day the market troughed, the measure v-bottomed after hitting 1.2%. That was the lowest reading since 1.1% on March 10, 2009, just one trading day after the Nasdaq's Great Financial Crisis low.
The measure has now edged up to 4%, and may well be on the verge of reclaiming its descending 10-day moving average (DMA), which ended Tuesday at 5%. The NH/NL index has been below its 10-DMA for 28-straight trading days.
Since late 2008, amid severe Nasdaq instability, there have been four instances of the NH/NL index putting in two sub-10% troughs separated by one to three months or so, which ultimately led to major market lows: 2008-2009, 2011, 2016, and 2018. In those four cases, the measure's average trough was about 3.8%.
The NH/NL index fell to 6% on January 28, and if Friday's low at 3.9% holds, this most recent average is about 5%.
The measure could of course fall further, and languish at extremely low levels. Its all-time low was 0.5% in late 2008. Nevertheless, it appears to be historically low, with significant room to rise. And in the event of a sharp upturn, the Nasdaq may not just see a few hot days, but instead a full-blown spring/summer heat-wave.
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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)