Bearish Bets Against S&P 500 Are Surging, Despite Love for Big Tech
Index would be negative for the year without the contribution of seven big tech companies
By Hardika Singh, The Wall Street Journal, June 4, 2023
…
Hedge funds and other speculative investors have built up a big bet that the S&P 500 will decline, marking their most bearish positioning since 2007. At the same time, they are preparing for a rally in the technology-focused Nasdaq-100, with net bullish wagers in recent weeks approaching the highest levels since late last year. …
The divergence in positioning reflects the fragility of the 2023 stock rally…The S&P 500 is up 12% this year, but it would be negative without the contribution of seven big tech companies… Shares of the 10 largest companies in the S&P 500 climbed 8.9%, while the other 490 fell 4.3%…[end quote]
This is like a game of musical chairs with only 7 seats left.
The tech stocks are vulnerable to increasing interest rates. A couple of Fed officials hinted last week that the FOMC might hold steady at the June rate-setting meeting – but they also said that the Fed could raise after the pause. Core PCE inflation hasn’t dropped for months and the economy is still strong. It’s likely that the Fed is not done raising rates yet. Certainly they won’t cut rates in the short term.
Why the U.S. Remains Far From Recession
The pandemic’s aftereffects fuel economic resilience despite rising interest rates
By Sarah Chaney Cambon, The Wall Street Journal, June 4, 2023
More than a year after the Federal Reserve began rapidly raising interest rates to tame inflation, the hallmarks of a widely expected recession remain elusive.
Employers are hiring aggressively, consumers are spending freely, the stock market is rebounding and the housing market appears to be stabilizing—the most recent evidence that the Fed’s efforts have yet to significantly weaken the economy…
Job gains, in particular, remain robust, pumping more money into Americans’ wallets. Payrolls grew by a surprisingly large 339,000 in May, and the increases for the preceding two months were higher than initially estimated, the Labor Department said Friday. … [end quote]
As long as employers are hiring, people are spending and inflation doesn’t drop it’s likely that the Fed will not cut the fed funds rate. About 60% of the speculators on the CME think the Fed will raise the fed funds rate to 5.25% - 5.5% or above in September. That is a caution for tech companies, zombies and banks.
Stocks popped on Friday as Congress finally got its act together and raised the debt ceiling. All stock internals improved as traders celebrated that the Treasury will be able to pay bills and the economy won’t spiral into a crisis. The Fed’s hint that they won’t raise the fed funds rate in June was another plus for the stock market.
The Fear & Greed Index was in Greed. Junk bond prices jumped and their spread over Treasuries declined gently. Similar to rising stock prices, junk bonds are showing investor confidence in a strong economy.
The Treasury yield curve has been rising, which means that Treasury prices are falling. Investors are moving away from the safety of Treasuries toward riskier investments. The trade is risk-on and gapped up on Friday.
Yippee!
The USD has been in a stable channel since the start of 2023. Its recent moves appear to be noise. Gold has stabilized after last year’s runup. “Doctor Copper” is in a downtrend due to the slowing Chinese economy. Oil is falling and OPEC is discussing production cuts. Natgas is bouncing along the floor.
The short-term outlook is bullish for stocks but there is plenty to concern us in the medium term. If OPEC cuts production and oil prices rise it could be that 70s show all over again. There’s no sign yet that inflation is dropping to the point that the Fed would consider a fed funds cut. The strong employment numbers hint the opposite. The expected recession is holding off so far despite several indicators that it will arrive soon…but those same indicators have said so for months. The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2023 was 2.0 percent on June 1, which is quite respectable and not a recession at all.
https://www.atlantafed.org/cqer/research/gdpnow
The METAR for next week is sunny. As always, the METAR is a short-term forecast. I still think it’s too early for buy-and-hold types to get into the market since I think the recession will eventually arrive and the stock market will tank. Nimble speculators might want to take advantage of the short-term trading window of the few stocks that are rising. Such a narrow selection of winners is a dangerous situation that risk-averse investors like me avoid.
Wendy