PERFORMANCE CHASE (Cont)
Moody’s downgraded US debt…
and markets rally from a gap down open.
HFs and institutions are still under exposed to US equities.
It is an extraordinary dynamic playing out in markets.
Also… I would not be surprised if the year yields top out around here.
There are a lot of folks expecting a 5% yield.
It is highly consensus.
But, real interest rates are high.
That means bond investors are earning attractive yield - and in a disinflationary environment.
Also, if growth slows, bonds should benefit.
Real time tax returns show slowing of income growth.
Short interest in bonds is also extremely high.
Mortgage rates are very high.
Backlogs of homes are building. Hard to see mortgage rates going higher.
The boat is tilted too much to one side.
Technically, the last 2 days look like panic selling of bonds.
The cure for high prices is high prices.
The cure for high rates is high rates.
Cyclicals tech and discretionary are stating to give way to other ideas such as healthcare.
I mentioned there are plenty of names in healthcare with attractive free cashflow yield
Take a look at Da Vita $DVA
Both buybacks and FCF yield and valuation are attractive
Really, medical devices as a theme are once again attractive.
When an entire theme is attractive - esp one linked to a long term secular trend - I get interested.
Take a look at $MDT as another example.
$DVA $MDT $XLV $TOT
PERFORMANCE CHASE
This weekend in the @LumidaWealth we wrote about the possibility of a Monday decline and a 'performance chase'.
Here's the situation.
Hedge funds have high gross long exposure, but low net exposure.
They have lots of short in small caps.
Small caps are rallying more than any other category.
So, hedge funds are forced to cover those shorts. That propels those names higher.
And the cycle repeats.
There is nothing pre-ordained about a performance chase. Those conditions don't require a performance chase.
But, the Trump admin talking up markets and pivoting on tariffs is enough to ignite Animal Spirits and light these markets.
What you have here are retail investors squeezing hedge funds.
(We also discuss this topic in the Lumida Non-Consensus Investing podcast.)
Further, major indices are now above their 200 day moving averages.
That's an important technical level.
More trend followers will step into the market.
The best analogy for this market is January 2019 -- the month after the end of the Q4 '18 Trump 1.0 trade war which had a 19% decline in the S&P.
Market conditions are overbought...but crucially, staying overbought.
This is a new dynamic.
So long as Trump stays the course you can see 6,000 by June.
(By July, if the 10% tariffs stick, then you would get a bout of stagflation starting around then.)
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