Wake Up Call
Quick Hits:
Massive reversal of recent trends, with small caps surging and big tech dumping.
Chances are, this was due to inflation stress coming out of small caps, yen intervention, and popular longs and shorts reversing hard.
Details:
Today is exactly the sort of thing I've been worried about, with Mag 7-type exposures underperforming handily. For example. the SPY is down 0.88%, MGK (Mega Cap Growth) is down -2.32%, and RSP (Equal Weight SPY) is up 1.21%.
It's way too early to declare victory, as one day doesn't make a trend. The big question is if this is a one-day reversion or the start of a new trend. Honestly, it's really hard to say. It's interesting that Realized Volatility is indicating some stress and Relative Strength is trending down. Options greeks like gamma and vanna indicate greater downside potential. It's certainly a reasonable place to take a break.
What happened? I'd say stretched positioning combined with a low inflation print to cause a shift. Specifically, all the people hiding in big tech seemed to decide it was safe to break out into other areas, as the gulf is wide. A yen intervention also caused extra wildness with carry trades, which probably encouraged Mag 7 selling. Lastly, low volatility makes for leverage, and a lot of popular, leveraged trades got hit, today. For today, being long growth and short everything else hurt quite a bit.
It's easier to watch what happens and react, but if I were to speculate, I'd guess this move lasts for a bit. In the short-term, I wouldn't tend to go after MGK-type exposures, preferring Quality At a Reasonable Price (QARP.) Nothing has fundamentally changed to make me think this is a long-term shift, but for now QARP makes much more sense than Mega Cap Growth (MGK.)
I'm sure plenty of investors are hoping this was a one-day event and will revert, as this hit a lot of popular trades. If it doesn't revert tomorrow, expect more of the same for a while. For what it's worth, I'd expect the pain to last awhile (weeks.) Too many things seem lined up to make this graceful. Like forest fire management, at this point, we've created a lot of underbrush (weak buyers.) It's easy to imagine those weak holders get flushed out. We'll know more, tomorrow.