Developed Countries

In July we first highlighted the monstrous contribution of the top five stocks to the S&P 500’s return and cautioned that such a high concentration of returns in a handful of tech titans was not sustainable. More recently, we warned again about the danger of concentrated returns, and currently the same stocks that were pushing the market higher are the ones pulling it down. In other words the pendulum is swinging the opposite way, as concentration of returns cuts both ways. Table 1 shows MAGAF stocks losses in index points since the September 2nd peak and highlights that they are responsible for 46% of total SPX losses despite having “only” a 25% market cap weight in the index. Bottom Line: A healthy rotation out of overvalued tech titans and into beaten down cyclical stocks is likely getting underway. As a reminder, in the most recent  Weekly Report we went long a basket of bombed out “back to work” stocks at the expense of a “Covid-19 winners” basket. Table 1    

Neutral In mid-April we went overweight the S&P home improvement retail (HIR) index on the back of demand-stimulating zero interest rate monetary policy, loose fiscal policy as well as rising lumber prices. As a reminder, HIR companies make a set margin on lumber sales, hence higher lumber prices are a tonic to the industry’s top and bottom lines. However, in mid-June we highlighted weakness in our HIR macro model, a hook down in existing home sales and tick up in inventories. Together, those factors compelled us to institute a stop at the 10% relative return mark, which we subsequently increased further to 15%. Last week our stop was triggered, and we booked 15% in relative gains and moved to the sidelines in home improvement retailers. Bottom Line: Downgrade the S&P HIR index to neutral and book 15% in relative gains since the mid-April inception. The ticker symbols for the stocks in this index are: BLBG: S5HOMI – HD, LOW.