Moderna Set To Power Wednesday Rally
There are a few vaccines being worked on. 4 are set to start being produced later this summer with the goal of having them be given out to people early next year. Vaccines are being produced before they undergo all human trials so we don’t need to wait for production after they are cleared by the FDA.
Moderna’s initial findings showed the first 8 people given the vaccine produced antibodies. Then on Tuesday afternoon, it was reported all 45 people had antibodies. This is a good first step towards getting a vaccine next year.
Moderna’s big rally after hours and the rally in the overall market is a good sign. We could see the small caps and cyclicals outperform the large cap tech stocks. That means we could see the Russell 2000 rise much more than the Nasdaq. S&P 500 is set to have a major sector rotation out of tech and consumer discretionary and into the utilities, financials, and industrials.
We could even see a shift within consumer discretionary and tech. Amazon is 50% of the consumer discretionary sector. We might see retailers outperform it. Tech might see software selloff while semiconductors rally.
Most Crowded Trade Ever
Long U.S. tech and growth is the most crowded trade ever. That’s not just my opinion. It’s the opinion of fund managers. As you can see from the chart below, 74% of managers said this is the most crowded trade which is the highest percentage for any trade ever. This is the type of exciting data we were all looking forward to in the BAML survey. There are few comparisons for this because there is rarely ever this much of a consensus on what is crowded.
Another example was the U.S. dollar in 2015 which didn’t top out after this reading. FANG and the Nasdaq have been considered the most crowded before, but never to this extent. That’s because sentiment on rates is rock bottom. Almost no one thinks rates will rise. They are bearish on the possibility of a recovery, which isn’t what you’d assume if you glanced at the S&P 500 which has had a huge recovery rally.
FANMAG Drives Everything
Without the big internet stocks, the overall market has barely done anything. As you can see from the chart below, FANMAG is up 29% per year since 2015 and the S&P 500 is up 8%. Without these 6 stocks, the index is only up 4.5% per year. It’s very tough to beat the market without them. It can actually get you fired if you don’t own any. That’s called career risk.
Investors have herded into these names. They have good businesses, but everything comes down to price. At some point, it will be difficult to avoid underperforming the market if you own them. The roles will reverse.
This index would have done even better if it owned Tesla in this period as it is the best large cap stock of the past few years. And, the index might be left holding the bag if it gets Tesla with about a $300 billion market cap. So many people are speculating on it being added to the index that it might crash once it is added.
To be clear, Tesla can’t tank the index. It will probably have a weighting somewhere around 2% to 4% depending on its size upon entry. Even if it falls 50%, it will only have a modest impact. Tesla will have a major impact on the Nasdaq 100 if it crashes though. This will be a stock to watch for the rest of the year. Remember, it reports on Wednesday July 22nd.
Investors Aren’t Overweight Equities
Even though the stock market looks overbought, fund managers increased their cash positions and aren’t highly overweight global equities. Cash levels increased from 4.7% to 4.9%. As you can see from the chart below, the net percentage saying they were overweight global equities was slightly positive. 71% of managers said stocks were overvalued which is down from 80%.
If they aren’t investing because of valuations, they might be forced to chase the market. On the other hand, they might act as a floor under the market, buying the dip.
72% expect stronger global growth which is the highest since 2014. However, only 14% think there will be a V shaped recovery, while 44% see a U shaped recovery. 30% see a W shaped recovery which implies a double dip recession. We aren’t there yet even though the economy has stopped improving in the past 4 weeks. 34% of managers plan to take no action before the November election, while 31% plan to reduce risk exposure.
It doesn't make sense to change your positioning in the lead up to the election. If you think Biden will win, change your portfolio now. You probably should have already done so as the election is in just 4 months. 15% are buying volatility and 13% are buying the dollar in anticipation of the election.
It seems the best contrarian trade was seen as going long banks and energy and shorting tech. Wells Fargo reported terrible earnings, which only sent the stock down 4.6% on Tuesday because it is so cheap. It has about the same price to book value as it did at the trough of the financial crisis. That’s even though it won’t be making any acquisitions to save the financial system in this cycle.
Managers are long healthcare, American stocks, technology, and bonds. They are short energy, the U.K., banks, and industrials. Allocation to commodities is 5% which is the highest since July 2011. That’s likely because of the strength in gold. As you can see from the chart above, the most underweight sector is utilities despite near record low rates.