Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
A sharp reversal in tech stocks Monday – first up two per cent then down two per cent – has Ritholtz Wealth Management’s Michael Batnick wondering if the tech rally is over.
“This type of reversal is rare and is only seen in volatile markets. It happened at the bottom in March 2020, and before that you’d have to go all the way back to the bottom of March 2009… Tech stocks did this type of thing in March 2000, right as the tech bubble was making its final ascent… a better question investors should ask is, “am I okay if it was and am I okay if it wasn’t?” If the market does tumble 20% or more, will I be able to sleep at night? If the market races 20% higher, am I exposed enough so that I won’t feel the fear of missing out?”
Big technology stocks dominated the advance in the main equity benchmarks on both sides of the border since markets bottomed in March, so a correction in the sector means an at least temporary top for the broad indexes.
“Was that the Top?” – Irrelevant Investor
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B of A Securities’ popular monthly survey of portfolio managers also uncovered some tech-related concerns.
“74% [of managers] say long US tech stocks most “crowded trade” (highest reading in [survey] history) … Asset allocators are stubbornly long health care, US, tech, cash, bonds, and short energy, UK, banks, industrials; but 2 notable shifts…allocation to commodities now at highest since July'11… Contrarian trades: best short is tech stocks given positioning and stretched performance; best long is energy (oil prices acting well given whisper of higher OPEC supply) & banks”
“@SBarlow_ROB BoA PM survey: “contrarian trades: best short is tech stocks given positioning and stretched performance; best long is energy” – (research excerpt) Twitter
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Scotiabank strategist Hugo Ste-Marie is looking for second quarter TSX earnings of -50 per cent year over year,
“Ready for a 50% haircut. Q2/20 was marked by peak lockdown conditions, with extremely depressed activity levels and commodity prices. With close to 80% of TSX earnings typically coming from cyclicals & resources, the Q2 reporting season will be challenging. Consensus is pegging TSX Q2/20 EPS at $142, implying a 48% haircut YoY. Sequential improvement. Despite the profitability squeeze, Q2 EPS might be higher than Q1 for two reasons: cyclicality and banks’ PCL. Large EPS dispersion. Bay Street is flying blind, expect large EPS surprise (positive or negative)… Energy and Discretionary expected to deliver the steepest drop. Utilities and Golds are two outliers. While Financials/banks should suffer on a YoY basis, EPS are expected to improve substantially relative to Q1. Base metal miners may also offer some positive surprise.'
“@SBarlow_ROB BNS on TSX Q2 EPS, “ready for a 50% haircut”” – (research excerpt) Twitter
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B of A Securities’ U.S. quantitative strategist Savita Subramanian appears to have really strong conviction on value stocks,
“1. It’s the economy stupid: in 14 of the last 14 recessions, Value stocks led in the recovery… 2. Profits (not rates) drive style cycles and our profits forecast indicates trough growth in 2Q 2020. In every profits recovery except two (post-Tech Bubble and 2016), the trough to peak in corporate profits growth saw Value lead by a large margin. 3. Sentiment and positioning: Value is deeply neglected 4. Value stocks trade at record levels of cheapness to Momentum stocks… 5. Given #4, record levels of valuation dispersion are not surprising - i.e., lots of mean-reversion alpha to be had - and this is a typical precursor to a Value leadership cycle… 6. Growth stocks’ monopolistic strangleholds evoke peak plutonomy concerns -rich getting richer, big getting bigger - and argue for heightened regulatory scrutiny. 7. Japanification risk: Value was the best performer in Japan’s lost decade, marked by low rates, low growth, a closing economy and a range-bound market (sound familiar?)'
“@SBarlow_ROB BoA: 7 reasons to buy value stocks” – (research excerpt) Twitter
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Newsletter: “Is this a new tech bubble?” – Globe Investor
Diversion: “How to Quit Your Doomscrolling Habit” – Lifehacker
Tweet of the Day: " @RobinWigg Almost three-quarters of fund managers surveyed by Bank of America say long US tech stocks is the most crowded trade in markets - the biggest reading in the history of the BAML survey.” – Twitter
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Scott Barlow