Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Technology stocks are set to open sharply lower Monday as Nasdaq futures plunge ahead of the market open.
There are a number of reasons for the weakness – signs of more anti-China trade policy from the White House and indications of a slowing global economic recovery – but the options market is the most likely source of volatility according to the Financial Times,
“SoftBank is the ’Nasdaq whale’ that has bought billions of dollars’ worth of US equity derivatives in a series of trades that stoked the fevered rally in big tech stocks before a sharp pullback [last week] … ‘These are some of the biggest trades I’ve seen in 20 years of doing this,’ said one derivatives-focused US hedge fund manager. ’The flow is huge.’… The sheer size of the trades appears to have exacerbated a “melt-up” in many big technology stocks over the past few months. In August alone, Tesla’s share price shot up 74 per cent, while Apple gained 21 per cent, Google’s parent Alphabet rose 10 per cent and Amazon 9 per cent.”
The Softbank strategy has led investors to believe that the recent gains in major technology stocks are only temporary, hence the selling.
“SoftBank unmasked as ‘Nasdaq whale’ that stoked tech rally” – Financial Times (paywall)
“With few alternatives for investors, market selloff likely to be contained” - Ian McGugan, Globe Investor
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Despite equity market volatility, Morgan Stanley is sticking with its forecast of a V-shaped global economic recovery.
In a Monday report, chief global economist Chetan Ahya wrote,
“The V-shaped recovery that we originally envisaged is playing out faster than we thought. By 2Q21, a global synchronous recovery should take hold, with all engines of the global economy registering strong growth…”
In a separate research report published over the weekend, the firm’s U.K.-based equity strategist Andrew Sheets wrote,
“much of the performance since the March lows has been straight out of a ‘normal’ early-cycle playbook – policy eased, smaller and more cyclical stocks outperformed, credit rallied and outperformed equities (risk-adjusted), the dollar weakened, inflation expectations rose and yield curves steepened.”
Mr. Sheets listed his preferred market sector to benefit from the recovery. Buying European credit won’t interest most Canadian investors, but the strategist expects U.S. small cap stocks to start outperforming and yield curves to steepen in global government bond markets.
" @SBarlow_ROB MS: how to play their expected V-shaped recovery – (research excerpt) Twitter
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Citi U.S. equity strategist Tobias Levkovich is getting mixed but dramatic signals from his most important indicators (my emphasis),
“Investors became intrigued by the 100% probability of a down market in the next year generated by the Panic/Euphoria Model, highlighting extended investor sentiment akin to 1999-2001 … Our normalized earnings yield gap valuation approach [essentially, the earnings yield on the S&P 500 compared with government bond yields] implies a near 90% probability of gains looking out a year, yet our seven factor methodology is less than encouraging and the percent of market value attributable to growth expectations does not bode well for future returns either. .. Recognize that the top 10 IT names by market cap in 1Q00 traded at roughly 76x trailing earnings and the current largest 10 carry a 59x multiple.
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Diversion: “9 Fun Ways to Help Kids Learn While they Play at Home (2020)” – Wired
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Scott Barlow