Legendary hedge fund manager Howard Marks from Oaktree wrote

The large potions occupied by the top recent performers—with their swollen market caps—mean that ETFs attract capital, they have to buy large amount of these stocks, further fueling their rise. Thus, in the current up-cycle, over weighted, liquid, large cap stocks have benefitted from forced buying on the part of passive vehicle, which don’t have the option to refrain from buying a stock just because its overpriced.

Marks also commented that at some time these same funds will be forced to sell to meet liquidations but to whom?

Yesterday Bloomberg commented about the propensity of ETFs to go long technology and short energy, a trade that I had rhetorically commented appeared to be occurring. As noted several weeks ago the capitalization of Apple is greater than the entire capitalization of the S & P 500 oil sector.

Bloomberg further opined that since the technologies are vastly over owned and energy is vastly over owned, there is the potential that ETFs may underperform for a number of years if there is a change in sentiment.

Regressing for a moment, many believe that “Gerrymandering” is a relatively new concept. But I am certain all recall from their seventh-grade civics class that the term “Gerrymandering” is named after a Father of our Country, a signer of the Declaration of Independence, and former Massachusetts governor, Elbridge Gerry, who proceeded to draw a group of crooked lines on maps to enhance the election chances of he and his friends.

Many times, I have commented that it is never different there are just different people.

Most have opined that today is indeed different, this massive crowded trade will last until eternity. They all implode but the question is as to when.

The market map will be redrawn just as Gerrymandering will always occur but will largely fail overtime for if it did not fail electoral change would never occur.

Commenting about yesterday’s market activity, equities were mixed on coronavirus news. Markets were also spooked by the news the Fed will further shrink their repo operations. Treasuries ended nominally higher.

Last night the foreign markets were mixed. London was up 0.03%, Paris down 0.07% and Frankfurt up 0.28%. China was up 0.38%, Japan down 0.56% and Hang Sang up 0.31%.

The Dow should open flat on conflicting interpretations as to how fast the coronavirus is spreading. Oil is up about 2%. The 10-year is up 8/32 to yield 1.59%.

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.