Yesterday I commented about the massive outperformance of technology which started in earnest in 2016.  According to Bloomberg the ten years of tech outperformance is the longest stretch in history with concentrations exceeding the manic 2000 apex.

Deutsche Bank writes positioning in equities…aka mega capitalized technologies has only been this extreme 4% of the time.  The last time investors were this heavily invested in equities came almost exactly two years ago, right before the brutal February 2018 selloff.  The reason for this selloff was a shift to higher bond yields, the result of greater than expected economic activity.

Most will accept a major catalyst for the 2019 advance was change in monetary policy, the result of trade insecurities which questioned economic growth assumptions.  If we adopt this view, one then would conclude 2020 will be the inverse given the absence of trade headwinds.

As widely noted 2019 economic growth did not crater as the pundits predicted.  However the bond market discounted such a retraction.

The issue at hand is what happens to equity values if interest rates—as defined by the 2 year Treasury—rises in yield.

As written a gazillion times trading is dictated by algorithmic trading models which in turn influences passive investing, a strategy that now comprises over 55% of the market’s capitalization.  Indexing is now the market not a part of the market.

Goldman Sachs writes many algorithmic models are very similar, quantifying a rise in yields for the two year Treasury beyond two standard deviations in about 30 days will trigger massive equity selling.  Two standard deviations is about 34 basis points for the two year Treasury according to Goldman.

Such occurred in February and December 2018.  Selling commenced in earnest with the former obliterating two volatility linked ETFs and the latter was the catalyst for the December 24 call by the Treasury to the largest money center banks asking whether they are experiencing any liquidity issues.

Many have been duped into a false sense of complacency.  Typically such complacencies end poorly.

Commenting on yesterday’s market activity, Treasuries nominally advanced on a more benign CPI than expected.  Equities were relatively quiet albeit there was some conversation about tariffs remaining into effect until after the election.

Last night the foreign markets were down.  London was up 0.19%, Paris down 0.09% and Frankfurt down 0.12%.  China was down 0.54%, Japan down 0.45% and Hang Sang down 0.39%.

The Dow should open nominally lower amid mixed earnings and trade concerns.  The 10-year is up 5/32 to yield 1.80%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. 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. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.