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Much of The Same

The massive overperformance of the seven companies that have propelled the indices higher is well known.  The dangers of such imbalance have been widely discussed.  The massive bifurcation between the NASDAQ 100 and the Russell 2000 has also been documented given that the Russell 2000 is almost 21% lower than its apex in 2021.  This difference is historical.

Yesterday the NASDAQ surged however the Russell 2000 fell another 0.2%.  The YTD decline is 3.78% versus a 5.52% gain for the NASDAQ 100.

The accepted reason for the advance was continued trouble in the regional banks which increased the odds of six rate cuts back to 90% according to sentiment indicators.  There was a chorus of Fed officials who said yesterday the maximum number of rate reductions is two or three. 

The difference in performance figures between the NASDAQ 100 and Russell 2000 is historical, as is this difference between market expectations of Fed policy and that of projected Fed policy.

Who will be correct?

The trend is your friend and will continue until it stops, a stoppage that will occur when all least expect and will not be recognized for many months after such has occurred. 

Valuations don’t matter until they do.

David Einhorn of Greenlight Capital said today that the markets are “fundamentally broken” as the growth of passive investing and algorithmic trading has transformed markets.

 Einhorn further stated that “passive investors have no opinion about value and algorithmic investors base their trades on short term price moves rather than a company’s actual worth.”   He further stated algorithmic investing has an opinion about price, “like what is the price going to be in 15 minutes.”

Reality will return, but when?

A strong argument can be made that liquidity—or the ability to sell or buy a security without moving the market—is abysmal.  Some fear the return to reality—where valuations do matter—can be sharp and painful.

Yesterday’s record auction of the 10-year Treasury was met with “solid” demand given the cheapening over the past several days.  The outcome of the $42 billion auction was a non-event and in many regards was expected.

Today is the auction of the 30-year Treasury. Will its $25 billion offering be met with the same demand?

Last night the foreign markets were mixed.  London was down 0.06%, Paris up 0.52% and Frankfurt up 0.27%.  China was Japan up 2.06% and Hang Seng down 1.27%.

Futures are little changed.  The 10-year is off 6/32 to yield 4.14%.

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Kent Engelke

Chief Economic Strategist Managing Director

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.