Alibaba (BABA) announced that they are going to split the group into six companies. The stock (BABA) gapped up and after a brief test of its morning lows around 92, it went above its intraday VWAP, set up, and provided a low-risk entry. Then it trended higher for the rest of the day while most tech stocks were under pressure. It has the potential to continue higher tomorrow on a red-to-green move. This is how we played it:
The fed raised the benchmark interest rate 25 bps again to 4.75%-5%. They hinted that they are very close to pausing hikes for the year but don’t expect to cut unless either inflation comes down quickly or unemployment skyrockets – none of which seems likely in the near term. The market thinks that the Fed is bluffing and it is currently projecting rate cuts starting in June because of recession risk. The market has been wrong a lot when it comes to anticipating Fed’s decisions in the past year or so.
The S&P 500 is up almost 4% year-to-date. The index is market-cap weighted, meaning mega companies like Apple and Microsoft have a much bigger impact on it. The equal-weighted S&P 500 is actually down 2% for the year. The Nasdaq 100, which is also market-cap weighted, is up 17% YTD. A few big tech companies account for all market gains so far this year. The rest of the market has been under pressure. The rule of thumb is that such a concentration of strength is not sustainable. We have seen similar play in the recent past and we know that it can continue a lot longer than most expect.
Semiconductors have been especially strong. SMH is up 26% so far in 2023. If the market is really worried about a recession, semis should not be outperforming by such a wide margin. Maybe the pullbacks in energy, basic materials, industrials, and financials are not about a potential recession but about the unwinding of the so-called inflation trade from the last year when anything tech was clobbered and money went to other sectors.
Last week I wrote that if the Fed has to choose between preserving confidence in the banking system and fighting inflation, they will understandably select the former. The consequence was a $300 Billion increase in the Fed’s balance sheet in a week which basically wiped out half of the reduction they did in the past year. As suspected, the big winners were government bonds, gold, and bitcoin as people flew to perceived safety. What was a bit surprising was the big surge in mega and large-cap tech stocks. I get the reasoning – they are cash-rich, they have pricing power, so they are likely to endure any crisis. There are rare assets in a way. People gave them a vote of confidence. There might have also been a significant rewind of the inflation trade. We saw crude oil and most commodities taking a decent plunge while big tech squeezed higher.
In the meantime, the banking crisis hasn’t been resolved yet. Just look at the price action in bank stocks last week. The bank ETF, KBE was down another 20% and finished near the lows of its weekly range. In-between financials and basic materials in the gutter, the S&P 500 and Russell 2k don’t stand a chance for a sustainable rally.
Next on deck is another FOMC meeting this coming Wednesday. The Fed is expected to raise rates by only 25bps, if at all. Their guidance will matter more as the market is basically expecting a pivot very soon. I don’t want to guess how the market will react. I rather position after the dust settles on Wednesday and take things one day at a time in this environment. If Powell makes more hawkish statements, the market might get worried and accept a recession scenario during which the tech sector will also get hit. If the Fed blinks and says that they will wait on further rate increases, we might see a continuation in tech strength. Gold and bitcoin are likely to do well in both scenarios.
