So Much Money In So Few Stocks

Many times I have commented about the narrowness of the markets and the complete absence of macroeconomic, geopolitical or security analysis in investment decisions. Momentum and indexing is dominating, which by definition the big get bigger and the small get smaller.

Perhaps this following data places the above paragraph into the proper context. For the month of January below is the return of four companies, four companies that are dominating the S & P 500 and are also some of the largest companies in the world. The performance figures are for January 2018.

o Neflix +41%

o Amazon +24%

o Google +12%

o Facebook +6%

Wow! These advances are following an incredibly strong 2017 which lifted three of the four companies over 50% and the other by 37%.

The above companies are not small or mid-sized growth companies that are under owned, but are global behemoths that require billions to increase share price. The basic premise to make any company trade higher is more buyers than sellers.

I thought 2000 was myopic where 50 companies dominated the S & P 500. Today there are five.

What happens when selling commences?

In my view, the other massive disconnect in the market is oil. Yesterday, Goldman followed Citicorp and raised its six month target for oil to $80. Oil advanced over 2% to a three-year high to over $66/barrel. Oil is now up about 2.5x times from its February 2016 lows. Oil shares however were generally flat in the day, continuing their trend of vastly lagging the markets.

Change is the only constant, but typically occurs when all least expect it, catalyst unknown.

Speaking of a potential catalyst, January’s jobs data is released at 8:30 am. Consensus is expecting a 180k rise in non-farm and private sector payrolls, a 4.1% unemployment rate, a 0.2% increase in average hourly earnings, a 34.5 hour workweek and a 62.7% labor participation rate.

I can argue if the data is considerably stronger than expected, yesterday’s selloff in Treasuries which sent the 30-year to a 3% yield, the highest level since May 2017, could sharply accelerate. The 10-year Treasury is around 4-year high yields.

I think it is noteworthy the Atlanta Fed yesterday projected a 5.4% first quarter GDP, the greatest growth since the 6.9% pace registered in the third quarter of 2003. Wow!

What will happen today? At the close yesterday, three of the largest technology companies posted results. One company exceeded, one missed and the other gave guidance that missed expectations.

Last night the foreign markets were down. London was down 0.30%, Paris was down 1.11% and Frankfurt was down 1.20%. China was up 0.47%, Japan was down 0.90% and Hang Sang was down 0.12%.

The Dow should open considerably lower. Can we make the argument that the current earnings season was the epitome of “buy on rumor and sell on fact” as 81% of the S & P 500 companies have beaten analysts’ forecasts, the highest in seven years, with EPS up 12%? There is a record 75% of companies that have raised FY 2018 guidance according to JP Morgan.