Is Today Different?

By: Kent Engelke | Capitol Securities

A major difference in the headlines about the current advance and those that occurred in the past is the near unanimity the advance is focused in just a handful of names. Yesterday’s front page of the WSJ stated five companies contributed to 41.4% of the annual advance in the NASDAQ, an extremely narrow rally stating that such a vast concentration of wealth can create a major imbalance.

The WSJ then compared today’s technology fueled advance to the one that ended in 2000, an era where approximately 50 companies dominated. As widely known, the NASDAQ topped out in March 2000, fell about 70% and according to the WSJ, took 3,766 trading days to retrace its decline.

Returning back to the here and now, the fund flows into ETFs has been intense. As noted many times, ETFs are capitalization driven investment strategies where the big tend to get bigger and the small get smaller. In many regards ETFs indicate that past performance is indicative of future performance, a statement that is riddled with massive compliance risk.

I ask is today’s massive over performance of only five companies the result of the massive proliferation ETFs (and the total domination of the markets by technology based trading)? I think yes.

As noted the other day, many of the hedge fund and private equity luminaries are bearish, partially the result of this massive concentration of wealth into one industry and several names. Historically, and as indicated in 2000, such myopicy does not end well.

Change is the only constant. I reiterate, if Trump’s proposals become legislated, growth can exceed 3% for the first time in over a decade permitting Main Street — aka the value and small capitalized companies —to outperform Wall Street — aka the mega-capitalized growth companies — also for the first time in over a decade.

I think if Trump’s agenda is not enacted, the odds are over 50% there will be a significant decline in the averages, a decline that I believe will be primarily focused in a handful of names given massive ownership levels.

What will happen today following a relatively quiet day?

Last night the foreign markets were down. London was down 0.46%, Paris was down 0.24% and Frankfurt was down 0.17%. China was up 0.36%, Japan was down 0.19% and Hang Sang was up 0.49%.

The Dow should open flat. The 10-year is unchanged at 2.31%.