Retail Getting Bagged

The post bubble environment is playing out and the winners and losers are becoming clear.  The winners:  energy, pharma, healthcare, utilities.  The losers: mega cap tech (GOOG, AMZN, META, TSLA) software, semiconductors, speculative tech (EVs, ARKK favorites).  The worse performing names:  AMZN, GOOG, TSLA, NVDA, ARKK, etc. are heavily owned by retail investors.  The best performing names are not:  XOM, OXY, MRK, LLY, XLV, etc.  

The stock market has managed to do what it always does:  punish the uninformed who come late to the party and crowd into the most popular and overvalued names.  Let's take a look at 2 of retail favorite ETFs:  TQQQ (3x leveraged Nasdaq 100) and ARKK, vs 2 of the best performing ETFs: XLE and XOP.  

Inflows into QQQ, TQQQ, and ARKK, and outflows from XLE and XOP.  Yet, the performance is the complete opposite of the investor flows.

While you've seen a big rally off the October lows for the SPX, you haven't much of a bounce in ARKK or even in TQQQ.  

The most overowned stock among retail, TSLA, is acting the weakest among the megacap tech names.  It still hasn't even been able to get back above the October lows, when the overall market bottomed.  Its quite clear that there is a drastic reduction in demand for concept stocks that are massively overvalued with weakening earnings outlooks.  About the worst combination you can get for a stock.  Would not be surprised to see TSLA perform even worse in 2023 than in 2022.  Look at the low institutional ownership, which means that retail ownership is huge, uncommon for a stock with a market cap so big. 

 The heavy participation of retail investors, who are still heavily invested (they got diamond hands!) is a classic symptom of a market that is saturated and likely heading lower.  From 2008 to mid 2020, retail investors stayed away from the stock market, as equity fund outflows were the norm.  Only in the past 2 years has that changed.  The millenials, probably the dumbest generation of investors, finally had enough of sitting on the sidelines and finally piled into the bubble stocks (FANG, EVs, ARKK, meme garbage) en masse in 2021 to catch up.  Not only that, they also piled into cryptos, looking to get rich quick.  The end result is a bubble that's now popped, with retail bagholders littering the landscape.  The wealth effect is real for these millenials.  They are the ones with the most propensity to consume yet have been hit with the biggest losses.  This is not going to help with household formation in the coming years.  Add to the much higher mortgage rates and house prices that still haven't come down much and you have a shit sandwich for the millenials.  

Last Wednesday, Powell dropped his hawk act and showed his true colors.  Its not easy putting on act all the time, especially when the incoming econ. data doesn't support it.  Powell either had to lie through his teeth to try to forward guide a much higher terminal rate to keep the stock market down, or just be honest and admit that looking at lagged data to keep hiking rates is asking for trouble.  Powell seems to be over the  hawk phase of his act, and finally telling people what he really thinks.  He's afraid of overtightening, and is still going for that soft landing.  Although its highly unlikely that there is a soft landing, he'll probably soften his tone for none other than political reasons.  

He is already feeling some heat from the Dems for being too hawkish, and he's a guy who tries to please politicians.  He's the farthest thing from Volcker, no matter how much he wants to be revered like him.  The sooner he drops his infatuation with being the next Volcker, the less pain the economy will feel in 2023 and 2024.  But its probably already too late.  This is nothing like the late 70s, early 80s.  The secular stagnation and debt dynamics are total opposites of that time period.  The yield curve inversion and the leading indicators have already baked in a mild recession.  I can't picture Powell getting ahead of the curve, and he'll probably just be reactionary as always and be late as a result, panic cutting in big chunks in the summer/fall of 2023 to try to stave off a huge rise in unemployment and a big economic slowdown.  

I put on a small short NDX position on Thursday, and am looking to add to the position on Monday.  The market seems to be struggling here as we approach that much talked about SPX 4100 level, which seems to be the target for a lot of short term bulls.  With CPI and FOMC, along with a bunch of central bank meetings next week, it would fit the pattern of a pullback ahead of the events, and then probably a rally after the events are behind us.  So looking for a pullback later this week.  Not sure about levels, but probably the best time to cover will be Thursday/Friday.