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A warning shot?

24 July 2020

Mark Hawtin suggests recent market events might be indicative of a surprisingly uncertain future.

Having seen one particularly wild day in the market last week, particularly after Europe closed, we believe it is worth looking at some data that signals a degree of caution might be warranted. As a team, we use DeMark indicators as a key signal of overbought or oversold conditions. DeMark indicators have the ability to compare the most recent maximum and minimum prices to the previous period’s equivalent price, in order to measure the demand of an underlying asset. On 13 July, the Nasdaq 100 completed a 9-13-9 count, signaling an overbought level. Following this signal, we typically wait to see a four day reversal in prices, followed by a lower opening day. With the size of the move, this reversal happened in futures trading on 14 July.

The exact same pattern is evident in Amazon seeing USD 120 billion wiped off its market cap from top to bottom in 13 July’s session. Amazon represents the epitome of the dash to a select group of what are considered beneficiaries of the Covid outbreak. There is no doubt to us that the level of disruption we are witnessing is being accelerated by the working from home (WFH) world of today, and we see this as strong support for the disruptive opportunity going forward. That said, as we typically show with the Gartner hype-cycle, price and reality can often be at odds for periods of time. It is interesting to see how Amazon has performed relative to its other mega-cap counterparts, accelerating away most recently. The stock is up 22% in just the last month, as the rally accelerated to take its year-to-date run to +68%, which is a measure better than Apple +13% 1M, +30% YTD; Microsoft +10%, +31%; Google +7%, +13%; Facebook +5%, +16%.

The acceleration over the past few weeks is no more evident than in Tesla now boasting a USD 300 billion market cap. It made just 367,500 cars last year, which technically is not far short of USD 1 million market value per car!

We believe these moves can go on for far longer than is rational. Given the unpredictable nature of market moves like this, and with a tsunami of liquidity to back up the buyers as well as a new culture of day traders that we have written about previously, it would be foolish to make a bold call for the top. However, caution must be advisable in the short term. The election battleground in the US looms, Q2 earnings started in earnest last week (with JPM already reporting), and valuations in parts of the market are stretched.

The disruptive growth part of the market can be split into three buckets: cyclical / value that does not look expensive, though we have yet to see the path of the economy to recovery; core growth that is fair to expensively valued but not outrageously so; and the ‘hot’ stock group – WFH, enterprise value, next generation names where price action is reminiscent of 1999/2000. It is important to divide the market like this, because there is a clear stratification, unlike previous bubbles where all names were overvalued.

Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. The companies listed were selected from the universe of companies covered by the portfolio managers to assist the reader in better understanding the themes presented. The companies included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice.