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GET READY FOR MORE FAT TAIL MARKET EVENTS

GET READY FOR MORE FAT TAIL MARKET EVENTS


On 9/3/20 TPA told clients that it had added a new alert to the Canaries in the Coalmine – momentum stocks. TPA clients had enjoyed riding BIGTECH and FAANGT stocks as they rocketed ahead of the market for many months. TPA’s mantra for most of 2020 had been that these mega-cap, growth stocks were the place to be, but on 9/3 TPA explained that something had changed. In the 9/3/20 World Snapshot, TPA wrote:


“NEW CANARY IN THE COALMINE TO WATCH – MOMENTUM STOCKS - TPA publishes the Canaries in the Coalmine each morning for clients. The Canaries are early warning signs that something has changed in the market. TPA has repeatedly told clients to be heavily weighted to BIGTECH and stocks that are either protected or benefit from the Pandemic. We have, however, also warned clients that BIGTECH and FAANGT need to be monitored given their huge weight in the market. TPA specifically targeted “TSLA, CRM, ADBE, AAPL, and NVDA. These 5 stocks have had huge rallies in the past month. The relative performance chart below shows that these 5 stocks have completely outpaced the S&P500 and the QQQ 2020 YTD.”

On Friday, the S&P500 closed at a new high, but this occurred without the help of momentum stocks. Charts 1 and 2 shows that the S&P500 had a new high close at 3585 on 11/13, slightly improving on the 9/2 former high close of 3580.


Chart 3 shows how the momentum stocks TSLA, CRM, ADBE, AAPL, and NVDA outperformed until 9/1 and chart 4 shows how they have underperformed from 9/1 to Friday 11/13.


Chart 5 reveals that the winners since 9/1 have been exactly the opposite of Mega-Cap growth. The outperformers have been Russell 2000 Value, Russell 2000, Russell 2000 Growth, and Russell 1000 Value. Russell 1000 Growth is the ONLY underperformer.


The allocation tables below show that the winners and losers since 9/1 have flipped. The new winners are Banks, Financials, Retail, REITs, and Healthcare. The new losers are Internet, Computers, Software, and SEMI’s.


So, the recent rally has been driven by the former losers and much of this performance happened after the PFE’s 11/9 announcement of very positive vaccine data. The moves since 11/9 are so dramatic that they have destroyed many statistical models. Jon Quigley who manages $3.8 billion wrote to clients, that “…events happened that statistically never could happen.” That that occurrence could statistically happen roughly ““once every 5,944,505,312,905,660,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000 days in a normally-distributed return series,” (Bloomberg 11/13/20).


In a market run in part by models, machines, and day-traders, this probably should not have been a surprise. “It’s not a coincidence we’re seeing more 6 sig+ moves relative to history,” Cem Karsan, founder of Aegea Capital Management LLC, tweeted, using the symbol denoting standard deviation. “These aren’t your father’s equity markets.”


The questions for TPA clients are

1. Is the current relative performance pattern sustainable? and

2. Should we now expect more fat-tail events?


TPA’s answers to these questions, in order, are

1. Maybe not and

2. Definitely.


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