FAANGs aren’t what they used to be, so watch out for bear market bounce, says this hedge fund manager

It has been a rally. The S&P 500
SPX,
-0.19%

is starting the week at a seven-week high, buoyed by hopes of a less aggressive Fed and a sense that earnings pessimism was overdone.

The benchmark stock index is up 12.6% from a recent low in mid-June, having posted its best July performance since 1939, according to Dow Jones Market Data. Last week’s 4.2% pop took it through resistance at 4,000, moving further above its 50-day moving average in the process. And so.

But naturally, some are not convinced.

With the S&P 500 Relative Strength Index now at 74 and in “overbought” territory, short-term bear traders can expect a bit of a pullback.

And Kevin Smith, chief investment officer at hedge fund Crescat Capital, thinks the problems are bigger than just an overextended momentum indicator.

“Last week looked to us like a capitulation of short sellers for the market in general and in mega-cap tech stocks in particular. Crescat does not give up at all. There were plenty of ‘buy the news’ headlines that could mark the peak of another bear market rally,” Smith says in a note to clients.

He cites three elements of what he calls truly bearish news in recent days; the Fed’s 75 basis point hike in interest rates; a consecutive negative impression of real GDP; and “dismal” mega-cap tech earnings.

“Yes, it was all really bad news, but short-term positioning was off the table in anticipation of all this bad news, so there was a technical reorganization of the short sellers,” Smith acknowledges.

As for the economy, investors are fooling themselves if they point to a strong job market as evidence of a soft landing as the Fed tightens policy.

“It’s sad how many people, including policymakers, seem clueless to the fact that labor markets are always a lagging indicator before economic downturns. Because inflation is so high today, and the Fed is so far behind, the current period of negative real growth is likely to be very long and just beginning.

And as for big tech earnings, he’s particularly dismissive: “There was a massive slowdown in revenue, earnings and free cash flow for all FAANG+ stocks recently reported, and all remain highly valued. .. The truth is that high multiples growth stocks traditionally do poorly in an inflationary environment. These stocks are hardly growing anymore, especially on an inflation-adjusted basis.”

FAANG stands for Facebook, Amazon
AMZN,
+2.26%
,
Apple
AAPL,
+0.19%
,
netflix
nflx,
+0.02%

and Google (although the former and latter now appear as Meta
GOAL,
+0.75%

and alphabet
GOOGLE,
-0.30%

)

Source: Crescat Capital

Smith concludes that because the FAANG+ results were not as strong as the market has been interpreting, he is increasing his bearish bets. “We have been increasing our shorts there in this recent short covering rally. We believe the equity bear market will resume soon with the Fed still in tightening mode and the yield curve now well inverted.”

markets

US stock index futures are a bit softer after their recent strong run, with the S&P 500 future
ES00,
+0.13%

it fell 0.3% to 4,122. and the Nasdaq 100
NQ00,
+0.68%

future falling 0.2% to 12,948. dollar index
DXY,
-0.49%

it is retreating further from the last 20-year highs, down 0.3% to 105.61. The 10-year Treasury yield
TMUBMUSD10Y,
2,608%

it has risen 2 basis points to 2.671%.

The buzz

Boeing stock
LICENSED IN LETTERS,
+6.25%

jumped more than 4% after the aerospace group got FAA clearance to restart deliveries of its 787 Dreamliner.

us crude oil futures
CL.1,
-5.08%

are down 3.2% at $95.44 a barrel after soft manufacturing surveys from Porcelain Y Europe added to global growth fears.

Ali Baba
9988,
-3.76%

Stocks fell further in Hong Kong on Monday after US regulators last week added the e-commerce giant to a list of Chinese-owned companies that could be delisted.

US Wheat Futures
W00,
-1.80%

remain near five-month lows after Ukraine was able to send its first grain shipment from Odessa since the Russian invasion.

In earnings, Loews
L,
-5.68%

publishes results before the opening of the market, while Activision
British Television Channel,
-0.38%

and pinterest
PAWS,
+0.21%

come after the closing bell.

Shares in HSBC
hsba,
+7.01%

have risen 8% after the Asia-focused but London-listed bank delivered better-than-expected earnings.

US economic data on Monday: ISM Manufacturing for July and Construction Spending, both at 10am ET.

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