😳 Momentum Stocks Reach Uncharted Territory

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Today is all about extremes - market peaks and valleys.

Let’s dive in:

• Momentum Stocks Reach Uncharted Territory 😳

• What To Watch This Week 👀

• Should We Be Spooked By Retail Sales Trends? 🛍️

Today’s newsletter is a 5 minute read.

Momentum Stocks Reach
Uncharted Territory 😳

Here’s a chart that may be shocking to some people, but not to investors who are in tune with stock markets this year:

The visual above shows just how dramatic the performance of momentum stocks have been relative to the overall market lately.

While momentum can be quantified in different ways, the label typically applies to stocks that have positive price momentum.

In other words, stocks that have been on the rise recently just keep rising!

Stocks such as NVDA, LLY, COST, CAVA, CMG, and VRT fit into this category in the past year:

Some of those such as NVDA or VRT fit an existing hot theme (AI) while others such as COST don’t appear to have a clear justification.

COST trades at an all time high price-to-earnings ratio of 50X but the business hasn’t meaningfully changed this past year (other than it’s typical 5-7% revenue growth).

Quant trading and CTA firms are particularly drawn to momentum investing strategies, so their increasing AUM may be driving this phenomenon.

To some degree it’s also self perpetuating, as good performance in momentum drives other market participants into the same strategy.

However, there are two possible dark sides to this development:

1. beaten down value stocks have steeper declines than ever

2. so much capital in this one strategy could lead to a turbulent market event

There have been several episodes in the past where a bunch of firms tried to exit the same crowded trade/strategy, and the market took a dive.

These include the collapse of LTCM in 1998, the “quant quake” in August 2007, the “flash crash” in 2010, and “volmageddon” in February 2018.

Luckily those events were short lived, but it’s unclear if another one could happen and how severe it would be.

Trying to bet against momentum stocks in the meantime could prove very costly.

When it comes to some stocks that are currently unloved however, there might be an opportunity.

We’re seeing new lows in a lot of stocks that could have long term growth opportunities and trade for low valuations.

Here’s a sampling of stocks that have made new lows recently you might know:

• PayPal (PYPL)

• Snowflake (SNOW)

• Lululemon (LULU)

• Paramount Global (PARA)

• Wayfair (W)

• Teladoc (TDOC)

• Dropbox (DBX)

• Zoom (ZM)

• Atlassian (TEAM)

• Coursera (COUR)

• Warner Bros Discovery (WBD)

• Asana (ASAN)

• Ulta (ULTA)

• Twilio (TWLO)

Momentum stocks are on a historic run, but no broad market trends last forever…

Perhaps it’s time to take a closer look at the unloved parts of the market!

What To Watch This Week 👀

Nvidia and other semiconductor stocks finished down last week, an increasingly rare occurrence.

Still, the Nasdaq and S&P 500 finished up slightly after a few choppy sessions, while some laggard sectors such as energy and financials finally snapped their losing streak.

Crypto continues to trend slowly lower, so we’ll be watching for any major price breakdowns there this week.

Nike, FedEx, and Micron earnings are worth watching this week, but otherwise the earnings calendar is very light.

Economic data in the US remains mixed lately, while it seems to be improving in some European countries as well as in China.

Here’s some of the important macro releases on this week’s calendar:

• Australia consumer confidence (Mon)

• Canada inflation (Tues)

• Germany consumer confidence (Wed)

• US Durable Goods orders (Thurs)

• France inflation (Fri)

• Italy inflation (Fri)

• US Personal Income & Spending + Core PCE (Fri)

• China manufacturing (Sun)

Market breadth has been narrow this month, but if the NVDA selloff intensifies then we might see momentum funds shift course this week.

We’ll be keeping an eye on the following assets & sectors:

📈 Rising Recently:

• Software (IGV)

• Gold Miners (GDX / GDXJ)

• Retail (XRT)

• Consumer Discretionary (XLY)

• Nasdaq-100 (QQQ)

• Momentum (MTUM)

📉 Falling Recently:

• Chinese stocks (KWEB / FXI)

• Small Caps (IWM / IJR)

• Cleantech & Solar (TAN / PBW)

Should We Be Spooked By
Retail Sales Trends? 🛍️

Last Tuesday we received the updated retail sales report for May.

It gives us insights into how much the consumer is spending on certain categories. It’s a very useful report for those of us trying to pinpoint where the economy is heading.

The report sent S&P 500 futures higher for a short period of time as the “bad news is good news” narrative continues.

Weakness in the consumer = rate cuts in the market’s eyes.

This is why the market is holding its gains for now.

So … how “bad” was the report?

First, we did get a revision downward for April’s report. That was the first hit.

Next, although the retail sales report (including all categories) showed positive growth month-over-month, May showed that retail sales ex-automobiles was actually down -0.1%.

This is continuing the trend from April and besides March being a standout, the trend has been showing weakness continuing in spending ex-autos.

Used automobile prices have come down which has helped consumers spend in this category again.

Here’s another vantage point:

Looking at the data excluding auto and gas (both being less “discretionary” spending categories in the U.S.), we’re left with a trend that is aligning with a lot of the data we’re seeing elsewhere (again, March was a standout in the overall trend).

Of course, the data is still positive for May, but, much “less” positive than prior months.

Although this sounds bad on the surface, when we look at how the retail spending has trended from 2020, it’s easy to not get TOO worked up about it.

Let’s compare 2008’s recession to 2020.

The 2008 financial crisis led to a classic decline in retail spending followed by a recovery back to normal.

Then, there’s 2020. Nothing like the “normal” ups and downs of 2008 or other classic recessions.

The entire dynamic of 2020’s crisis was so much different from 2008.

Jobs became more than plentiful, people couldn’t leave their homes so they had loads of disposable income, and then stimulus checks added fuel to the spending power of consumers.

Unpacking today’s state of the consumer requires thinking through some of this nuance.

I don’t think this retail sales trend is one to get too spooked about just yet.

Consumers are certainly slowing down without question, but, is this a temporary “recalibration” or a new concerning trend that spending power will continue to fall and lead us into a recession?

It still seems too early to tell. Not only that, lower rates could be a buoy for spending again in cyclical categories like furniture, which have been in the dumps.

If we didn’t have rate cuts to look forward to, I think there’d be more cause for concern here.

Normally, rate cuts mean something ominous is happening with the economy. However, this entire cycle since 2020 has been nothing but normal.

Food For Thought 🧠

“Being open source means anyone can independently review the code. If it was closed source, nobody could verify the security. I think it’s essential for a program of this nature to be open source.”
- Satoshi Nakamoto

DISCLAIMER: We are not investment advisors, and this content is for educational purposes only. We don’t offer financial, legal, or tax advice. Nothing we say is a recommendation to buy or sell any assets. Trading and investing are extremely risky, so please be careful and do your own research.