Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here. |
Our own ProfPlum has talked at length about the changing market structure that gave us the cap-weighted distortion we have seen for the bulk of the past few years. The Magnificent 7 still comprise 27% of the SP500 or 10.7 trillion in market cap. As passive vehicles receive continuous inflows, particularly Blackrock and Vanguard, etc., they buy as the price increases. Ironically, they buy more as a proportion of their inflows of a given stock as the price increases. This, combined with the decline in market-making liquidity or inventory of stocks that are held, means there is no depth to the order book; consequently, as money flows in from mutual funds, we see the supply side becoming more and more inelastic and the cap-weighted distortion almost becomes a self-fulfilling prophecy.
JP Morgan tells us that 90% of the market is not trading on any fundamentals. The market is tied to ETF creation, index arbitrage, mutual fund liquidity fulfillment, etc.
The mechanism that distorts the market is also the market's undoing. As we go through this recession, we will concentrate on what people have to sell, not necessarily what they want to sell. The great irony is that the small and micro-caps are trading more on fundamentals than their much larger brothers and sisters. The 5-year return of the Dow Jones Micro-Cap (1639 constituents) is -4.3%. Annualized 1-year total returns of -6.2% and 10-year total returns of 4.25%, including some banner years in 2013 and 2020 of +47.3% and +22.3%, respectively.
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Learn more about the Market Situation Report written by Tier 1 Alpha. |