10 Year Treasury Yield Jumps 9 Basis Points Pummeling Stocks, Value > Momentum, TLT Oversold, NKE Earnings, Top Gun’s Long/Short Portfolio
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The yield on the 10 Year Treasury jumped 9 basis points to 1.73% yesterday, pummeling stocks, especially Growth Stocks. The S&P was -1.48%, the NASDAQ -3.02% and the Russell -2.94%.
Since I consider the NASDAQ to be the leading index of the bull market, let’s take a look at it technically. At 13,116 is now only about 500 points above its recent closing low of 12,609 on Monday March 8 while it is about 1000 points below its All Time Closing High of 14,095 on Friday March 12. That is the broad range that for me will ultimately determine whether this is a correction in a bull market or the beginning of a bear market. A break and close above ATHs suggests the former while a breakdown below 12,609 suggests the latter. Yuri Matso used trendlines rather than recent highs and lows to develop a different technical picture for the NASDAQ-100.
Turning to Section 2: Value > Momentum, yesterday’s action is more evidence in favor of the idea that the rotation out of Growth and into Value is durable. Danny Merkel posted a beautiful chart on Twitter illustrating this rotation using the Russell 2000 Value ETF (IWN) and the Momentum ETF (MTUM).
On Wednesday morning, I posted a tweet by Ryan Detrick showing the the 20+ Year Treasury ETF (TLT) had moved into bear market territory – and it only got worse the last two days. However, Rolando Santos pointed out yesterday on Twitter that the TLT is extremely oversold and due for a bounce.
Lastly, I want to discuss Nike (NKE, Market Cap $227 Billion) earnings from yesterday afternoon as another example of how Reopen Value is more than fully valued (for previous analyses along these lines see my discussions of LYFT and ULTA).
NKE reported disappointing Revenue Growth of only +2.5%. They attributed this to supply bottlenecks in North America that led to a 10% decline in their largest geographic segment. While shares are off almost 2% right now in the premarket, the stock is still trading at 44x EV to Trailing 12 Month EPS (excluding the COVID-quarter, 1Q20). I’m using EV to give them credit for the $3 billion net cash on their balance sheet and excluding 1Q20 to normalize their earnings and the stock is still at 44x. That’s a lot to pay for 2.5% Revenue Growth.
Putting it all together, if Mega Cap Growth and Speculative Growth have peaked due to rising interest rates and Reopen Value is more than fully pricing in a robust recovery and probably reaching its own peak, the bull market is over.
It is for this reason that I am short Speculative Growth via Cathie Wood’s Ark Innovation ETF (ARKK, 15% of Long/Short portfolios), Mega Cap Growth via QQQ and SMH (7% each of Long/Short portfolios) and Reopen Value via IWM (7% of Long/Short portfolios). Top Gun has a long portfolio of Defensive Value stocks slightly larger than the short portfolio in addition to our 70% position in gold and silver mining stocks as a way to play the most important theme going forward IMO: Inflation. With inflation now the #1 risk in the minds of professional money managers and gold finding technical support where it needs to, I expect this part of our portfolio to really start moving.