I’ve focused a lot on interest rates this week because they are going up and that is fundamentally bearish for the expensive tech stocks leading the market. The reason is that a lot of tech stocks value is in future earnings. As rates go up, the discount rate used to calculate the present value of future earnings goes up which reduces their present value. This relationship did not hold Tuesday as the NASDAQ went up 0.76% even as rates inched higher. Nevertheless, there is a point at which this relationship will reassert itself.
In addition to rates, market breadth continues to be poor. The indexes went up Tuesday but NYSE + NASDAQ Advancers / Decliners was negative (3,160 / 4,264). That’s because the mega caps represented by ETFs such as QQQ and OEF (S&P 100 Mega Caps) – which were up 0.71% and 0.43%, respectively – masked the weakness in smaller stocks beneath the surface as represented by ETFs such as RSP (S&P Equal Weight) and IWM – which were up only 0.13% and 0.18%, respectively. Take a look at how hard RSP rolled over in the afternoon in the chart above. The mega caps – especially Tech – continue to push the indexes higher but beneath the surface there is a lot of weakness. This is not sustainable over the long term.
All the same, you have to respect price which is why I covered all of my shorts Tuesday morning. There will be a time to short this market – and doing so will be extremely profitable – but not quite yet.
On the other hand, it’s too risky to go long the sexy stocks right now like electric car makers Rivian (RIVN) (up another 15.16% Tuesday) and Lucid (LCID) (up another 23.71% Tuesday), neither of which have much in the way of actual deliveries or revenue (see above graphics). This is the kind of action you see at the very tail end of great bull markets. Enjoy the party but don’t be the last one to leave.