Wild Swings in Mega Cap Stocks

The swings we’ve seen in the top stocks of the S&P 500 are truly astonishing. In just the last month, the S&P 500 went from a 4800 peak to a 4320 trough, followed by a wild bounce. It’s even more interesting when you dig beneath the surface to see the moves of the top holdings.

I have a 2 month candleglance chart above, comparing SPY with it’s top 10 holdings. BRK-B has the clearest 2-month uptrend, showing some of the rotation from growth to value. JPM went up early in the year as rising interest rates are usually good for financials, but dropped badly after seeing the yield curve flatten and credit spreads start to widen.

The enormous drop seems high given that the company is still wildly profitable with growing revenues, but after the fall it still sports a P/E ratio of 17 which is about the same as BRK. At lofty P/E ratios, it doesn’t take much to cut the price by a lot. By comparison, it’s closest peers seem to have been AAPL with a P/E of 28.7, GOOG with 25.5, and MSFT with 32.6. The highest P/E’s here are TSLA with 188, NVDA with 75 and AMZN with 49, so expect a wild ride with those. That leaves JPM as the closest to a value stock here with a P/E of only 9.9 and a 2.7% dividend yield.

It still seems strange to have such wild swings in such large companies, as it doesn’t seem to make sense if you believe in the popularized theory of efficient market pricing. I like to look at inflection points and think about what changed the trajectory. Here’s a few examples:

For the next era, it’s easiest to explain if I include two support charts with it:

And finally, the current era:

It’s fascinating how most of the eras above saw massive inflection points higher in stock valuations. The 401k era left the previous stock trends in the dust. That trend paled to the internet revolution with the first rise of retail adding to those regular 401k flows. As often happens, bubbles led by retail investors usually collapse as the money can flow out as fast as it flows in.

The government and the federal reserve tried hard to find the winning formula over the next decade that would bring back the big stock gains from the 1990’s, and with changes in a number of regulations after the different crises they managed to do just that. From the elimination of glass-steagall in the 90’s, to the elimination of mark-to-market accounting in 2009, to the curtailing of SEC action against monopolies, to the encouraging of once banned stock buyback programs, to the introduction of hedge funds to the housing market, to the introduction of zero rates and quantitative easing, along with negative rates abroad, they found a winning formula in the 2010’s.

This led stocks to rise just as fast as the 1994-2000 tech bubble era throughout the entire decade, all while bringing back the gains of the housing bubble in the early 2000’s. Even more impressive, these gains did not see significant retail involvement, making them more sustainable for a longer period. Post covid, the rise of retail investing pushed the curve higher than ever before as it piled onto the other trends which continued at a blistering pace.

Well, I hope I left you a lot to think about there. There are many implications to the changes above which are more divisive than ever as we enter are in a time of growing instability in valuations, domestic politics, geopolitics, sociological changes, etc. Our theories are as divergeant as our data as trust in news sources is low and societies fragment into groups with wildly different views of what is going on in the world. My favorite description of it is “Nothing is True, But Everything Is Possible,” which you can hear more about in the Hidden Forces podcast, episode 229 with Dmitri Kofinas and Peter Pomerantsev.

Anyway, here’s how my holdings ended up this week:

  • HEDGES (10.0%)
    • 10.0% TLT Calls
    • 7.6% AG (Silver), shares
    • 6.9% AG (Silver), calls
    • 3.2% SAND (Gold, Silver & others), calls
    • 4.2% EQX (Gold), calls & shares
    • 4.2% LGDTF (Gold)
    • 4.5% SILV (Silver)
    • 3.9% SILVRF (Silver)
    • 3.8% MTA (Gold & Silver)
    • 3.2% MGMLF (Gold)
    • 1.9% RSNVF (Silver)
    • 2.2% SSVFF (Silver)
    • 2.6% HAMRF (Gold)
    • 0.9% DSVSF (Silver)
  • URANIUM (29.1%)
    • 13.9% CCJ, mainly shares & some calls
    • 7.3% UUUU
    • 3.0% UEC, shares & some calls
    • 1.9% BQSSF
    • 1.6% DNN
    • 1.4% ENCUF
  • US CANNABIS (18.0%)
    • 2.1% AYRWF
    • 2.2% CCHWF
    • 2.4% CRLBF
    • 2.2% CURLF
    • 2.1% GTBIF
    • 2.4% TCNNF
    • 2.3% TRSSF
    • 2.3% VRNOF
  • CRYPTO (1.1%)
    • 1.1% XRP
    • 0.2% ATCO calls
  • CASH (-7.2%)

My total holdings saw a 1.2% gain, which is welcome after the 9.9% drop last week.

Overall, I expect a volatile chop-fest through March, which I think will end up higher but it could end lower as well, before a potential waterfall in late March/April as the federal reserve stops QE and actually begins to raise interest rates and tighten policy.

Although I am confident in the long-term holdings of my core portfolio, I am aware that any liquidity crisis would cause valuations of potentially everything to plummet. As such, my plan is to sell on rips and be patient on dips with a goal of getting a positive cash balance by early March. That way, if the market tanks like I think it will, then I won’t have any problems from margin debt and I’ll have some money to invest when it stabilizes lower.

However, I am not so confident in impending collapse that I will abandon my holdings – I plan to ride most of them through. It would be really annoying if I dumped everything just to see a fierce re-balancing into my former holdings rather than a crash. On the flip-side, if I keep my core holdings and liquidity-driven crash does occur, I expect to make significant gains from my TLT call hedge position which will backstop my temporary losses elsewhere.

That being said, I made some progress trimming this week. I sold URG from my Uranium portfolio for a 10% gain, and I sold deeper in-the-money Feb 18 calls on my AG shares. If they expire in the money and those shares are called, then my margin debt fall close to zero, and if they don’t then at least I grabbed another 11% of premium out of them on the way down.

I did add a couple things this week though, including a few more TLT calls after it got hammered lower on Friday, and some deep out-of-the-money August calls in ATCO after I heard a Real Vision episode on shipping. I like having some low cost chances of decent gains here and there, and stocks are certainly volatile these days. These can easily lose – I had some calls in AG and UEC go to zero in recent weeks – but I also had a recent gain in XOM calls turning $300 into $2200.

That’s all for now. Good luck and happy trading.

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at gluskinsheff.com. Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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