Flight to Mega-Cap Stocks Continues

The S&P 500 has been consolidating in a fairly tight range between 4100 and 4200 since the beginning of April.

Here’s the equal weight S&P 500, ticker RSP. This looks like a descending channel, with the 50 day moving average falling below the 200 day moving average. Interesting that it is descending while the market-weight S&P 500 is climbing.

Here’s where all the money is crowding these days – AAPL and MSFT:

Here’s AAPL, recently hitting a 1-year high.

MSFT is well above its 1-year high:

The multi-year volatility of these mega-caps still amazes me. AAPL has a market cap of $2.76 Trillion, and within the last 2 years it fell below 130 (3) times and soared above 170 (4) times. 31% market swings in valuation mean a fluctuating valuation of $856 Billion. MSFT tends to trend more, with a market cap of $2.37 Trillion and rising from 250 to 350 then falling to 220 and rising back to 318. 220 to 318 is a 45% market swing for a fluctuating valuation of $1.06 Trillion.

It seems amazing that these two companies can be that volatile, but it makes sense considering that these companies are held in significant amounts in most exchange-traded funds. The S&P 500 trackers hold 14% of their assets in these two companies alone, and the NASDAQ trackers hold 26% of their assets in these two companies. These ETFs are designated as “passive,” which means that they don’t react directly to price. Their price reaction is to buy shares when money enters the fund in accordance to market cap.

Money has been flowing steadily into these passive index-tracking funds, especially recently as they are seen as “safe” because people feel they own the entire index. The higher the price of AAPL and MSFT rises, the more incremental dollars added go into purchasing their shares – and if flows into these funds reverse, then the higher price means more incremental dollars will be sold from AAPL and MSFT shares. What can make these flows reverse? A spike in layoffs would directly mean less money is going into 401k funds in weekly payrolls and could spook a number of investors holding these funds to consider a larger allocation to bonds. When flows reverse, these two stocks can fall quite rapidly, hence the high volatility over a two year period.

There’s not much more I can really say on markets except that we’re in a waiting game. The debt ceiling talks are totally irrelevant to the driving flows in markets today unless something happens that is serious enough to change them. Stock prices do not anticipate or to fundamentals, they simply flow with the prevailing winds which are still pushing the mega-caps higher.

High valuation metrics, like a P/E ratio near 30 for AAPL and near 35 for MSFT, and the danger of high exposure to China while Congress debates measures like this https://www.reuters.com/world/us/us-senate-draft-new-legislation-counter-china-2023-05-03/ simply mean that the price can drop quite considerably if the upward flows from stock buybacks and the passive investing trend are overwhelmed. On the other hand, there is a high short interest in the S&P 500, and if sellers are exhausted while passive flows and stock buybacks keep pushing then it could spark a massive short-covering rally. The only way to really play this is to expect volatility to be high and keep your exposure relatively low with instruments like puts when it looks like flows might shift downward and calls when they might shift upward. I’m biased to the downside here, but I could easily lose my AAPL puts and come out fine.

As for other stocks …

Cannabis is probably the most interesting as there had been another push for the all-important “Safe-Banking” legislation, but it looks like it has been once again derailed by Senate Majority Leader Chuck Schumer who tacked on a bunch of requirements that don’t have enough support to pass.

I still believe in the supply shortage story with many commodities, but commodities often react to the real economy more than stocks do and the trend is dis-inflationary to downright deflationary. Recent earnings have supported this with huge disappointments for Home Depot, Target, and Foot Locker while Walmart has been doing well with its focus on consumer staples. I haven’t heard about any significant new bankruptcies this week, but they do keep coming. Last week we had 7 big companies including Vice Media, Cox Operating, and Envision Healthcare, before that was First Republic Bank, and the pressure is still there. I’m still long a bunch of mining stocks with out-of-the-money covered calls sold on them to wait out this period of weakness.

That’s it for now. I recently added more Jan 2025 TLT calls. Here are my portfolio allocations:

• HEDGES (5.6%)
  • TLT Calls (3.5%)
  • LEN Puts (0.6%)
  • AAPL Puts (1.1%)
  • TSM Puts (0.4%)
• PRECIOUS METALS (38.7%)
  • AG w/ cc (5.7%)
  • EQX w/ cc (5.0%)
  • MTA w/ cc (4.2%)
  • SILV w/ cc (4.7%)
  • LGDTF (3.0%)
  • SLVRF (3.8%)
  • SAND w/ cc (2.5%)
  • MMNGF (3.0%)
  • SSVFF (1.9%)
  • BKRRF (1.4%)
  • RSNVF (1.3%)
  • DSVSF (1.2%)
  • HAMRF (1.2%)
• URANIUM (23.8%)
  • CCJ w/ cc (4.2%)
  • DNN (3.4%)
  • DNN calls (1.6%)
  • UUUU w/ cc (4.1%)
  • UEC w/ cc (2.9%)
  • UROY (3.2%)
  • LTBR (2.1%)
  • EU (1.7%)
  • BQSSF (0.7%)
• BATTERY METALS (14.9%)
  • NOVRF (5.9%)
  • SBSW w/ cc (4.1%)
  • EMX (3.1%)
  • PGEZF (1.8%)
• US CANNABIS (9.6%)
  • GTBIF (1.7%)
  • VRNOF (1.6%)
  • TCNNF (1.0%)
  • TRSSF (1.3%)
  • CRLBF (1.2%)
  • CURLF (1.3%)
  • CCHWF (0.6%)
  • AYRWF (1.0%)
• OTHER (5.9%)
  • DOCN w/ cc (2.2%)
  • XRP (3.7%)
• CASH (1.6%)

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