Nasdaq Rebalance

US funds hit limits on holdings of high-flying tech stocks

Major asset managers and mutual fund specialists such as Fidelity, BlackRock, JPMorgan Asset Management, American Century and Morgan Stanley Investment Management have run into strict regulatory limits that determine whether a fund can be categorised as “diversified”. The trend is a further sign of how a lopsided rally powered by just a handful of big companies is creating unexpected issues for investors and index providers, and follows news that even the Nasdaq 100 — the index most closely associated with high-flying tech groups — will be rebalanced to reduce the dominance of the largest groups such as Apple, Microsoft and Nvidia. The S&P 500 has added 18 per cent so far this year, but seven large tech stocks have accounted for the majority of the gains. Mutual funds that register with the Securities and Exchange Commission as “diversified” cannot put more than 25 per cent of their assets into large holdings — with a large holding defined as a stock that represented more than 5 per cent of the fund’s portfolio at the time of investment. Funds are not punished if the value of their existing large holdings naturally rises past the 25 per cent limit, but once it is hit they cannot buy any more of the affected stocks. At the end of May, Fidelity’s $108bn Contrafund, for example, could not buy any more shares in Meta, Berkshire Hathaway, Microsoft and Amazon, because they made up a combined 32 per cent of its portfolio.

I covered this topic several times last year, most recently here: Why You Shouldn't Own Apple Stock and even more recently on the Substack: Me in April: Microsoft Done, QQQ Fails Diversification Rule

The Nasdaq 100 will undergo a rebalance because of this issue. My view is this is the sign of a massive market top. Last time this became an issue, the market solved it in March 2000. That this is going for almost 5 years now, going back to the 2018 major sector shuffle, indicates this could be a far larger top in time and price. The alternative explanation is the United States is becoming a techno-fascist country with emerging market qualities. For example, Taiwan Semiconductor is around 40 percent or more of the Taiwan market capitalization.

Rollovers

King of the Semiconductors

TSM is 11 percent of SMH.

Bull or Bear Market in Miners, Semiconductors

Bullish and bearish patterns tend to fail in the wrong market. In a bull market, expect the bullish setups to succeed. Expect the bearish setups to fail. Buying the dips works. In a bear market, it's the reverse. Bearish setups succeed, bullish ones fail, and selling the rips is profitable.

Below is a mining stock that came across my radar again today. I think there's downside risk to around 90 cents assuming this is a bull market. I can also see (not a forecast) what could be a head-and-shoulders top forming. I've seen this pattern on other mining shares and it gave me pause, but if this is still a bull market most of these patterns should resolve higher.

Similarly, Taiwan Semiconductor could be basing for a breakout later this year. You can imagine if it breaks resistance and moves higher, the current pattern could evolve into a cup. Or it could be setting up for a downturn this summer with a breakdown through horizontal support. If it did break the target is $67, conveniently where a price gap exists (blue line). Since 2009, these patterns typically do not complete or if they do, bottom long before reaching their potential target (exceptions being some sectors such as energy and commodity producers). That will change if and when a bear market begins.

Let's go back to BTC. Since this is the crypto leader, completion of this top would mean the bear market is in the early stage, rather than this being the late stage of a correction. Failure of this topping pattern would be a powerfully bullish signal though.

Here is Dogecoin showing the pattern in TSM above, with mulitple instances of it all resolving higher.

Finally here is ARKK. When a bear market begins, it typically starts in the lower quality names. If the bull market that began in 2009 is finally undergoing a topping process, look for assets such as ARKK to never recover. If the bull market is still going strong, then ARKK should eventually make new all-time highs.

The Beginning or The End for Semiconductors?

The bulls say a new bull market started in March 2020 and some Teradyne cleared its 2000 high, but has since pulled back. Bullish above the blue horiztonal, but I'm bearish on semiconductors and tech in general.

Taiwan Semiconductor. Everyone knows they have a monopoly. Everyone knows theres's a shortage of chips that is ongoing. Chart looks like a correction for now, but below $107.46 the outlook turns decisively bearish in the intermediate-term. Bonus is the Taiwan ETF. TSM is about 22 perecnt of the fund. The top-5 are all tech stocks with about 35 percent of the fund's assets. Tagging aa long-term resistance line.

Finally, the most liquid semiconduictor ETF.

Keep Shortaging Chips

Rolled out of some AMD puts for TSM puts. This is a volatility play. I'm betting TSM will accelerate to the downside, that its options are mispriced for what is coming. Additionally, I was able to buy 2 TSM puts for every 1 AMD put I sold.