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.

Apple on the Line

Probably will take a new 52-week low ($128.65) to get downside acceleration.

Apple Ratios

A trip to the lower support on AAPL/QQQ corrolates to a $130 price at the current level of QQQ> A conservative target is a touch of that support. Adjust for move in QQQ.

New Covid Lockdowns Spurring Rumors

163.com: The closure of Beijing Railway Station is a rumor

On the evening of November 23, it was reported on the Internet that "Beijing Railway Station was closed for the first time in 63 years, and it will be recorded in the history of the station." The reporter learned from Beijing Railway Station that this news was a rumor.

Meanwhile in Henan, the newly hired Foxconn workers are being paid 10,000 yuan to go home.

BTC, Apple and Emerging Markets

BTC and Apple are the two most important chart junctures for the bear market right now. Not more important assets than the U.S. dollar or bonds, but they are sitting right near major support lines and both are core assets for the speculator and investor classes. If these charts break their support lines, it's a big bearish signal. Conversely, with the maket going on nearly one-month of a rally, failure to break lower here would provide a new bullish catalyst.

Emerging markets are also sending a bullish signal. However, they sent a false signal in 2008. Not for themselves; they didn't make a new low after bottoming in the autumn of 2008. Their low signaled the coming change in leadership, but U.S. markets wouldn't make a low until March 2009.

The Korean won is rallying and the South Korea ETF is nearing its former long-term support. If emerging markets have legs, it looks like South Korea is the leader. If this rally is going to give way, South Korea is also reaching a spot where a reveral is likely.

Commodities Signal Something Wicked

Preface: I'm all set whichever way the market goes and I'll change positioning as necessary. Even if you're bearish, it makes sense to have real assets, some physical precious metals and you should have a small watchlist of lotto-ticket junior mining stocks in case things change in a hurry.

Commodities exploded higher on Friday. Market participants and more so financial media, always create an explanation for what happened. The story for Friday's move was China re-opening. 

Another explanation is that the money printers take power away from the Federal Reserve. There is a growing rumor that the Treasury Department led by former Fed chair Janet Yellen will seize monetary power. She has floated the idea of doing a "twist" where the treasury issues new debt and buys back older debts. This would squeeze shorts and shock the market in the short-term, though maybe not. First, if this is done, it is the financial equivalent of draining the SPR for votes. How many votes will the Biden administration get for the SPR policy? It looks like a negative number to me. I bet this move is a larger negative number. It wants to "drain" the treasury market of very favorable debt (from the view of the U.S. government) and replace it with more volatile short-term debt that will reset at higher interest rates. As with the SPR drain, they refuse the simple solution: issue less debt. Instead of sending $30 billion to Ukraine, issue $30 billion less in treasuries. What a concept! As with the SPR drain, if the policy fails and the future is worse, then they've screwed the country. Interest on the debt will bring forward the date when massive cuts in welfare and warfare spending will be made.

It's possible the gambit will fail immediately too. In addition to worsening the government's fiscal position, they are crossing a red line by interfering in monetary policy. As someone who opposes central banks for economic and political reasons, it nonetheless is a superior economic arrangement to a U.S. treasury run by literal money printing MMTers. It is possible the market reaction to this treasury move will be a collapse in treasuries, the U.S. dollar and an outbreak of inflation so bad that there are inflation riots in the streets. For this potential risk alone, it is insane for a Democrat administration to effectively take 100 percent responsibility for the nation's fiscal woes built up over generations, but that is what will be the "narrative" if they do it.

The above scenario is a valid explanation for a sustained explosion in commodities of which Friday was merely the start. Another is that for all the whining by degenerate speculators and gamblers, the Federal Reserve still has interest rates at negative 2 percent measured by core CPI. What if I and others who expect lower inflation are wrong? If neutral policy includes rates of positive 2 percent, that argues for an 8 percent Fed funds rate right now. That would mean mortgages above 10 percent. What if the move on Friday was the market calling bullshit on the Fed and inflation is about to rip higher? Say hello to 10 percent on the 10-year and 15 percent yield on mortgages. 

Intuitively it makes sense. There is no hope of a soft landing given the amount of debt-financed stimulus and lockdowns that preceded it. At the very least, the 30 to 50 percent rise in home prices, more than 100 percent in many places, should reverse nearly 100 percent if the inflation comes out. Factor in lockdowns and the economy should be at a lower level than it was in February 2020. There was a great deal of economic destruction carried out by politicians and then hidden by massive stimulus. The electoral guillotine that will drop on Tuesday November 8 is the public reaction to the tip of an iceberg of destruction that the ruling class sent our way in 2020.

Alright, there's your commodities bull case. How about the bear case? First, the Fed gets serious about inflation if the runaway inflation scenario is real. They do whatever it takes to get inflation down, including the hardest landing for stocks since 1929. You will hear screeching like never before if the Fed does an emergency rate hike, but it is the appropriate move if commodities are taking off. Copper is begging for a 100 basis point emerging hike if it has one more day like Friday.

More likely, the big move is the end of a speculative wave. Whenever I'm writing one of these posts, something big usually follows. Markets get to the starting line of a major phase change many times before they go through with the change. If this isn't the phase change yet, then history says Friday was a great shorting opportunity.

Prior spikes in copper, outside of the Ukraine war pop, came at the end of rallies:

Huge spikes in and of themselves can be bearish outside of V-bottom type moves preceding them. If China doesn't unleash massive stimulus and/or the U.S. treasury isn't dumb enough to trash the currency and treasury market, then that spike is unwarranted.

Friday's move still leaves assets such as gold and copper with their crash analogs intact. Gold did pop up, but that candle could still end up looking like April 2013 before the month is out.

Silver had a similar spike with similar volume in the futures market at the start of October.

That also came within the context of a stock rally. Using the the stock market for context and relative weakness in stocks last week, the pop in commodities looks like it could be an outlier move.

As for the broader market, it can be distilled down to one stock: Apple. The stock has a bearish topping pattern that has yet to break. The measured move off the topping pattern gives a target of below $80 per share. There is a gap at $95 per share. If it fell as much as the rest of BigTech, it would trade down around $110 at minimum. Long-term support is around $124 per share. Apple is the largest stock in the S&P 500 Index at more than 7 percent of the index. It is nearly 25 percent of the technology sector. It is 14 percent of the Nasdaq 100. Finally, it broke the AAPL/SPY uptrend ratio. While not a necessarily a trade signal, it does indicate Apple is officially losing its status as the largest company in the stock market. I doubt this will be a painless transition. It is possible Apple collapses alone, but unlikely. 

We'll find out soon enough what the market has in store. One thing I'm relatively certain of: if commodities go up, then stocks like Apple are going to crumble. If commodities reverse lower, it'll probably be for a bad reason that is also bad news for Apple. It's possible both stocks and commodities rally for a time, but I don't see them rising together for long. 

Apple is Done

The most important stock in the major indexes is probing a new low for the day and could break a moderately important trendline that has been support for 2 years. Not a major line, but the next levels I'm watching are long-term support at about $123 by November 18 monthly option expiry and the gap at $95. That's a 10 percent loss to the support line. The ratio chart it busted. I don't view that as a tradable chart, but it is an important chart telling me Apple is in the process of giving up its market leadership.

I don't know how the broader market will finish today with bulls still rampaging, but I have hard time seeing surging asset prices, surging gold, oil, copper, gasoline and so on as being sustainable. If the commodities keep rising like this, then inflation is going to surge higher and the Fed will look at the strength everywhere and see no problem with faster rate hikes.

If Apple falls below the October 13 low of $134.37 today, that might be enough to take the whole market down.

It's All Apple Now

There's some squeezing in the Nasdaq now, but when the NQ was up about 1 percent this morning, the entire amount was from Apple alone. Apple was 13.67 percent of QQQ coming into today. It was up about 6.5 percent when the QQQ was up less than 1 percent. A 6.5 percent gain in Apple was enough to lift QQQ about 0.89 percent (lots of moving parts so this isn't precise). They reported not good earnings. Not terrible earnings though, and the stock was probably heavily shorted by bears looking for carnage. Hence a big squeeze this morning that propped up the markets. I expect it will run out of steam around 11 am, not far from here, although it might get all the way back to 3900 before reversing.

Amazon in a Precarious Spot

Amazon and Apple report after the bell. Leaving aside extreme outcomes, even a modest miss by Amazon could break a support line that goes back to 2017. Next support below is at $65, though it rises over time. Apple has support in the $120s, but my eye is drawn to the ratio wedge. If Apple misses earnings, the might be enough to break the wedge. When that goes is when Apple is clearly in the process of being dethroned as market leader.

I sold half the Apple puts I bought yesterday because I've almost doubled my money. The rest is free ride.

Update: Amazon fell as much as 20 percent on terrible guidance. Apple wasn't great, but stock is holding up ok with either small single-digit losses or even flat at times. Tomorrow morning's PCE will be the make or break news event for the day. It should come in weak and help a little, maybe not a enough. If it comes in hot, then Cleveland Fed is probably too conservative for October too. That'll kill any talk of a pause/pivot.

Boiling the Market Down to One Stock

Apple made a higher low in October, making it one of the stronger BigTech stocks along with Amazon. Both Google and Microsoft made new lows in October.

Last week or two, Apple said they would shelve plans to increase iPhone 14 production. Now they're reportedly cutting their original production target for the iPhone Plus with component assembly factories in China cutting production 70 percent and 90 percent. It's behind a paywall though, that's the only snip I can see.

The news is great for traders. Assuming this isn't fluff news that can be ignored, it'll give a meaningful read of current market sentiment. No matter how consequential news may be, it's the market reaction that tells the story. A bullish market will ignore the bad news and grind higher. A bearish market will ignore good news and grind lower. If the rally has legs, the Apple news will only be an intraday dent in trading.

Apple Still Doomed

Since 3700 Didn't Crack, Shorting More

ES held the line. Here is AAPL as an example. I think what happened today is a one-dy version of these prior moves.

All My Positions

I have short positions of varying size on all of these. In terms of number of options, XLP is by far the largest position. By dollar size, CME, APPL, MCD, SHW are relatively large. If I group together all my energy positions XLE, COP and USO, that would be larger than everything, but some of these are weekly puts that I may take off early next week if crude doesn't dip quickly. XLP puts are cheaper though, and thus I anticipate they could be my largest position at the conclusion.

Update: I forgot to list BITI calls, a short position on BTC.