Market breadth is very weak recently.
A lot of indicators are doing things they have never done before. And I see this as the result of the central banks flooding the financial markets with liquidity and much of that liquidity ending up in a few companies. Tesla is one of them. It still sits in the TSP S fund which invests in all the non-sp500 companies.
The following is a chart that highlights how the broader sample of companies in each index are not keeping up with the indexes which have become dominated by a few mega-companies.
In the chart above, we see the TSP C and S fund moving higher in the last week while a broad sub-set of these indexes are weakening. This is not healthy, but most of this rally has not been based on the health of the economy or the companies making up the indexes.
What we are seeing is a movement of funds into a narrower part of the stock market in both the large cap index (SP500) and the small cap index (non-sp500 index or TSP S fund).
Everyone has been talking about how the SP500 is dominated by the big 5 (Apple, Google, Amazon, Microsoft, and Facebook). And yes, this explains why the market-weighted SP500 is out-performing the equal-weight SP500 that treats the price of all SP500 companies the same.
But what about the non-sp500 index? It has over 3000 companies and does not have any of the mega-caps in it… well, until recently.
Tesla’s stock has gone vertical lately. So much so that IF they let it into the SP500 index it will jump into the top 10 companies on entry. This has only happened one other time when they decided to allow Warren Buffet’s Berkshire Hathaway into the SP500.
Because of its size, Tesla now commands 4% of the market weight of the TSP S fund which means its price movement attributes to 4% of the moves in a fund with over 3000 companies in it. And wouldn’t you know it, the difference in the smaller 2000 companies in the S fund compared to the S fund comes down to one stock – Tesla.
So what happens if they move TSLA into the SP500 index? In effect, it would be like the TSP S fund selling TSLA at its current price and keeping the gain and the TSP C fund buying TSLA at what I consider a very high price.
I don’t know who is running TSLA’s price up in the futures market in such away as to not care about getting the best price. What I do know is that all the SP500 funds that track the SP500 index will be forced buyers of TSLA at high prices if the SP500 index managers allow it into the index.
TSLA has engineered 4 quarters of profits growth on energy credits, so they could technically allow TSLA in the index. Or maybe not, due to lack of “quality” earnings. It shall be interesting to watch. But TSLA alone explains the bad breadth in the TSP S fund.
Dana Lyon’s posted this chart on his twitter feed about the “worst breadth of all time” in the Nasdaq exchange. It seems in the last 30 years we have never had the Nasdaq surge 1% to all-time high while the number of Nasdaq issues simply “advancing” was so low (40.5%). Even the peak of the tech bubble did not log such divergence.
Another “Never Before” was posted on TheDailyShot on the 26th which shows never before has the US Stock market value relative to the GDP surged this high in one year, period… let alone while Consumer Confidence has crashed in the opposite direction over the same time. Thanks Fed.
Now what could possibly be correlated to this movement in the stock market. Hmmm?
And to add to the “Never Before” category, I have never read a former Fed Chairman or Chairwoman be this critical of our gov’t. Janet Yellen wrote an opinion piece in the New York Times on 24 August which could not be more blunt “The Senate Is on Vacation While Americans Starve“.
Of course, the Fed is to blame for this too by delaying the zombie apocalypse.
With trillions printed to bailout investors then prop up the markets and with policies designed to help businesses load up on debt one more time before declaring bankruptcy… they let the Supply-Side Only Senate off the hook for now.
The zombie companies (that have not covered interest payments on debt for the last 3 years) mostly exist in the same Russell 2000 index we discussed above which is a subset of the TSP S fund. The mid-caps in the TSP S fund are not so strong either.
But these numbers are for the last 3 years, not the post virus world. Which leads to the next “never before” chart. Never before has the default rate of high yield corporate bonds surged this high while high yield interest rates continue to drop versus no-risk Treasury yields – never, and they should not.
Interest rates defying gravity is simple to explain.
The Federal Reserve is printing money out of thin air to buy corporate bonds and the market thinks it has guaranteed insurance. Sure the Fed can drive interest rates down, but it can not make companies solvent and stop the defaults. Defaulting, BTW, means investors get wiped out.
Another way to look at this, is the army of zombies is gathering forces behind temporary measures and will attack in full force in 2021. But no worries, all of these over-indebted companies before the virus have a savior. His name is Jerome Powell and as the Fed Chairman he has said:
“We should make them whole. They did not cause this.”
Good luck Jerome. Making those customer-less companies whole while the people starve should go over real well.
And just doing the basic math: Trillions of Federal Gov’t Deficits, plus Trillions to “make them whole”, plus Trillions in Social Spending Needs adds up to a whole lot of dollar printing to force interest rates to stay below the inflation. Something is going to break soon.
Invest safe, stay safe.
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