With the reversal in technology stocks and by default momentum/growth comes the potential for a more broad based risk-off move, as momentum works just as easily in the opposite direction.
Complacency reigns for now, but risk builds slowly, and when sentiment shifts, liquidity quickly disappears. Then the previous stability in the seemingly never-ending melt up is destabilizing in itself, with everyone rushing for the exits at once. Particularly following the increased retail and hot money participation chasing momentum in the high-flying stocks, which increases the risk of compulsive selling when sentiment shifts. Long growth/short value positioning is at historical extremes and a reversal in this positioning could be painful, with a correction well overdue.
The key for whether the tactical move is one of profit taking in tech and a rotation toward vlaue/cyclicals OR whether profit taking across some of the high flying momentum names spurs a more broad based risk off move, may well lie with the fate of the USD. As our head of FX strategy John Hardy notes, the USD is at pivotal levels for confirming a real trend in USD weakness, heading into the all important EU Council summit on Friday and Saturday. The risk of a move higher in the USD likely having the capacity to spur sectoral rotation toward more broad risk off. Again, one sided position in EURUSD reveals the risk of disappointment should the recovery package deal prove less of a slam dunk, as has been hinted via the continued resisitance from Austria and the Netherlands.