Key points in this equity note:
- A big unwind in positions in US equities likely happened this week with selling of technology mega caps and covering of shorts in small caps.
- Tesla shares are up 4.5% in pre-market after a strong session yesterday as GM is following Ford in adapting its EVs to Tesla’s charging stations.
- Adobe is our earnings focus next week with solid revenue and operating income growth expected. Investors will focus on Figma acquisition and pickup in outlook from recent product updates.
Unwinding of mega caps and covering of economic sensitive small caps
This week was rather dramatic as we have highlighted in several of our equity notes with the VIX Index plunging to new lows for the pandemic cycle and the VIX forward curve signaling calm and expectations of extended momentum. But underneath the surface of equity indices the long tail of stocks are underperforming mega caps overlapping with previous periods of significant tipping points.
Since the US debt ceiling was resolved the Russell 2000 has been on a tear as small caps are the most sensitive stocks to changing economic conditions. As we came into this week both small caps and technology stocks rallied together but starting Tuesday and accelerating into Wednesday before petering out by Thursday, US small cap stocks rallied hard while technology stocks declined. Measured over a 2-day period ending on Wednesday, Russell 2000 stocks rallied 4.5% while Nasdaq 100 stocks declined 1.7%, which is a pretty significant move when looking over the past five years (see chart below). One possible explanation is that some bigger funds engaged in an unwinding of positions leading to selling mega caps and covering shorts in small caps, maybe due to the US debt ceiling solution improving economic conditions.