Yesterday saw the largest sell off in the NASDAQ since March, and it looks to continue in the pre markets today. If you look at the major averages, things look fine: the Dow and S&P 500 are still up double digits for the year and the NADAQ 100 is still up close to 4%. However, if you look beneath the surface at the more speculative stocks, you see a different story. For example, according to Morningstar, TSLA is down almost 11% year to date and Zoom Video is down almost 15%. If you look at some of the ETFs that invest in speculative stocks from the speculative top, which was around February 15, to yesterday, it looks even worse. Three of these prominent ETFs ranged in negative returns from ~-26% to ~-35% for the preceding 3-mo period from mid-Feb to mid-May.  

The definition of a bear market is a decline of over 20%, and all of these ETFs fit that bill. If you are into technical analysis and you look at some of the underlying holdings in these ETFs then the picture doesn’t look so good either. Why do the speculative stocks matter? Because they did so well last year and started this year off hot; money flowed into those and similar strategies. Wall Street does a great job of copying what has been successful, so the ETF sponsor, ARK, and its story has most likely spawned several competitors. It is likely, then, that there is a ton of money in these more speculative stocks. It is also unlikely that the broader markets can continue to rally while these stocks are getting crushed.

The obvious question is whether this selloff will eventually spread to the broader market. The answer is somewhat nuanced. As I have written about in the past, there is no real “market” anymore. Stocks are so uncorrelated they have become impossible to categorize that way. So, for the sake of simplicity, let’s talk about the S&P 500 as so much money tracks, and is benchmarked, to that index. Could this be the start of a 5-10% correction in the S&P 500? It could. Could this be the start of a bear market? Probably not. A correction can happen when stuff just gets too ahead of itself and traders get a reason, any reason really, to take profits. For a bear market to happen we really need something structurally to be wrong. Could there be something lurking beneath the surface? There could be, but it’s not likely at this point. Let’s go through some of the things that could be horribly wrong:

  1. The weak jobs report on Friday could be a sign that the economy is not that strong. Contrarians to this view may argue that as the Covid 19 restrictions lessen in key states and businesses fully re-open we may look at the jobs report as an aberration. For example, I go into New York City about once a week, and each time, it always seems to be busier and more is open. I hear the same story from the people I talk to around the country. Corporate earnings have also been really strong.
  2. Inflation could be here to stay and could get worse. This is possible. I have a hard time believing inflation is transitory. The Fed disagrees however, and they control short-term interest rates, so that is all the matters for now.
  3. Interest rates could go higher. Maybe, the market wants to push them higher. Remember, the difference between now and, say, the 4th quarter of 2018 was that the Fed was raising rates then, but today they are not. Until the Fed announces tapering of bond buying and/or the possibility of higher interest rates, then I’m not too worried. 
  4. Covid could surge back. Maybe, but it looks like we have it under control here. There are some pretty big countries that don’t, so in a global economy this is certainly something to monitor.
  5. Archegos could be a canary in a coal mine. Remember back to the beginning of 2008 when Bear Stearns went under. At the time it didn’t seem like a huge deal, but in retrospect that was the tremor before the earthquake. Could Archegos be the same thing? Probably not. It looks contained to one guy and a few investment banks. When stuff like this happens you always have some concern as so many things are interconnected, but this doesn’t look like anything to be worried about.
  6. Could ARK take down the market? Maybe. How many people are mimicking this type of strategy, and how many are doing it with leverage? If people continue to withdraw money, some of the stocks ARK has will be under a lot of pressure. This could trigger margin calls in other places, which could have a cascade effect. 
  7. Could people sell last year’s winners to avoid higher capital gains taxes? Yes, this could certainly be an issue.

Bottom line, we have an overall strong economy, strong earnings, and an accommodative Fed. There are some cracks beneath the surface so you can’t be complacent. If you are a dip buyer, just be careful.  If you are expecting bonds to protect you then you need to revisit that analysis. This could be the start of a small correction. A lot of stocks got way ahead of themselves and that can’t last forever. Some of the stocks that were up triple digits last year could still have some significant downside. However, it is unlikely the start of a much larger bear market.   

The views and opinions expressed herein are those of the Chief Executive Officer and Portfolio Manager for Tuttle Capital Management (TCM) and are subject to change without notice. The data and information provided is derived from sources deemed to be reliable but we cannot guarantee its accuracy. Investing in securities is subject to risk including the possible loss of principal. Trade notifications are for informational purposes only. TCM offers fully transparent ETFs and provides trade information for all actively managed ETFs. TCM’s statements are not an endorsement of any company or a recommendation to buy, sell or hold any security. Trade notification files are not provided until full trade execution at the end of a trading day. TCM typically rebalances on Monday, however there could be daily trades that are not reflected in this recap.  The time stamp of the email is the time of file upload and not necessarily the exact time of the trades. Most TCM ETF portfolio trades settle on a T+2 basis. These files represent an unofficial account, as all accounting and custody for the TCM ETFs is performed by Citibank. Updated TCM ETF end of day holdings are available on TuttleETF.com and SPCXETF.com

© 2021 Tuttle Capital Management LLC (TCM). TCM is a SEC-Registered Investment Adviser. All rights reserved.