By Ron William, CFTe, MSTA

The Perils of

Sound the alarm! The recent escape-velocity melt-up in mega cap tech, is likely to suffer the perils of "painting the tape," based on historic divergences in market internals, greater than Y2K TMT and 2008 GFC. Jesse Livermore, a famous trader of the early 20th century and publisher of the classic trading bible Reminiscences of a Stock Operator was known for taking advantage of a previous version of this market anomaly. Generations later, the term evolved to describe artificial and unsustainable market rises that would typically carry large asymmetric risk. However, as many astute professionals know, this is only a market setup and not a timing signal.

Chart 1: Mega-Cap Tech Unwind

What’s changed now is the intersection of technical, macro, and political factors. Technically, several key ratios are now at a critical tipping point. One headline example is the growth/value ratio of Nasdaq 100 to Russell 2000, recently hitting its Y2K TMT record bubble peak (Fig 1). Breadth divergences not only in the broad market, but in Tech itself, with the no. of falling tech stocks now back at yearly lows (Figure 2). Remember, this is against the backdrop of the narrowest breadth measure since Y2K TMT and 2008 GFC. Currently, the growth/value ratio is unwinding sharply lower, with small cap marginal outperformance, fuelled by record call volumes in IWM (Figure 3).

Goldman Sachs points to changing macro sentiment, as the soft-landing narrative is once again gaining traction (Fig 1) and safe-haven flows into mega-cap tech unwind. This follows the overheated debt-ceiling political drama, now resolved, with President Biden claiming a “crisis averted”.

Chart 2: Calm After the Storm

However, many remain concerned about elevated risk factors, notably FED TGA, Reverse Repo and $3 trillion gorilla debt supply issuance (Fig 7) vs. lack of demand (Fig 8), with foreign holdings of USTs reaching the lowest in 19 years! This concern is further amplified by diminishing availability of UST buyers.

Chart 3: The AI Boom, ST Overbought, but LT Theme

The AI boom proved stronger than expected, with YTD performance quadrupling for some leading stocks (Fig 1) and NVIDIA hitting the trillion $ valuation. Perhaps most ominously, the recent exuberance has come at a time of tightening financial conditions as AI trumped The Fed (Fig 2).

While there will undoubtedly be individual stocks that deliver accelerated growth from spending on AI this year, it is unlikely to be enough to change the trajectory of the overall earnings trend in a meaningful way. Instead, it may pressure margins further, as companies decide to invest in AI despite decelerating economic growth, as predicted by our Roadmap cycle model. Looking ahead, upside potential remains, as highlighted by L&G ETF AIAI base pattern and high score, relative to the world (Fig 3).

Chart 4: Tech Downside Risk

Moreover, the Foundation for the Study of Cycles (FSC) model signals imminent downside risk for Nasdaq (Fig 12). Sentiment flows are polarised (Fig 13 & 14), implying the rally had been front-loaded and could now prove to be seen as pump and perhaps ‘dump’ next? Interestingly the 3x short Nasdaq 100 ETF (SQQQ) is currently taking in the most cash ever YTD.

A barbell strategy, with downside protection is likely the next game in town during H2 2023. Be selective with risk assets, consider profit-taking, while building up defensive plays, such as gold, cash, quality bonds and non-correlated portfolio risk.

In behavioural terms, it’s time to switch from FOMO to FOLO. The performance equity curve (Fig 15) demonstrates that fear (FOLO) beats greed (FOMO) in volatile markets. Take note of this well known market wisdom shared by many pioneers. Warren Buffett warns of the importance of risk management in his biblical reference to the Noah’s Ark principle “predicting rain doesn’t count, building arks does”. While Stanley Drukenmiller recalls his worst trading mistake during the Y2K - due to FOMO extremes and the need “to play."

Feature media interview.

Chart 5: Fear (FOLO) Beats Greed (FOMO) in Volatile Markets

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Ron William, CFTe Bio

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Ron William, CFTe, is a market strategist and educator/mentor with more than 20 years of experience working for leading macro research and institutional firms, producing tactical research and trading strategies. He specializes in global, multi-asset, top-down framework, grounded in behavioural technical analysis, driven by cycles based on the "Roadmap" signature model of veteran market technician Robin Griffiths, published in his book Mapping the Markets.”

Ron also applies a "market & mind" approach at IntensiChi, using the latest techniques in behavioral-risk models and neuroscience sourced from expert groups. He further supplements with mentoring/coaching, trained by the International Coaching Federation (ICF), and teaches a regulatory approved masterclass in Applied Behavioral Science, with investment, private banks and CFA Societies.

Ron's primary work, as part of his current institutional market advisory firm (RWA), acquired global industry recognition as winner of “Best FX Research” in 2020. Financial media programs and industry publications regularly feature his market insights, including “Is the big cycle about to turn?”, predicting the 2020 crash and alerting the “Minsky paradigm” of 2020 H2-2022.

Driven by high-integrity education, Ron serves as part of the education committee of the International Federation of Technical Analysts (IFTA), Development Director at the Foundation of the Study of Cycles (FSC), Head of SAMT’s Geneva Chapter, and an honorary member of ESTA. He is also a visiting lecturer at universities, active guest speaker for the CFA, CAIA and CISI, and senior teacher at colleges offering an accredited diploma in trading and investing.