To The Moon

Learnings and conclusions from this week’s charts:

• Mag-7 has been underperforming vs the “S&P493”.

• Valuations are high because profitability is high (profitability is cyclical).

• Investor cash allocations are very low (which is a warning sign for stocks).

• Margin debt acceleration has reached warning levels.

• Stockmarket seasonality turns negative from July-Oct.

Overall, we are witnessing continued bull-market-broadening and bullish rotation as the S&P500 ex-Mag-7 makes new highs and the equal vs cap weight relative performance line ticks up. But there are a few warning signs to keep in mind and the bear case would be that Mag-7 underperformance turns into something sinister…

$S&P 500(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$ $NVIDIA(NVDA)$ $Apple(AAPL)$ $Microsoft(MSFT)$ $Alphabet(GOOG)$ $Amazon.com(AMZN)$ $Meta Platforms, Inc.(META)$ $Tesla Motors(TSLA)$

1. Mag-7 vs the Rest: the prevailing narrative in markets over the past few years is that it has been all about Mag-7, so it’s probably a surprise to see that Mag-7 have been floundering through June while the S&P500 ex-Mag-7 (aka the S&P493*) is out to new all-time highs.

2. MAGS vs XMAG: looking at the relative performance of Mag-7 vs the rest it’s been a similar scale collapse in relative performance for Mag-7 as was seen in Q1. That Q1 decline was basically bearish rotation where the previous market leaders led the market lower. What we are seeing right now is what I would call bullish rotation as the previous leaders pass the torch to the previous laggards.

And that’s probably the most bullish pathway for the US Stockmarket right now; bullmarket-broadening and bullish rotation. Maybe the headline cap-weighted index doesn’t rise as fast, but instead you see a bunch of rotation under the surface.

3. Equal-Weight vs Cap-Weight: another angle on this is the relative performance line for the equal vs cap weighted S&P500.

A few things to note on this: firstly, it’s actually normal for the equal-weighted index to outperform the cap-weighted index over the longer term; second, wild deviations from trend in this line can indicate/confirm structural weaknesses or vulnerabilities in the market, third, this line looks to be attempting to bottom (double bottom?) — which again would bring the rotation theme to mind.

It also whispers that we need to be wary of bearish rotation where the previous leaders run out of steam after an extended bull market, and due to their larger weight take the index down.

4. Cycles in Valuations (and Profitability): one reason to be alert on that front is if you look at the extremes in the chart above, they map to some of the periods of higher than usual valuations in the stockmarket (seen below).

Drilling into this chart, it is very interesting because it confirms the bullish narrative that valuations are high for a reason (high profitability).

But the bearish counterpoint would be that return on equity is cyclical, so if profitability gets damaged (e.g. AI capex bust, economic downturn, some other shock/crisis), then the reason for high valuations will fade away and valuations will mean revert. That’s the bear case. And we can monitor specifically for signs of that (none yet).

5. Cashed Out: another echo on this theme is investor cash allocations bouncing along the bottom (which has often been a topping sign in the past).

6. Margin Debt Warnings (1/2): another bearish warning flag is the surge in this margin debt vs M2 indicator (i.e. margin debt normalized vs the money supply).

7. Margin Debt Warning (2/2): and here’s my own margin debt risk indicator updated to the just released May data. The rate of expansion in margin debt is the 4th fastest in recent history, and is consistent with a heightened downside risk alert. I would note that the pervious 3 major topping signals on this indicator did take a few months to work, but the message is pretty clear here.

8. Seasonally Slippery: zooming back in to the more immediate term, seasonality sours from late-July into Oct/Nov (albeit stocks have a habit of rallying from mid-June to late-July; so maybe there is a bit of a seasonal bull trap being set here!).

9. Seasonal-Cycle Surge? on the other hand, when you look at the election-cycle seasonal pattern, yes you get the same conclusion that it could be a bit of rough and tumble for markets heading into the mid-terms… but afterwards the historical tendency has been for stocks to put on a solid rally.

10. Industrial Revolution: another silver-lining and in line with the bullish rotation theme, industrial stocks have broken out (industrials benefit from stronger real activity, hard capex, and improving global growth — all things that are currently underway in earnest).