Market review 24.01.21
Focusing on themes, not rates
Hello everyone,
This week, semiconductors took the spotlight, with SMH up 8%. Spot uranium continued higher and gained 3%. Meanwhile, TAN, REMX, and KWEB were each down 7% or more.
This aligns with the significant trends in place for many quarters, which is the focus of today’s blog post.
Major Themes
I’ve never seen market participants (including myself) focus on interest rates as much as last year. Here’s the number of Google searches over time for the words “Treasury Yield”:
Stocks have been at the mercy of every move in rates over the past two years, especially the more sensitive areas like fintech, regional banks, and commercial real estate. Fintech names got hit hard as the 10-year Treasury yield (TNX) climbed towards 5%, then soared as yields eased in Q4. YTD, fintech and blockchain stocks have cooled off.
Could this year be less about swing trading “rate plays” and more about riding big themes over the medium term? It may.
Harley Bassman, founder of the MOVE Index (the VIX equivalent for the bond market), sees bond price volatility returning towards normal this year (link). This is in line with the weekly chart of MOVE, which shows a potential 2-year topping formation:
The above chart is very important, as a breakdown would signal that rate volatility is coming down. If that happens, we shouldn’t spend too much time looking at a TNX chart.
What should we focus on instead? Themes displaying relative strength and that could have persistent narratives. Below is a list I compiled.
Positive Themes:
Technology: Hardware/Semis/Data (building blocks of AI), Cybersecurity
Healthcare: Rapid development pace (weight loss drugs, vaccines, gene editing)
Discretionary: Homebuilders (demographics, supply constraints)
Industrials: Infrastructure & Defense fiscal spending
Energy: Uranium (most viable option in the energy transition, supply constraints), oil (supply constraints)
Global: Japan (stimulus/governance), Mexico (growing supply chain center), India (demographics)
Negative themes:
Energy: Renewables (intermittent and insufficient baseload power)
Materials: Lithium is obsolete for EV batteries
Global: China, Russia (Conflict, demographics)
In the remainder of this post, I will review charts for many of the above positive themes. Let’s dive in.