Indeed, the NQ8 stocks are leading the market, also pulling small caps higher.
Fixed income assets are still under pressure (not shown here) along with gold miners and the materials group.
So, nothing new there.
What I found interesting is the XRT (Retailers) group strength. XRT has gained 25% in the past 50 days, while the QQQs and SPY only gained 9%. This is a very strong outperformance.
If we look at XRT 50Days returns since 2006, we can see that XRT experienced 50-day returns higher than 25% only early in the QE period. This current push looks like an outlier, especially since consumers have been paying increasing sums to cover higher interest payments.
Retailers should not be pushing that high since they are very sensitive to interest rates.
If we only look at the XRT/SPY overperformance, we can see that we are clearly in exuberance territory.
Why such exuberance? When comparing XRT to SPY for the past two years only, we can see that early in 2017, XRT experienced much negativity, but that it is now well over performing SPY. Early in 2017, the narrative was about AMZN taking over all the big retailers which would have to close brick & mortar shops at high costs. What happened to that narrative?
I believe that the early 2017 narrative is still valid: AMZN is eating the lunch of standard retailers, while higher interest rates will make it much more difficult for consumers to max their credit cards out.
The XRT push into higher territory is due to how XRT is balanced.
https://www.barchart.com/etfs-funds/...T/constituents
XRT includes 91 stocks that carry similar weights. For example, AMZN, which boasts a market cap of 630 B$, carries the same weight in XRT as FL, which only has a 6.3B$ market cap (100 times lower than AMZN.)
More importantly, the 10 largest holdings of XRT, which represent 14.45% of the index experienced a total 1.39B$ of sales increase during last Quarter, while AMZN alone increased its sales by 50B$ in last Quarter only. These 50B$ have to come from somewhere, which is mostly from other retailers.
Another interesting aspect of XRT is that OSTK is at the top of its holding, with 1.93%. OSTK is changing its business model as it has entered into the Crypto model.
Hence, XRT managers are trying to put more weight on probably the most doubtful companies (OSTK, PETS, RAD)
Conclusions:
I believe that XRT will be coming back to the reality by August of 2018, when the first signs of inflation and the Fed's rates increase will start shaking markets out. The best is probably to use put options in order to limit upside exuberance risks.
