First, for some perspective, we should bear in mind that ALL bubbles end badly. There have been no exceptions. Not even Bitcoin, which has already enjoyed multiple -50% drawdowns in its short lifespan. Why people are crowding back into something that has proven to be spectacularly unstable, is not for me to say. Call it the power of eternal delusion.
Recall that for most of 2020, Tech stocks were deemed the most crowded trade. As we know, that super bubble is already well on its way to re-tracing the path of the Dotcom crash, about one month ahead of schedule. In addition, the Biotech vaccine bubble is imploding. The EV/SPAC bubble is imploding. Pot stocks, Gamestop and Reddit pump and dumps, and of course Chinese stocks. China led the recovery out of the pandemic and now they are leading the decline, as the sugar high wears off. There are more bubbles in this timeframe than we've seen at any time in past decades. All as a result of the central bank sponsored sugar high. The losses are mounting.
Here we see via the Nasdaq that the Fed's bailout in 2020 looks almost identical to the 2019 bailout:
There is one final bubble that is the most crowded bubble of them all. Far more crowded than Bitcoin. That is the cyclical recovery bubble. This is where all of the new money is now headed in this new quarter beginning April Fools Day.
Bulls will make the case that the much dreaded end of quarter rotation did not explode the stock market. That the transition from Tech stocks to cyclicals and from stocks to bonds was "seamless". From this point forward, all new money will be flowing in one direction towards the most overbought and overowned bubble still standing. The bubble that now takes the crown from Tech for the most crowded bubble. A sector that is so in favor, that these "beaten down" stocks are now considered momentum plays. From this point forward, momentum quants will be crowded into high beta cyclicals.
It's a disaster wanting to happen.
"As investors continue to rotate their exposure into value sectors, stocks in that corner of the market starting to take on characteristics of the momentum factor, an uncommon combination that bodes well for investors"
“This is the holy grail of quant and Value investing!”
This is the holy grail of meltdown. No surprise, Jim Cramer is all over it. The same guy who said two days ago that Wall Street is dumping too many SPACs and IPOs, and that they will implode the market. Now he advises crowding into cyclicals. His argument is that large funds need more "beta" so they are crowding into cyclicals to get more leverage relative to the economy.
"Money managers don’t care about the most exciting long-term growth stories … they want the companies that can deliver the biggest upside surprises right here,” Cramer said. “In a booming economy, that means owning boom-and-bust cyclicals"
Boom and bust cyclicals indeed. As this chart shows, boom and bust cyclicals have been crowded since the election. Goldman put out their first call to buy cyclicals way back in October, almost six months ago. This trade is crowded and it's already rolling over, despite becoming the go to stock trade on Wall Street.
In summary, what we have is another Wall Street recovery masquerading as a Main Street recovery.
It's an end of cyclical dead-end.
There is no way out for those who believe in it.
The momentum algos always get out first. This time will be no exception.
