fbpx

Education Series: Single-Stock ETPs

S&P 500: Champions and Losers

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

Institutional investor concerns about the U.S. equity market being overvalued have been around since 2017. Despite a large percentage of institutional investors buying into top-line stocks such as Tesla and Amazon, this concern hasn’t really subsided. Surveys reported that most Fortune 500 CFOs and fund managers held this belief in 2020. Mr. Charlie Munger, Vice Chairman of Berkshire Hathaway, reiterated this belief in 2021 and added that the market will (or should) correct soon.

Given recent performance of the S&P 500, some might arrive at the quick conclusion that there is every indication of a recession being anticipated. However, a long-term study of trends in individual securities and sectors highlight that this is not the case: market corrections are aiming for a reset in the overvaluation seen in some key sectors and stocks.

Rises and Drops

Let us consider yearly horizons starting from November 2019 till 2021, with an additional window till the 25th of February 2022. The index is analysed via the holdings of S&P 500 ETF (SPX). The contribution of each security within SPX to the total movement of the SPX is estimated and termed the “Contribution Index” and the total change in stock price within each window is termed the “Price Delta”.

The Top “Rise” and “Drop” Leaders as per the highest and lowest “Price Deltas” yield some fascinating results:

Based on the deltas, it could be implied that movement restrictions had propelled Amazon and Netflix to a massive year-on-year delta by the end of 2020. Added to this were the concerns over the pandemic that drove pharmaceutical and diagnostic companies to high deltas as well. Meanwhile, companies associated with travel and energy companies had significant drops. By the end of 2021, it could be implied that Alphabet’s steady growth was the fuel that drove the index while pharmaceutical companies began to drag. In the months since November 2021, however, construction, energy and food companies had massive rises while “tech” giants such as Amazon, Alphabet and Tesla were collapsing.

But why is the S&P 500 collapsing? This is attributable to the weighing schema: “Tech” companies have very high weights and an outsized effect on the index. Thus, even when the stock price upticks in these types of companies were minimal, the index would go up. By the same token, when these stocks slip, it gives the appearance of a massive fall. For instance, in the November 2019-20 window, Amazon, Alphabet, Microsoft and Apple is estimated to have contributed about 60% of the uptick in the index while in the three-month window between November 2021 till February, these same stocks have contributed to 59% of the downturn seen in the index.

In holistic terms, while a number of “non-tech” stocks have been rising in the three-month window, this has little to do with the economy. While it is true that the US economy is facing 40-year highs in inflation, what’s also true is that nearly every major stock in every major industry is massively overvalued and there is every indication that this is being corrected.

The Ratio Squeeze

Ratios form multi-dimensional boundaries when it comes to instrument indicators. In itself, no stock should in theory be valued too high relative to others in its industry or classification. In practice, this has not been the case. Given the fact that US Treasury yields have been too low to guarantee “safe harbour” from inflationary rises for the past 20 years and more, there has been a “crowding effect” in other public markets such as equities. Narratives on new technology and over-optimistic impact on market share have rarely translated into real-time eternal dominance which, in turn, means that projections reflected over a long-term horizon becomes more and more speculative.

Let us consider the Top Two overweight and underweight in terms of one ratio – the Price-to-Earnings (PE) Ratio – for each industry classification at the start of each window period all the way till February 2022.

In recent times, the likes of Disney, Twitter and Hess Corporation are overweight relative to their industry medians while the likes of Citi and General Motors are underweight. What’s most interesting in the short-term window spanning November 2021 till January is that, in nearly every case, while the champions’ ratios are dwindling, the median ratios are rising slightly or holding steady. This suggests a strong diversification move.

In some cases, the ratios are egregiously high: Disney is at nearly 70 relative an industry median of around 24 while Tesla is 166 when the industry median is around 17. In an interesting bit of forecasting, Goldman Sachs’ strategists had predicted that the S&P 500 will likely net about 9% in gains for 2022. Given the diversification being seen, it can only be assumed that a net reallocation of capital from overweight stocks in each industry classification to those considered underweight is underway.

Note: The terms “underweight” and “overweight” are being used relative to industry median. There are plenty of arguments to suggest that even industry averages and medians are too high. On a practical basis, however, it should be assumed that no stock will come to rest anywhere close to ideal ratio efficiency any time soon. In other words, while ratios can be expected to be optimistic in the forward-looking horizon, it will be less unrealistic. Ratios of 70 and 166 simply lend more volatility to the stock trajectory, which cannot be assumed to remain eternally upward.

In Conclusion

The multidimensional “ratio cool-off” seen in recent times and the possible reallocation of capital highlights the possibility that market players have begun adopting a paradigm that is long overdue. Overvaluation leads to stock volatility that impacts the stability of long-term portfolio management. But it bears noting that the decay wouldn’t be a smooth one precisely because of overvaluation: any seemingly meaningful news about top-line stock results in short-term “bump” or “drop” followed by a correction. Nonetheless, as a whole, trends in apparent capital reallocation and ratio decay in this overvalued market would likely continue over the year.

On the tactical front, it is entirely possible for European investors to make plays without diminishing their existing holdings to take advantage of any short-term trajectory in top-line stocks in both directions. A variety of single-stock exchange-traded products (ETPs) built on top of leading “high-conviction” stocks that are seeing this decay are available across European exchanges and brokers to make a play on the downturns. A number of ETPs based on leading ETFs are also available. With new tools in the arsenal, it is now possible for traders to benefit from short-term trajectories while keeping intact their holdings in high-conviction stocks – if they choose to.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

Related Posts

Search

Search
Generic filters
Exact matches only
Search in title
Search in content
Search in excerpt
Filter by Categories
AAPL
AMD
AMZN
BA
BABA
BARC
BP
C
CRM
Deutsche Videos
Education
ETPs
FB
Featured
GOOG
GS
HSBC
HSBC
In the press
Insight
Insights
JPM
Market Insights
MSFT
MU
NFLX
NVDA
PYPL
RDS
Research
Research
SHOP
SQ
TSLA
TWTR
UBER
Uncategorized
Uncategorized
Uncategorized
V
VOD
Websim
ZM
Search
Generic filters
Exact matches only
Search in title
Search in content
Search in excerpt
Filter by Categories
AAPL
AMD
AMZN
BA
BABA
BARC
BP
C
CRM
Deutsche Videos
Education
ETPs
FB
Featured
GOOG
GS
HSBC
HSBC
In the press
Insight
Insights
JPM
Market Insights
MSFT
MU
NFLX
NVDA
PYPL
RDS
Research
Research
SHOP
SQ
TSLA
TWTR
UBER
Uncategorized
Uncategorized
Uncategorized
V
VOD
Websim
ZM

Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Julian Manoilov

Senior Analyst

Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Oktay Kavrak

Director

Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

Welcome to Leverage Shares

Terms and Conditions

Notice

If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.

If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.

Risk Warnings

The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.

This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.

Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.

This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.

United States Visitors

The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.

Persons accessing this website in the European Economic Area

Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).

Exclusion of Liability

Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.

Leverage Investment

Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.

Cookies

Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.

This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2. 

By clicking you agree to the Terms and Conditions displayed.