Danger lurks below

Tech stocks are finding a floor and catching a bid as bond yields fall….

or if you look at it inversely; when bond prices rise.

The chart below shows ServiceNow vs the 3-7 Bond ETF (IEI).

Whatever direction the bond price goes, so does this stock.

Try it on some others.

But it’s the same story as before.

Lower yields (see discount rate) is good for lowly or unprofitable companies who are more so relying on higher revenue guidance to buoy their equity prices.

For the time being, I’m identifying these rallies as momentum and potentially being fortuitous rather than under the guise value and trading genius.

Whilst I think bond yields have more downside over the coming year, I see increasing probability that they take a break from their current downward trend and move a little higher to shakeout the late comer buyers.

My work suggest that the risk/reward of being long ‘tech’ with new money at todays prices is marginal which I think resembles a bull trap.

There are also many ‘gaps’ below in many equity prices.

I’d rather search for ‘maximum pessimism’ or ‘capitulation’ before exhibiting the sort of confidence (or short term memory loss) that I’m seeing today.

In such a bond yield bounce that I anticipate and subsequent decline in tech stocks, I also sound a warning to those holding or ‘playing’ the long side of 2x and 3x technology related index and sector ETF’s.

More on that later.

January 27, 2023

by Rob Zdravevski

rob@karriasset.com.au