FAANGs aren’t what they used to be, so beware of bear market bounce, says this hedge fund manager

But, of course, some are not convinced.

With the S&P 500 Relative Strength Index now at 74 and in “overbought” territory, short-term bearish traders can expect a slight pullback.

And Kevin Smith, chief investment officer of hedge fund Crescat Capital, thinks the issues are bigger than just an overextended momentum gauge.

“Last week looked like a short-seller capitulation for the market in general and for mega-cap tech stocks in particular. Crescat is not capitulating at all. There were a lot of “buy the news” headlines that could mark the peak of another bear market rally,” Smith explains in a note to clients.

He cites three elements of what he calls really bearish news in recent days; the Fed’s 75 basis point interest rate hike; a consecutive negative impression of real GDP; and the “ugly” tech earnings of mega-caps.

“Yeah, that was really bad news, but short-term positioning was offside waiting for all that bad news, so there was a technical upheaval from short sellers,” Smith believes.

When it comes to the economy, investors are mistaken if they point to a strong labor market as evidence of a soft landing as the Fed tightens policy.

“It is sad to see how many people, including policymakers, seem oblivious to the fact that labor markets are always a lagging indicator ahead of economic downturns. Because inflation is so high today and the Fed is so behind the curve, the current period of negative real growth is expected to be very long and just beginning,” Smith says.

And on big tech earnings, he’s particularly dismissive: “There’s been a massive deceleration in revenue, earnings, and free cash flow from all of the FAANG+ stocks that have recently released reports, and they’re all still very valued… The truth is that high multiple growth stocks traditionally fare poorly in an inflationary environment, and these stocks don’t even go up anymore, especially on an inflation-adjusted basis.

FAANG stands for Facebook, Amazon AMZN,
+10.36%,
AppleAAPL,
+3.28%,
Netflix NFLX,
-0.50%
and Google (although the first and last are now listed as Meta META,
-1.01%
and Alphabet GOOGL,
+1.84%
)

Smith concludes that because the FAANG+ results weren’t as strong as the market interpreted, he’s adding to his bearish bets. “We increased our shorts there in this recent short cover rally. We believe the equity bear market will soon resume in earnest with the Fed still in tightening mode and the yield curve now well inverted.

Markets

US stock index futures are a little weaker after their recent strong run, with the S&P 500 ES00 future,
-0.20%
down 0.3% to 4,113. and the Nasdaq 100 NQ00,
-0.19%
forward sliding 0.3% to 12,935. The DXY Dollar Index,
-0.41%
fell further from recent 20-year highs, down 0.4% to 105.47. The 10-year Treasury yield TMUBMUSD10Y,
2.661%
is up 2.1 basis points to 2.672%.

The buzz

US Crude Futures CL.1,
-1.75%
are down 2.2% at $98.04 a barrel after weak manufacturing surveys in China and Europe added to fears for global growth.

Alibaba 9988,
-3.76%
Shares fell further in Hong Kong on Monday after U.S. regulators last week added the e-commerce giant to a list of Chinese companies that could be delisted.

US wheat futures W00,
-1.67%
remain at nearly five months since Ukraine was able to send its first shipment of grain from Odessa since the Russian invasion.

In earnings, Loews L,
+0.88%
publishes its results before the market opens while Activision ATVI,
+0.55%
and Pinterest pins,
+0.93%
come after the closing bell.

US economic data Monday: ISM manufacturing for July and construction spending, both due at 10 a.m. EST

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