1/ This Is Probably One...
1/ This Is Probably One...

1/ This Is Probably One...

1/ This is probably one of the most important threads I've ever put together, so if you're anyone other than a degenerate YOLO options gambler, you probably want to read ahead. (View Tweet)

2/ Awhile back, I shared a thread about concentration risk in equity markets. https://t.co/R5wnn51Bla (View Tweet)

3/ We all know that a large amount of passive flows support these mega cap stocks, but they didn't amass such huge weights in the indices because of passive bids. They'd have simply retained their weights if passive were the only bid. (View Tweet)

4/ Active money flowing into these stocks have given them their outsized weights in the indices. And active money continuing to bid them have driven their relative valuations higher as index valuations have dropped. (View Tweet)

5/ The S&P 500 trailing 12 month PE was 35.96 when the index peaked on 1/4/22. It is 23.91 today. Still high, but down 33.5% from its peak. And we'd expect this. Last time Fed Funds Rate was this high, S&P 500 TTM PE was around 18. (View Tweet)

6/ So how has Big Tech fared? Here's a snapshot: $AAPL 29.18 on 1/4, 29.47 now $MSFT 35.39 then, 45.74 now $GOOG 25.78 then, 35.21 now $META 24.37 then, 40.24 now $NVDA 63.47 then, 164.24 now $AMZN 51.35 then, 267.10 now $NFLX and $TSLA are the only 2 with lower PEs today. (View Tweet)

7/ So although the market has started to reprice for higher rates, active managers and investors are paying considerably more per dollar of earnings for Big Tech than they were when the market was at ATHs....despite MUCH higher rates now. (View Tweet)

8/ Why? In a word: FOMO. Underperforming fund managers have spent 6 months chasing these stocks higher, because nobody wants to be the fund manager who underperformed by not owning the stocks everyone owns. (View Tweet)

9/ People keep saying we need a major event catalyst for markets to drop. We don't. The concentration risk and extreme valuations of this group of stocks itself is why the market is in serious trouble. (View Tweet)

10/ Any little thing that sparks passive selling is going to cause all those ACTIVE managers holding these stocks to cascade sell them just like they FOMO bought them....and they're ALL holding these stocks. (View Tweet)

11/ My best guess is that as unemployment accelerates and student loan payments resume this summer, passive contributions will decline swiftly and passive redemptions will accelerate. (View Tweet)

12/ Because of the concentration in these names, they'll be sold in outsized proportion by passive funds, which will in turn cause active managers to dump them in accelerating fashion. We'll see the reverse of the last 6 months where these stocks will lead the downside. /End (View Tweet)