FAANGs ain’t what they used to be, so beware the bear-market bounce says this hedge fund manager

But, naturally, some are not convinced.

With the S&P 500’s relative strength index now at 74 and in “overbought” territory, bearish short-term traders may be expecting a bit of a pull back.

And Kevin Smith, chief investment officer at hedge fund Crescat Capital, thinks the problems are greater than just an over-extended momentum gauge.

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

He cites three items of what he terms truly bearish news over recent days; the Fed’s 75 basis point interest rate hike; a consecutive negative real GDP print; and “lousy” mega-cap tech earnings.

“Yes, it was all really bad news, but short-term positioning was offside on the expectation of all this bad news, so there was a technical shakeout of short sellers,” Smith reckons.

On the economy, investors are fooling themselves if they point to a strong jobs market as evidence of a soft landing as the Fed tightens policy.

“It is sad how many people, including policy makers, appear clueless about the fact that labor markets are always a lagging indicator ahead of economic downturns. Because inflation is so high today, and the Fed so behind the curve, the current period of negative real growth is likely to be very drawn out and is only just getting started,” Smith argues.

And on big tech earnings he is particularly dismissive: “There was a massive deceleration in revenues, earnings, and free cash flow of all the FAANG+ stocks that have recently reported, and they are all still richly valued…The truth is that high-multiple growth stocks traditionally do poorly in an inflationary environment. These stocks are hardly even growing anymore especially on an inflation-adjusted basis.”

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

Smith concludes that because the FAANG+ results were not nearly as strong as the market has been interpreting, he is adding to his bearish bets. “We have been increasing our shorts there into this recent short covering rally. We think the equity bear market will resume soon in earnest with the Fed still in tightening mode and the yield curve now well-inverted.”

Markets

U.S. equity index futures are a touch softer after their recent strong run, with the S&P 500 future
ES00,
-0.22%
down 0.3% to 4,113. and the Nasdaq 100
NQ00,
-0.24%
future slipping 0.3% to 12,935. The dollar index
DXY,
-0.43%
is retreating further from recent 20-year highs, down 0.4% to 105.47. The 10-year Treasury yield
TMUBMUSD10Y,
2.669%
is up 2.1 basis points to 2.672%.

The buzz

U.S. crude futures
CL.1,
-1.50%
are down 2.2% to $98.04 a barrel after soft manufacturing surveys from China and Europe added to global growth fears.

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

U.S. wheat futures
W00,
-1.80%
are holding near five-month lows after Ukraine was able to send its first grain shipment from Odessa since Russia’s invasion.

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

U.S. economic data on Monday: ISM manufacturing for July and construction spending, both due at 10 a.m. Eastern

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