Bubble Trouble, Yield Spikes, and Semiconductor Signals

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The S&P 500 is now more heavily dominated by tech and financials than at the 2000 and 2007 market peaks, says market analyst John Roque of Key Square Capital, formerly at Soros Funds. In an exclusive interview with Financial Sense Newshour, Roque explains why strategists are mistakenly overlooking this...but perhaps not for long. Roque also discussed the possibility for a further spike in yields, trouble in the semiconductor index, and other key indicators on his dashboard.

Bubble Trouble

Most believe the technology sector's weighting in the S&P 500 is 25.5%. This doesn’t hold, though, Roque told listeners, because three massive technology stocks — Amazon, Booking Holdings (formerly Priceline), and Netflix — were recently classified into different sectors.

If we add these back into tech, the weighting goes to 32%, just shy of the 2000 tech bubble peak of 33%, said Roque.

He also added real estate back into financials, which is how the S&P used to provide the weighting, and, as of mid-March, the adjusted relative market cap for financials combined with tech was 50% of the S&P, the highest recording ever.

“People aren't really looking at this correctly. … If a portfolio manager had 50% of the weightings in his portfolio in two stocks, he'd be pretty darn concerned.”

Yield Spikes

Roque's initial target for the 5-year Treasury yield has been 3% for some time, he noted, but if things get crazy on the upside, it could get up to 5%. Though this may sound high, the rate of change or the ascent of the move has been so fast of late, Roque wouldn’t be surprised if it overshot on the upside.

The 10-year heading above 3 percent is also significant, Roque noted.

The data goes back to 1790, Roque stated, and as is evident in the chart, there’s really no uniformity. It’s also worth noting that in 1945 we bottomed at 1.55%, and in July 2012 the bottom came in at 1.51%. This is a potential record 67-year double bottom.

“I don't know what the figure is on the 10-year that's going to present a problem for the S&P or for stocks broadly,” Roque said. Just by looking at the chart, “I don't know if there's any way to tell.”

Semiconductor Signals

The Philadelphia semiconductor index (SOX) recently closed below its 200-day moving average for the first time in 458 days, a record streak.

There have been other long streaks, Roque noted, of 447 days, 441 days, 265 days, 249 days, 236 days, and 157 days respectively. In those six prior cycles when the SOX broke its 200-day moving average, it was already in the midst of an important corrective phase.

“I'm not forecasting that this is what is likely to happen,” Roque said. “I'm telling you what we might want to be prepared for if history is any guide.”

There are other signs of possible trouble, as well. The S&P has experienced two declines this year of 12 percent and 11 percent, and the index didn’t even break its 200-day moving average. It's almost inconceivable that we could spend so long above the 200-day moving average on the S&P, Roque noted, and he thinks it’s reasonable to estimate that we might go below that level. He also wouldn’t be surprised if the VIX spiked again above 40.

Given the above, “I don't think it's that crazy to adopt a more cautious viewpoint,” said Roque.

Check back on the Financial Sense Newshour page Saturday, April 28th to hear this full interview with Key Square's John Roque. To see the rest of John's charts, click here for the full pdf.

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