Live for today or trade tomorrow? Breaking down the heated stock market battle unfolding right now

Published Sat, Mar 6 20218:27 AM EST

The stock market in recent months became a fight between the tomorrow trade and the live-for-today bid, and in the last week it turned messy. The stocks valued on promises for a transformed future have been sold hard in favor of those poised to thrive in today's spring-loaded economic revival. Yet after last week's jagged swings culminating in Friday's selling crescendo and powerful upside reversal, might these adversaries be able to coexist more peaceably for a while? The "disruptive technology" stocks and pre-revenue upstarts and speculative SPACs with a high story-to-substance ratio have had a thorough flush since mid-February. The fixation on the feast-to-famine ARK Invest ETFs has been appropriate, irresistible and probably now overdone. The flagship ARK Innovation fund (ARKK) at the Friday morning low had lost more than 30% in about three weeks. The fund has been a popular enough short that shares are hard to borrow and Wall Street desks have been busy creating synthetic versions of the ETF for hedge funds to bet against. Was that a short-term capitulation in this subsector, preceding a 10% bounce in ARKK from late morning into Friday's close? The Defiance SPAC ETF (SPAK) is off 22% from its peak, the Renaissance IPO ETF (IPO) off 20%, the same as the S & P Biotech ETF (XBI) . The cannabis stocks as a group are off closer to 40% and Tesla has disgorged a third of its value in two months. True bottom or just a bounce? Is that enough of a comeuppance to mollify the market gods and humble the newcomers who have jolted the market since last year with adrenaline and momentum? Impossible to say, of course, but the purge – aided in part by evident margin calls Friday - surely has reset expectations. And if your complaint a month ago was that these areas were full of froth, hubris and too much easy money, then at least a good portion of all of that has been bled away. At the same time, fewer than 10% of the stocks in the Nasdaq 100 were above their 20-day average at the worst levels Friday, a pretty reliable short-term oversold extreme. True bottoms are typically more a process than a moment, but this lopsided reading did give way to a forceful rebound, while also leaving open the chance that the recovery was just a mechanical bounce. The live-for-today trade could also be viewed as the revenge of the disrupted. Energy was the most hated and thus has had the most defiant comeback, the entire S & P energy sector having doubled since Halloween. It's a similar story with boring banks, busted Old Media, bereft brick-and-mortar retail and beset legacy car makers. Much of this is an uncomplicated repricing of cyclical stocks to reflect an economy gaining pace and poised to accelerate thanks to vaccines, pent-up savings, uncorked restlessness and another $1.9 trillion in fiscal help. Then there's the fact that these stocks were under-owned by professionals and are weighted heavily in the value indexes which were due for a mean-reversion comeback. Line blurs between disruptor and disrupted But something else is happening, too. The market has broadened out its bets on disruptive innovation to encompass old-line companies finally getting traction in their efforts of self-transformation. It started with Walt Disney getting full credit and more for its video-streaming business, quickly piling on a Netflix-like valuation to Disney+, meaning Netflix was no longer the only way to play the secular trend. Somehow the less-acclaimed streaming entrants from Discovery Communications and Viacom CBS are allowing them to shed their "terminal decline" valuation discounts. The same goes for General Motors and Ford winning credibility for their late but insistent commitments to electric vehicles, depriving Tesla of its status as the one and only vehicle in that race. Big-box retailers saw massive valuation expansion last year as omnichannel commerce using stores as distribution centers proved to be the real deal; Amazon shares have been stagnant for six months. And even Big Oil is drawing some green credibility, with activist investors getting seats on Exxon Mobil's board to help shepherd the company into the post-fossil-fuel future. This all could be fleeting investing fashion, an excuse to own the laggard stocks or simply a less-discriminating phase of the bull market, but for now it blurs the line between disruptor and disrupted. Mega-cap tech cheap? Meantime, the former glamour names have seen their premium multiples leak lower. This column last week noted Facebook and Alphabet still appeared attractive based on their free cash flow generation, and the stocks outperformed last week, up 2.6% and 3.6%, respectively. There are now some 200 members of the S & P 500 with price/earnings multiples on 2021 forecasts higher than that of Facebook – which might not be geared to this cyclical upturn and perhaps is no longer a tomorrow stock, but surely isn't a yesterday name either. And by this gauge from JP Morgan of hedge funds' net exposure to mega-cap tech, it would seem the group is far less crowded than just a few months ago. Big picture, the market's fitful realignment of asset prices to account for an economy poised to rip — and a Federal Reserve prepared to let it — netted out to about a 5% decline from a record high. Such pullbacks are fully routine, though a completed 5% dip is pretty indistinguishable from the first half of a 10% gut check. This drop, at least, was not accompanied by signs of broader stress in credit markets or any worrisome contortions in the equity-derivatives arena – both areas where financial accidents tend to originate. The tape is still in a zone where further chop and downside tests should not be surprising. Treasury yields calmed a bit Friday but with Fed Chairman Jerome Powell effectively saying the market will have to locate its own pain threshold on bond yields without any input from him, equities will stay sensitive to sudden moves in the rates market. Some good news here: The big money is already heavily betting on a further rise in yields, at the risk of overplaying its hand in the near term. The broader market got a bit oversold but not profoundly so. Sentiment is more wary than it was at the exuberant extremes of February, but the mood has not reset toward fear in a big way. Everyone who didn't own the ARK stocks was less afraid than they were full of relief and schadenfreude. And those who do own them are no doubt worried, but may still have house money to play with. Instinet technical strategist Frank Cappelleri noted that last week saw two days of at least a 1% S & P 500 gain and two days with losses of more than 1%, and the last time that happened was in late September, when the index made an initial trading low after its 10% correction. It's a single precedent and nothing like an all-clear. But a reminder that emotional indecision and heated argument often precede a peaceful resolution.

The stock market in recent months became a fight between the tomorrow trade and the live-for-today bid, and in the last week it turned messy.

The stocks valued on promises for a transformed future have been sold hard in favor of those poised to thrive in today's spring-loaded economic revival. Yet after last week's jagged swings culminating in Friday's selling crescendo and powerful upside reversal, might these adversaries be able to coexist more peaceably for a while?

The "disruptive technology" stocks and pre-revenue upstarts and speculative SPACs with a high story-to-substance ratio have had a thorough flush since mid-February.

The fixation on the feast-to-famine ARK Invest ETFs has been appropriate, irresistible and probably now overdone. The flagship ARK Innovation fund (ARKK) at the Friday morning low had lost more than 30% in about three weeks. The fund has been a popular enough short that shares are hard to borrow and Wall Street desks have been busy creating synthetic versions of the ETF for hedge funds to bet against.