David Tepper just punched the stock market in the face.
The new market narrative is "coordinated complacency" and "deflation."
Russell 2000 small caps are in trouble.
Apple's low P/E and the inverse algorithm trade could help it to outperform.
This market just got punched in the face. Today we received the best weekly jobless claims number in seven years and the Dow is -200. Not a good signal. Capturing today's headlines is hedge fund titan David Tepper, who spoke at the SALT conference in Las Vegas. SALT is basically the Super Bowl for hedge fund managers. These are the guys who set the narrative for the market. Because of his unparalleled performance, Tepper has become the market's kingmaker. It's a dangerous thing to have a money manger like Tepper become a market mover of this magnitude because he's inherently conflicted. It's very possible that Tepper is underperforming the market in 2014 because of his exposure to momentum and was in desperate need of a new narrative to profit from. Well, he accomplished his goal. From the guy who cried "Don't Fight the Fed" in 2011 and the guy who coined the "taper tantrum" in 2013, here's the new terminology:
His new phrase for Central Banks is "coordinated complacency."
"The ECB better ease in June…I'm not so keen on deflationary forces. I'm more worried about deflation than inflation…"
"Don't be too fricking long right now."
"I am nervous, I think it's nervous time."
"There's time to make money and there's times not to lose money. This is probably a time when you're supposed to think about preserving some of your money."
Tepper told CNBC he reduced his equity exposure to 60% from 100% six months ago.
So how does this new market narrative that includes "coordinated complacency" and "deflation" affect our portfolio? We now believe that the rotation out of momentum names will continue into the summer. Tepper destroyed any chance of stability until that ECB June meeting. And if the market doesn't like the ECB's policy in June, it will tank into July and August. All of a sudden, all eyes are back on the ECB. All of a sudden, all hedge funds are considering reducing exposure to 60%.
Last week, we mentioned you can't short the QQQ (as a hedge to AAPL) because of its exposure to low P/E names like Apple, so what can you short? The money flow looks to be concentrating into Russell 2000 (NYSEARCA:IWM) puts. Put volume on the June options is massive. I wouldn't be surprised if Tepper's biggest position is in the IWM June 2014 puts. He knew exactly what was going to happen after his keynote. This guy is dirty. Why is the Russell 2000 the downside vehicle of choice? Because its selection of small cap stocks has the highest P/E of all the indexes, its forward P/E is 30% higher than historical norms, and P/E multiple expansion has run its course. In a flight to safety, the Russell 2000 will get killed. In 2013, the IWM rose 39%. So far in 2014, it's down 6%. This 2014 reversal could be in the early stages of reducing the majority of 2013 gains.
As for Apple, it will put up a fight and could still rise in this environment because of the inverse algorithm used by hedge funds (short the market/long AAPL), but our short-term bullishness needs to be tempered until the broad market can rid itself of the Tepper narrative. Today we're selling a 20% allocation of AAPL October 2014 $570 calls. Over the next few months portfolio management should feed the winners among AAPL/YHOO calls or IWM puts. The summer 2014 trade just became crystal clear thanks to David Tepper.
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.