Whales can only hide in deep waters…

That’s why the stock market is going up.

What does that mean?

Well… let’s say you run the Saudi Arabian central bank. Or a major hedge fund with tens of billions in assets and able to leverage that up many times.

Or you are the sovereign bank of Norway and have tens of billions of oil revenue that needs to be parked somewhere.

The U.S. market looks pretty attractive, but you don’t want to pump the market with billions all at once or you risk being noticed who and what you’re investing in.

In fact, the number of companies that absorb billions without being noticed are extremely limited.  

Apple (AAPL). Facebook (FB). Google (GOOGL). Amazon (AMZN). Companies where the market cap is around $500 billion (B).

Or you can put your money into an S&P Index fund or large ETF.  That’s why the stock prices keep going up for these companies: because the whales have nowhere else to park their money.

Fundamentals no longer apply to these stocks… or even to the broader market for this reason.

Case in point: Apple.  

Apple’s stock is a growth stock (up 55% over the past year) but it is not a growth company. Earnings and revenues are growing a mere 5% per year.  The major source of growth are accessories like the smartwatch and now the “me-too” iSpeakers.

Most of their business is iPhone sales. But sales units have fallen. They now entirely depend on the phone replacement cycle.

And that’s another problem: compared to the same period last year, unit sales actually dropped. That’s doubly bad because sales were sluggish in the first half of 2016 as users waited for the new Apple iPhone release. (Oh, and this year included an extra sales day.)

Despite the signs of peak sales, Apple’s stock keeps moving up.

Because the big money has to be parked in Apple. It’s a virtuous circle: the money flows into Apple because it has to, but then the price goes up and the money keeps flowing in because it wants to.

Apple, Facebook, Google and the rest are the only game in town for these whales.

But if you own other stocks, fundamentals do matter.  

A recent analysis by Citibank showed that the stock market has been flat once you remove the FANGs (Facebook/Apple/Netflix (NFLX)/Google). All other stocks are trading on fundamentals and those fundamentals are not impressing investors.

So the good news is that the market is actually quite rational.

Fundamentals should remain good for another two months. At which point a new reality will dawn: that Trump is not really going to do much to boost the 2017 economy.  And that companies are going to pare back their spending.

KEY TAKEAWAY: If you are investing in equities, then choosing an Index linked ETF makes sense. But don’t do Nasdaq – it’s just investing in FANG stocks and that’s too exposed. You’d be better off investing in an S&P index instead.  

If you are buying names, then be much more careful. Business is booming in the defensive sector. Also retail seems be a bit oversold.