“Trust your own instinct. Your mistakes might as well be your own, instead of someone else’s.” — Billy Wilder

Europe may have managed to create a currency union, which has managed so far to hold together without a common fiscal policy. They may be one step closer to that goal after agreeing this week to issue common debt as part of the package to help stimulate the euro area economy. This latest development does seem to have helped give strength to the euro.

Overnight we had a couple of the big-hitting tech stocks report their results. Despite a slightly downbeat statement from Microsoft, the share price remained close to its all-time highs. Tesla, a stock that has seen sentiment change dramatically in the past year, managed to announce a profit for the last quarter. Adding further momentum to the stock as it will now be eligible to enter the S&P 500. Index funds will need to add it to the portfolio providing more demand. The S&P 500 may be testing 3300 as well as investors’ nerves, but it must be remembered that just 5 stocks make up 25% of the index. Half of the stocks in the S&P 500 are lagging the index by more than 10%. Such divergence is highly unusual and not even seen to this extent in 2008.

This divergence provides a problem for portfolio managers, if one had not owned at least some of the big tech names, Microsoft, Amazon, Paypal, Apple, or Google, managing performance would have been very hard. The more the stocks rise the greater the need to own them to maintain a weighting. One must also remember this also works in reverse on the way down, which then adds to the volatility. Correlations between now and 2000 continue to be made, the Nasdaq has not deviated this far from its 100 day moving average since 2000. The performance of the tech sector relative to the S&P 500 is at extremes also last seen 20 years ago. The love affair with the sector must be as strong as it was at the start of the millennium. The market cap of the Nasdaq index has passed that of the GDP of the eurozone.

Equities continue to be ignoring geopolitical risk as tensions continue to rise between China and the US. The latest being the United States ordering China to close its consulate in Houston. Beijing announced the order on Wednesday outrageous and would draw a firm response if not reversed. Papers were been seen to be burnt by the consulate on the grounds. Equity markets at present hold up as signs of the economic recovery continue, if that falters investors expect the Fed to increase their safety net. It remains a risky game.