Now That 'Everybody Knows'
The 'Great Rotation'... 'Everybody knows'... A potential trade setup we haven't seen since early 2022... Interest-rate-sensitive sectors and the AI megatrend took a breather today... Is it time to panic about AI?...
Some are calling it the 'Great Rotation'...
I (Corey McLaughlin) wrote about the idea of "rotation" yesterday. As we explained, small-cap stocks and industrials have been soaring over the past week or so – though that trend paused today – and mega-cap stocks have been selling off.
Even though it was down today, the small-cap Russell 2000 Index is up more than 10% since July 9. Meanwhile, the Dow Jones Industrial Average hit another new all-time high today. But since July 10, the tech-heavy Nasdaq Composite Index is down more than 3% and the benchmark S&P 500 Index is down a little more than 1%, including losses today.
Even by rough math, it looks like a textbook "rotation." As MarketWatch shared this morning...
Andy Constan, who runs the macroeconomic and commodity research firm Damped Spring, points out over the last five trading sessions, the Magnificent Seven market cap dropped by $349 billion, while the Russell 2000 rose by $324 billion.
That's representative of capital moving around the market, not out of it.
And as the so-called "Godfather of Technical Analysis," Wall Street veteran Ralph Acampora, has famously said, this kind of action – money flowing around the market among different sectors and styles but not out of it in a panic – is the "lifeblood of a bull market."
But now that 'everybody knows'...
I'm reminded of the phrase that our colleague Dan Ferris often talks about (like in this April essay). When "everybody knows" one thing, it's time to think differently because that story is already priced into the market... And it looks like everyone knows about this rotation now.
The same headline writers and mainstream analysts who were quick to pick up on the phrase "Magnificent Seven" to describe the big-tech market leaders last year are now using the term "Great Rotation" to describe the trading action lately...
The catalyst for this rotation has been the rising odds of a Federal Reserve rate cut coming in September. Just a few weeks ago, many investors didn't consider a rate cut a certainty.
But as we reported, Fed Chair Jerome Powell started laying breadcrumbs on July 2. And last week's consumer price index report for June included a "whiff of deflation"... which ratcheted up expectations for a rate cut as soon as September. More comments from Powell this week have only reinforced the idea of a rate cut.
The idea is just about fully baked into the market now, with federal-funds futures traders putting almost 94% odds on it, compared with 70% a week ago and 57% a month ago.
So traders and investors are taking gains in tech and putting money to work in beaten-down, capital-intensive, and rate-sensitive small-cap businesses, which could get a boost from an easier monetary environment.
That makes me wonder... Is the suddenly popular "Great Rotation" closer to its end than the beginning now that "everybody knows" about it? Perhaps... because small caps have been trending higher, with volatility, since late last year.
A potential trade setup we haven't seen since early 2022...
As our Ten Stock Trader editor Greg Diamond wrote to his subscribers yesterday in a post titled "Remarkable Price Action"...
Last week, I mentioned we're seeing sectors that were shorted or not owned (small caps and industrials) outperform the AI and tech stocks that are overbought, and a rotation was in place.
This week, a rotation has happened that I haven't seen in a long, long time.
Imagine waking up as a portfolio manager and seeing the Dow Jones Industrial Average up 1% and then seeing the AI/semiconductor sector down.
You're following the trend, but losing money on the AI trade. This is what's happening right now.
Greg says oversold small-cap stocks and industrials could be in a "catch up phase" right now. But he is also looking ahead to what's coming next...
If stocks continue to rally, Greg says, "it means a trading setup is coming along that I haven't seen since early 2022." You'll likely recall that this last setup was the start of a nearly yearlong bear market.
We're not in that type of danger zone yet, but Greg will be tracking his indicators to size up risk and reward in the market and specific sectors, as usual. Today, he told subscribers to take around an 8.5% profit off the table in a trade on industrials.
Interest-rate-sensitive sectors and the AI megatrend took a breather today...
Biotech stocks and other interest-rate-sensitive sectors that have been on the move, like homebuilders, were down today. For example, the iShares U.S. Home Construction Fund (ITB), which rose 11% last week, was down about 2% today.
The AI megatrend is also taking a breather... thanks to politics, in part.
Former President Donald Trump, now the front-runner to win November's presidential election, laid his cards on the table about an important piece of the AI story... a geopolitical hot spot in the South China Sea.
Trump said in an interview with Bloomberg Businessweek published yesterday that Taiwan – home to key microchip maker Taiwan Semiconductor Manufacturing (TSM), which makes chips designed by Nvidia (NVDA) – "should pay us for defense."
That idea raises questions about Taiwan's future security. The mainland Chinese government, across the Taiwan Strait, considers Taiwan its territory, but the democratic island nation has disputed that claim since the Chinese Civil War decades ago.
Concerns about a potential Chinese invasion of Taiwan, and U.S. involvement in a conflict, have grown over the last few years, as China has built up its naval capabilities. And now the market is thinking about potential Trump policies again.
You should read our colleague Dave Lashmet's work on this story to learn more. As he explained last year in a Digest titled "The Next Black-Swan Event"...
Taiwan is a global player in one of the most important industries in the world: high-end silicon microchips.
Today, chips run everything... your refrigerator, car, phone, and the Internet. So for you – and for your portfolio – a war between the U.S. and China involving Taiwan could be a disaster.
Dave also wrote in that edition about individual chip companies and how they would likely fare should conflict break out in the South China Sea. He sized up the risk of more than a dozen chip businesses and shared a "black flag" list, topped by this company...
The worst-hit firm will likely be TSM...
It's based in Taiwan. Whether China's war with Taiwan starts with a naval blockade or a missile salvo, this chipmaker (best known as TSMC) is at ground zero.
Even in a bloodless war, the Taiwanese stock exchange would simply end. TSMC shares could go to zero. Warren Buffett concluded that Taiwan Semiconductor faces multiple unsurvivable threats, so he sold every share of his TSMC investment.
Today, shares of TSM dropped more than 7% given a fresh round of uncertainty. Nvidia shares fell more than 6%. If anyone needed an excuse to "rotate" out of these popular chip stocks, they found it today.
Is it time to panic about AI?...
Good question. Our friends over at our corporate affiliate Altimetry have a few urgent thoughts on the matter that they're about to share with the public.
At 1 p.m. Eastern time tomorrow, Altimetry founder Joel Litman is going live with what he's calling the "AI Panic Summit." Joel is going to share everything he thinks you need to know about the AI sector right now and what you should pay careful attention to moving ahead.
You can register for the event for free here.
On this week's Stansberry Investor Hour, Dan and I were joined by David Tice, partner at Moran Tice Capital Management and a noted short seller. David spoke with us about his award-winning documentary, Grid Down, Power Up, which centers on what would happen if the U.S. power grid went down... explains why it could happen... and offers tips for surviving this overlooked societal risk...
David also shares his market outlook right now, including the sector he's bullish on, the area of the economy he thinks is set up for a huge decline, and how he and his team who run the AdvisorShares Ranger Equity Bear Fund (HDGE) go about identifying "bad" businesses to bet against.
Click here to watch the interview now... and to hear the full audio version of this week's Stansberry Investor Hour, visit InvestorHour.com or find the show wherever you listen to your podcasts.
New 52-week highs (as of 7/16/24): Apple (AAPL), ABB (ABBNY), Agnico Eagle Mines (AEM), Alamos Gold (AGI), A.O. Smith (AOS), American Express (AXP), Berkshire Hathaway (BRK-B), Cintas (CTAS), Electronic Arts (EA), Western Asset Emerging Markets Debt Fund (EMD), iShares MSCI Emerging Markets ex China Fund (EMXC), Enstar (ESGR), Fidelity National Financial (FNF), VanEck Gold Miners Fund (GDX), GEO Group (GEO), SPDR Gold Shares (GLD), Barrick Gold (GOLD), Intercontinental Exchange (ICE), ICON (ICLR), iShares Convertible Bond Fund (ICVT), iShares Core S&P Small-Cap Fund (IJR), iShares Russell 2000 Value Fund (IWN), JPMorgan Chase (JPM), Kinross Gold (KGC), Kinder Morgan (KMI), Coca-Cola (KO), Grand Canyon Education (LOPE), Altria (MO), MSA Safety (MSA), Motorola Solutions (MSI), Newmont (NEM), NVR (NVR), Omega Healthcare Investors (OHI), Sprott Physical Gold Trust (PHYS), Planet Fitness (PLNT), Ryder System (R), RadNet (RDNT), Royal Gold (RGLD), Roper Technologies (ROP), Invesco S&P 500 Equal Weight Technology Fund (RSPT), Sprouts Farmers Market (SFM), SPDR S&P 600 Small Cap Value Fund (SLYV), S&P Global (SPGI), SPDR Portfolio S&P 500 Value Fund (SPYV), ProShares Ultra S&P 500 (SSO), Teradyne (TER), Texas Pacific Land (TPL), Trane Technologies (TT), Texas Instruments (TXN), Tyler Technologies (TYL), ProShares Ultra Gold (UGL), ProShares Ultra Financials (UYG), Viper Energy (VNOM), Vanguard S&P 500 Fund (VOO), Verisk Analytics (VRSK), Waste Management (WM), Wheaton Precious Metals (WPM), Health Care Select Sector SPDR Fund (XLV), and Zebra Technologies (ZBRA).
In today's mailbag, feedback for Ten Stock Trader editor Greg Diamond... Don't forget, you can get a taste of Greg's work in his weekly, free Diamond's Edge videos here in the Digest each Monday, in the "media" section of StansberryResearch.com, or on our YouTube page... As always, send your comments and questions to feedback@stansberryresearch.com.
"Dear Greg: I am continually fascinated by your analyses. Not only am I constantly learning from you but I am amazed at the courage you have to publish your analyses to us, your subscribers. Your latest analysis, 'Time and Price Likely Marked "A" Top on Friday' is a prime example.
"I consider that my subscription to Stansberry Research would be all worth it if it was only to receive your work and insights. However, with Stansberry I get so much more for my subscription. Thank you very much and, please, keep it up." – Subscriber Franz P.
All the best,
Corey McLaughlin
Baltimore, Maryland
July 17, 2024