Car Crash

A slow-motion car crash is happening before our eyes. Both Apple and Tesla - notionally components of the Magnificent Seven - are now in full correction mode. The demand in China for both of their core products, iPhones and Model Y is starting to fade. Pricing is an additional threat as Huawei and BYD have gained market share. Apple has lost its crown as the world's largest company to Microsoft after giving up on the over-hyped "next killer app" EV Apple Car. And Tesla is increasingly looking more like a cyclical car company than a tech disruption play.

Yes I'm short Tesla and zero-weight Apple, but I don't think my positions distort my view. The over-promise of EVs is something I have already flagged in previous posts. The early adoption rate is over, and the heavy lifting of converting the world to battery power from gas guzzlers is an uphill battle. Apple has given up on their iCar dreams (shown above - at least it looked cool!), as the writing is on the wall. The mass market consumer adoption rate has been wildly overstated, especially in the U.S., with cheap gas and a preference for overpowered trucks.

Perma-bulls on EV technology are jumping ship and signing on to the AI craze in droves. That is siphoning off what residual belief there is in both companies as they seem only tangential beneficiaries of the race to capture AI investment dollars. I pointed this out in my Feb 6 Meta-morphosis piece alraedy but it's worth repeating.

"A mass-market retailer whose best product innovation is a $3,500 goofy headset, trading at 29X earnings just can't compete with the compelling AI narrative. That's a lot of market cap that is now looking for a new home."

However, I don't expect the savage redistribution of Apple and Tesla dollars into the "AI 5" and other areas to derail the bull market. However the benefits of stock selection over a macro-based risk-on, risk-off type of approach are obvious. The market is slowly morphing into a broader set of areas for performance. I'm old enough to remember when GE was valued higher than Apple. Twenty years later, which analyst "Top Pick" list had GE instead of APPL? But the chart below argues they should have.

GE vs Apple

Bad news is now good news, but in a stock-picking way. Every bull market has a period in which the cash from underperforming stocks gets recycled into new shinier coins to grasp. This is the micro-based approach to rotation that is now at play. A full-on macro-based move from growth to value or from large to small cap is looking less likely now as the economy is trapped between positive and negative variables. Strength from labour markets and easy fiscal policy is capped by 'higher for longer' rates. The jury is still out on the softness of the landing for the U.S. economy. I'm waiting for the Friday employment numbers for more clues.

Sorry to say that I have little insight into the stocks that will outperform. I have never claimed to be a good stock picker. I'm staying in my macro lane for now. But what I do know, is that operating in a bull market is trickier as it ages. Investors who are charged with outperforming an index increasingly succumb to the pressure to chase the winning trade, hence the bubble vibe being given off by this frothy market. AI has supplanted EV as the dominant narrative and that dog will continue to chase its tail for some time yet.

As the focus of investors morphs from the "picks and shovels" phase of the AI gold rush to the user base and productivity beneficiaries, stock selection effects will continue to dominate. I'm even reading that the seemingly low-tech worlds of mining and energy are likely to see many benefits from the adoption of AI in their production and maintenance practices. Are Exxon and Freeport McMoRan a valid way to play AI? We'll see.

Let's hope they are. We can't keep putting more money into the same winners like Meta and Nvidia. The measures of money flow tell the tale here. As NVDA has made a recent high, there is a dangerous non-confirmation from its volume of buying and MACD momentum. No stock is immune to a correction - so perhaps now that the earnings beat has been priced in, the stock can take a short-term pause.

So as the not-so-slow-motion car crash continues in one area of the market, others can benefit from fresh investor inflows. Just be careful which car you are in.

Risk Model: 3/5 - Risk On

The model is fading a bit this week as the Copper lagged Gold's sudden pop. Could be a catch-up play to Bitcoin from the yellow metal but my Copper call seems woefully offside now. China's in a bind a massive credit bibble unwind, combined with slowing export performance. If Trump wins in November, that won't get better. My long copper "trade" - has become an "investment" - argh!

As to the Model, the reading from an over-bought RSI is hampering the TSX version. If I replace the $XIU with $SPY the reading would go into sell mode, as the U.S. market is 12% above its 200 DMA - a dangerously overbought condition that has me cautious. Bitcoin's moon shot run is a further red flag.

Volatility has been a tailwind as the readings have stayed below the signal line for 4 1/2 months now. But I don't like the saucer shape that I see forming. Bull market corrections are - by definition - short and sharp. A strong report from the labour market this Friday is looming as a potential catalyst for the much-needed correction from a possible Fed rate narrative change.

3-Month Volatility