Start Sellin’ the News

If there was any question this is a bull market, yesterday put that thought to rest. Bulls don’t ask questions, they just keep going.

All it took was the bait and switch move by Treasury Secretary Janet Yellen, who delayed the predicted surge in the issuance of long bonds in the first quarter refunding. Bull markets tend to ignore the negatives and, like Pavlov’s dog, responds to all positive stimuli with gusto. After Yellen ‘rang the bell’, bond shorts reflexively covered their exposure and yields pivoted lower, as they did in November on similar news of reduced supply. With that risk-on signal, the Magnificent 6 dragged the markets higher.

And the hits just keep on commin’ this news-laden week. Earnings, Fed verbiage, and employment data are making this week a virtual Super Bowl of data. Unlike the whiff from Tesla, Microsoft Amazon, Meta, Alphabet, and Apple, should mostly report surprisingly better earnings, goosed by the AI tailwinds and resilient a consumer. The tale of two markets, Big Tech vs all the rest is still at play here. The bifurcation continues to expand the gap between the growth haves and have nots. To say that this market is narrow is like saying Taylor Swift is popular with people in Kansas City.

So why is this a good time to take profits? Simply put, bulls make money, bears make money, pigs get slaughtered. Buying into the AI trade now is a lot like the latter condition. Riding the winners is the right strategy when the sceptics disparage the trade. There is no greater contrarian bet right now than selling the AI leaders and buying the lagging cyclical trade.

The basic problem with this strategy is timing. The switch to these economically sensitive laggard groups seems like a siren song that risks foundering on the rocks of slowing GDP. If the premise of lower rates that is driving the Big Tech favourites has, at its core, a narrative of a declining economy, then making the switch now is too soon. But if we get anything like a ‘no landing’ or reaccelerating economy, then the switch will pay off in spades. Rates will stay higher and the multiple expansion theory driving the Mag 6 is vulnerable.

But the ultimate outcome of both these scenarios, when they are proven out by the data, will benefit cyclicals at the expense of the lofty expensive leadership stocks. If we get the weakness - it is ‘priced in’ and these stocks will expect a Fed response that will provide comfort to look over the valley, and lead to a ‘2025 recovery’ narrative.

If we get the touch and go or economic persistence that forestalls the Fed from lowering rates as quickly as the market is predicting, the high multiple stocks will correct sharply and the earnings expectations for cyclicals will recovery sharply.

So sitting out this 6 stock Tech rally has two benefits. You don’t have to constantly watch the market and worry about the timing and you don’t lose friends by bragging about how well your portfolio is currently doing. If the premise that underlies Tuesat11 has any validity, it should be now. I’m arguing for anticipating the anticipations that will drive the next move in markets, not the ones in today’s frothy AI dominated headlines. Hard as it is in the face of this rip, you gotta be sellin’ the news this week.

Risk Model: 3/5 - Risk On

The only two risk off signals remain the slightly lower AAII ratio and the overbought RSI. The Model is unlikely to capture in advance the type of sudden sell-off that I expect currently. We will see if going against both the risk model and the prevailing wisdom is a fools errand this week.