Switzer on Saturday

The rotation out of tech slows down on good news

Founder and Publisher of the Switzer Report
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After a worrying week for stocks with a rotation out of big tech stocks that has sent stock prices earthward, along comes a good inflation number and better company reports that have resuscitated market optimism, with all three big indexes up overnight. As a consequence, SPI Futures say these index rises will help the local market open higher on Monday.

So, what was behind the overnight optimism? Try these positive drivers:

  1. The personal consumption expenditures price index (PCE) increased by 0.1% on the month and was up 2.5% from a year ago, which met the expectations economists.
  2. A better-than-expected GDP growth number out on Thursday, up 2.8% against a forecast of 2%, which reduces recession fears.
  3. This has cemented the view that interest rate cuts will start in September.
  4. Cyclical and small cap stocks remain the new targets for key market influencers.

These developments added to other indicators has reinforced the view that the September rate cuts are not only expected but could be overdue and necessary, as Ken Mahoney, president of Mahoney Asset Management, inferred to CNBC with the following: “The numbers have been coming in tamer. In housing and real estate, you’re starting to see some cracks. They’re going to stop messing around, start cutting rates.”

Reinforcing this view that rates need to slide is the latest University of Michigan’s Survey of Consumers that slipped to a low 66.4, showing consumers are becoming less optimistic. The expectation of a looming rate cut is bound to put a floor under the stocks sell-off linked the rotation.

For those too worried about this rotation, this from Steve Eisman of The Big Short fame argues ‘the recent tech-led market pullback is driven by emotions instead of a fundamental deterioration,” CNBC reports.

“Rotations are always violent. They always catch everybody unaware. And it’s not a fundamental correction. It’s like a psychological rotation,” Eisman said on CNBC’s Fast Money program.

The senior portfolio manager at Neuberger Berman said there hasn’t been anything alarming about the economy overall and wisely added: “I don’t think fundamentals have really changed all that much. The only negative data point I would point to is that consumer spending seems to have slowed a little bit on the margin, and delinquencies are up a touch.”

The bottom line that needs to be understood is that big fund managers and the investors who follow their lead have taken profits on the big tech companies and the money has gone into the sectors and companies that will benefit from lower interest rates. It’s why cyclical/growth stocks, whose profits are sensitive to interest rates are seeing their share prices spike in recent weeks, while small caps generally are becoming increasingly popular, as I’ve been predicting for months.

Accordingly, the small cap Russell 2000 Index is up a whopping 11.71% for the past month, and it’s why I expect our stock market to eventually get a big lift. Our S&P/ASX 200 has a lot more similarities to this the Russell Index because these US small cap companies actually have big market caps compared to most of our companies in the ASX 200.

For example, Abercrombie & Fitch is number 9 in the 2000 index and has a market cap of $US7.7billion, while Harvey Norman has a market cap of $A5.71 billion and JB Hi-Fi is A$7.36 billion.

The rotation is likely to be an issue until rates cuts happen and the US election is done and dusted. But importantly, there has been nothing to change my view that another leg up for stocks is out there waiting to happen for our market rolling into 2025.

To the local story, commodity stocks bounced on Friday and the S&P/ASX 200 Index rose 0.8% (or by 60.1 points) to 7921.3 at the closing bell, with 10 out of the 11 sectors in the green. However, the Index lost 50 points or 0.62% for the week, which wasn’t bad considering the negative news out of the US and our market down over 1% on Thursday

BHP justified our support adding 2.2% to $42.10 while Fortescue rose 1% to 20.35, and both were helped by iron ore futures on the Singapore exchange rising 2.2% to US$102.15 a tonne.

Mineral Resources had a good day, up 3.5% to $53.67 after an on-track report that pleased the market. Energy stocks were up with oil rising to US$82 a barrel. Shares of Ampol rose 1.5% to $33, while Santos increased 1.2% to $7.74.

The following stocks did well on Friday: Meridian Energy up 2.2% and Telix Pharmaceuticals up 2%. The company has abandoned plans to list on the Nasdaq. Qantas was up 1.9%.

Despite a good Friday, Fortescue slumped 5.5% after its latest trading update was disappointing.

Earlier in the week, “Macquarie was down 3.4% after telling investors at its AGM that they’ve made a lower return on their funds this year than in the previous five years, amid weaker demand for its services. Among local tech stocks that declined, software business Xero was down 3.5 per cent and WiseTech shed 3.2 per cent.” (SMH)

What I liked

  1. Global interest rates are continuing to roll over as the focus for central bankers shifts from getting inflation down to avoiding recession.
  2. The newfound popularity of Kamala Harris reduces the chances of an election clean sweep of both houses, which could be risky if Donald Trump takes the White House. Checks and balances are better for stocks.
  3. 40% of US S&P 500 companies have now reported June quarter earnings results, with 79% beating expectations, which is above the norm of 73% but below the experience of the last reporting season.

What I didn’t like

  1. Global share markets fell over the last week on the back of softer-than-hoped big tech earnings, concerns about growth and political uncertainty in the US.
  2. In the US, the risk of recession is growing,with former New York Fed President Bill Dudley arguing that the rise in unemployment in the US is approaching levels that in the past have signalled recession. And inflation pressures have abated so the Fed should preferably cut in the week ahead.
  3. US correction fears are on the rise but I’m not too worried. I worry more about short-term overreaction, though it will create another buying opportunity.
  4. July business conditions PMIs were falls in Europe and Australia.
  5. US June quarter GDP growth came in much stronger than expected at 2.8% annualised up from 1.4%, with strong growth in consumption and capex. But it’s a backward-looking indicator, though it could delay the Fed’s rate cutting.
  6. China’s recovery is slower than expected and interest rate cuts followed.

The big data watches for next week

Next week we see the June quarter CPI is out on Wednesday and this will be a big watch for the RBA and what it does on interest rates on the following Tuesday. Meanwhile, the Yanks get an important jobs report, which will need to indicate that unemployment is increasing, and wage pressures are abating.

On the local rates call, this is the latest from AMP’s Shane Oliver: “Our view is that the RBA probably won’t hike again unless underlying inflation as measured by the trimmed mean comes in at 1.1% quarter on quarter or 4.1% year-on-year or higher.”

 

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The Week Ahead

Top Stocks — how they fared

Most Shorted Stocks

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before 

Quote of the Week

This is from AMP’s Shane Oliver:“The bad news is that shares may be entering another correction on the back of a growth scare. For some time we have been concerned that shares are at high risk of another correction as valuations are stretched, investment sentiment looks somewhat optimistic, recession risk is high, there has been a heavy reliance on tech and specifically AI shares to keep the key US share market going and geopolitical risk particularly around the US election but also around the Middle East (with now a Houthi/Israel front), China and Ukraine is high.”

(But the expected US rate cut in September could turn negative sentiment into a nice positive for stocks.)

Chart of the Week

This is for those nervous about stocks right now. This shows that seasonally US stocks don’t like August and September, while we are more anti- September and October.


Disclaimer

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.