Things you need to know.

–        What the heck happened?

–        Sellers run for the door…buyers back off – leaving a void in prices.

–        Is the TECH trade about to blow?

–        Try the Spaghetti Ubriachi

Bang! Kapow! Bam! Splat! Oooffff! Klunk!   Holy Artificial Intelligence, Batman! 

TSLA and GOOG lit the fuse and then the place fell apart…. Traders and algo’s not happy while large asset managers got a lesson in ‘concentration risk’.  The VIX surged by 22.6% and this morning it is up anther 5%.

First TSLA misses the estimates and then he (Lonnie) announced a delay in the robotaxi launch…. the stock ended the day down 12%!  And then GOOG – which wasn’t a negative report at all – got dragged into the mess as well….They beat on EPS, they grew revenues by 14% y/y, they earned $10 billion + in quarterly revenues and $1 billion in operating profits for the first time in their history….and the algo’s did what?  They took $9 or 5% out of it…. ending the day at $174.37. The other 5 names got smashed as well.   – AAPL – 2.8%, AMZN – 3%, MSFT – 3.5%, META – 5.6% & NVDA – 6.8%.

The meltdown across the technology sector and more specifically the Magnificent 7 drove the Nasdaq down 655 pts or 3.7%, it sent the S&P down by 128 pts or 2.3%, the Dow lost 505 pts or 1.25%, the Russell gave up 48 pts or 2.1%, the Transports lost 191 pts or 1.2% while the Equal Weighted S&P gave back 82 pts or 1.2%. 

Only Utilities +1.1%, Energy – flat and Healthcare +0.8% were spared…. but then again – you can’t tell me you are surprised?  How long have we been talking about this?  How long have we been waiting for a catalyst to ignite the fire?  And every time we thought a pullback was in sight – it failed to materialize, The buy the dippers jumped in…only to take the sector (and market) higher….So, now it’s earnings season….and the sector is priced to perfection…all we need is ONE thing to go wrong and BOOM! Down we go!

Of the 11 sectors – Tech took the brunt of the sell off.  The XLK – 4.1%, Consumer Discretionary – 4%, Communications – XLC – 2.6%, Industrials – 2.1%, Financials – XLF, Basic Materials – XLB and Real Estate – XLRE all down 1.3%, while Consumer Staples XLP gave back 0.1%.  Semi’s (chips) got whacked – 5.5%,  – individual names got hit even worse…NVDA – 6.8%, AVGO – 7.5%, QCOM – 6.3%, AMD – 6%,  Homebuilders – XHB – 2.8%, Retail – XRT – 1.6%, Airlines JETS – 2.7%, Metals & Miners – XME – 2%, Cybersecurity – CIBR – 2.6%, Aerospace & Defense down 2.1%…..

And so here is the issue….’Reality Check – Aisle 5’…. We allowed the story to take on a life of its own.  Apparently, everyone just expected AI to be a revenue generator on day 1.  And now investors are questioning that assertion.

Hello?  Wake up – AI was always an expense…it is in the infancy stages – stages when all kinds of money gets thrown at it, this isn’t a new idea at all….Talk of AI changing the world was a new story almost daily…..investors couldn’t get enough – which is ok – except they kept paying higher and higher prices and higher prices beget even higher prices causing that massive FOMO trade…I mean think about it….NVDA + 130% ytd,  – come on…. SMCI went from $275 – where it was trading for 7 months – to $1200 in 8 weeks…. a 330% advance – was that a signal that it was ‘out of control’? Maybe, but no one wanted to believe it….and the buying sent valuations to higher and higher – yet some how they all justified it…. telling us that ‘this time it’s different’.  So far, the mkt is not happy with they heard from the tech sector – granted only 2 names have reported…but there is a lot resting on what they say…. Can they convince the markets not to overreact? 

In any event – it speaks to the danger of concentration risk….Again – you can’t be surprised….We knew that the move up this year (and much of last year) was driven by 7 names….The question is – did you get caught up in the frenzy?  Did you overweight your portfolio with these names, or did you create a diversified portfolio…that included names away from Tech?

I have been warning you about all the fluff, saying that at some  point it has to give….The idea of a 10% correction is not out of the question….in fact – a 15% move is still within the realm of possibilities….recall – earlier in the week – I reminded you about the coming ‘seasonally weak’ time for the markets.  Aug – October is historically one of the weakest times for the market…After yesterday the market is still trading at 22 x’s forward earnings…. well above the 5 and 10 yr. averages of 19 x’s and 17.9 x’s.  Yesterday’s move sent the S&P down and thru the short term trendline…. (not surprising), It is now down 4% off the high. A 10% move would take the S&P to around 5075 – levels seen in April/May of this year.

To add insult to injury – the eco data yesterday sent a mixed message…Manufacturing PMI dropped from 51.6 (expansionary) to 49.5 (contractionary) – which suggests weakening…. while the Services PMI went from 55.3 (expansionary) to 56 (even more expansionary) suggesting strength.  New Home Sales fell by 0.6% vs. the expectation of +3.4% (again suggesting weakening). Today will bring us the second revision to 2Q GDP and it is expected to be +2% – up from +1.4%. Personal Consumption is also expected to be up at +2%. We are also going to get Durable Goods and those are expected to be +0.3%. up from +0.1% (again suggesting strength) ……

Don’t forget – we are now in the blackout period for the FED, the FOMC meeting is next week – the announcement due out on Wednesday at 2 pm.  While no rate change is expected – investors will be listening to what JJ says about the future. Currently the market is pricing in at least 2 cuts (if not 3).

US futures are essentially flat….…. Dow futures +7, S&P’s -6, Nasdaq -50 and the Russell is +5.   So far, 7 companies have reported this morning and 3 missed and 4 beat.  We will get about 20 more before the day is over.  Names like, AAL, LUV, RCL, HAS, NYCB, VLY, RTN, HOG, NOC & RTX…. representing airlines, cruises, toys, community banks, motorcycles and defense.

The S&P closed at 5427 – down 129 pts… The trendline is at 5428……The question now is will it hold or not?  If it doesn’t hold – prepare for S&P 5250/5300….at some point over the next couple of days….and if it does hold – then watch as it builds a base.  I said we needed to test trendline support and we did…. next week begins the seasonally weak time of year….so prepare yourself for more volatility ahead…. If you have more cash to put to work – sit tight….no need to rush…. Leave it in the mm fund earning 5%….

From an investment perspective – continue to focus on the long game…. Remember – having a plan and staying focused is key for a long-term investor…  Give me a call to discuss.

Take good care.

kpolcari@slatestone.com

Sources:  Bloomberg, CNBC, Reuters, Wall Street Journal

Disclosure: The content provided in this material is designed for educational and informational purposes only, and it is important to note that it does not constitute personalized recommendations. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment.  The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of Kenny Polcari or SlateStone Wealth.

The market commentary is the opinion of the author and is based on decades of industry and market experience; however, no guarantee is made or implied with respect to these opinions, which may not necessarily align with our firm’s standpoint.

While considerable effort has been invested to ensure the accuracy and dependability of the information presented, we must clarify that we cannot guarantee the accuracy of third-party information. Our usual sources for third-party data include channels such as Bloomberg.

Kenny Polcari is the Chief Market Strategist for SlateStone Wealth.  Neither Kenny nor the partners of SlateStone Wealth are compensated in any manner by the issuers of any securities mentioned in the publication.

Spaghetti Ubriachi

So, you ask – spaghetti ubriachi? (Ooo – bree – a – key)?   It means ‘drunk spaghetti.’ 

You cook it in water and red wine – a nice Chianti or “vino di tavola” (table wine).  No need to use an expensive red –   The trick is that you add equal parts of water and wine – bring to a boil and add the pasta – cook for 7 mins and then strain – reserving a mugful of water/wine.   You then finish it off by sautéing in a pan with butter, garlic, pancetta and ½ cup more of the wine…. read on…

You need – a nice chianti, garlic, butter, spaghetti, olive oil, chopped parsley, pancetta, and red pepper flakes (optional).

Add equal parts water and red wine to pot and bring to a boil.  Add salt.  Add pasta. Cook until al dente – like 7 mins or so. 

In the meantime, peel the garlic and slice it. – chop some pancetta.   Place the butter and olive oil in a sauté pan large enough to fit the pasta and place it over low heat to slowly melt the butter.  Now add the pancetta and cook just until almost crispy…. now add in the chopped garlic.  Saute.  (Here is where you will add the red pepper flakes if you choose)

When the garlic gets toasty add the additional ½ cup of red wine and about ¼ cup of pasta water…. turn up the heat until the liquid simmers. Strain the pasta – reserving a mugful of water…. toss the pasta into the sauté pan with the garlic & wine.  Mix well, tossing and stirring over med hi heat until the liquid is absorbed.  Do not let it “dry out” …. you can always add a bit more of the water if it does. 

Serve immediately in warmed bowls….be sure to have plenty of Pecorino Romano cheese on the table…

Buon Appetito.