Record Highs, Narrow Shoulders: Tech Carries the S&P While Half the Market Stays Behind – Try the Risotto Siciliana

Things You Need to Know

• S&P & Nasdaq break out to new highs
• The bulk of the market remains under stress.
• Oil steady, gold steady and bond yields up again this morning.
• Another treasury auction – today it is the 10 yr.
• Earnings just around the corner.
• Try the Risotto Siciliana.

And just like that – the S&P makes a new record closing high…. the Nasdaq makes a new record closing high – yet portfolios are NOT at record highs…. many still remain below where they were 2 months ago…And while investors don’t really want to hear it – there is a rational and clear explanation….and one that we have discussed before but will revisit now.

Remember – the S&P is a market weighted average – so the biggest companies (think sexy tech) have an outsized weighting on the index….and remember the TECH weighting in the index stands at about 40% and that does NOT include AMZN, GOOG, TSLA or META – which are NOT considered ‘TECH’ – they are considered Consumer Discretionary & Communications – I know, sounds a bit ridiculous but it is what it is. If you include those four names then the percentage weighting approaches 53% – more than half of the index – making it clear just how influential the tech sector and these names are to the headline index.

Now, if you compare that to the Equal Weight S&P – which gives every company the same weight vs. the biggest companies having greater influence then the picture become clearer. And remember – both indexes have the same names.

So, when we look at it – what we find is that more than half of the stocks are trading below their long term trendline – which means they are well into ‘correction territory’ if not ‘bear market territory’ – all while many of those ‘tech’ names are kissing new highs. So, what that means is the biggest names are doing the ‘heavy lifting while 50% of the names struggle.

And remember this – at the lows of this most recent draw down that began in August – the S&P lost about 3.9% while the Equal Weight S&P gave back nearly 7%. YTD – the S&P is up 14.2% while the Equal Weight S&P is up 10.8%…. And that’s it – it’s not more complicated than that.

At the end of the day – the Dow gained 0.5%, the S&P added 0.6%, the Nasdaq gained 0.5%, the Russell lost 0.6%, the Transports lost 0.5%, the Equal Weight S&P added 0.6% while the Mag 7 rose 0.5%.

Now before you go lighting your hair on fire – narrow leadership does not mean the bottom is about to fall out, but what it does mean is that a small group of names are carrying the index and if they start to disappoint on any number of metrics – think cash flow, margins, demand, competition or guidance – it will look very different and the speed at which that may happen might shock the markets…. because once the algos decide they want out – is when the sh*t hits the fan.

Selling will beget more selling, and buyers will see that and pull back, they won’t disappear, they will just pull back – happy to buy stocks at cheaper prices…I mean – who doesn’t love a good deal?

Which brings us right back to coming earnings which are now less than one week away…. And as I pointed out on Monday – FactSet is expecting profits to rise by 29.3% y/y, Bloomberg Intelligence expects them to rise by 25% y/y – either way – that’s not nothing….and it helps explain why some investors are looking past the much of the negativity.

So here is my concern – how much good news is already priced into some of those highflyers? Because when stocks hit records BEFORE the results arrive, then companies better deliver. They better not disappoint on any metric, not one…and the guidance will need to be robust, or the action will be at risk. And remember – they can have a great qtr. but if they are cautious going forward – expect to see a lot of RED. It’s called re-pricing risk.

And the names we are talking about – mostly those AI names that are carrying the index – the ones that investors can’t get enough of, think a crowded trade – those are the names to focus on…. I mean NVDA’s market cap is exploding, AMD tells us that chip demand is strong into 2029…. I think she said ‘several years’….and several is more than a couple. MRVL had their investor day and raised their 2028 forecast, investors took that stock up 6% – Why? Data Center chip demand! CEG (Constellation Energy) announced a ‘major power agreement’ with GOOG and that cause investors to take that stock up 12%. I mean the story goes on and on…

At the end of the day – Utilities surged by 3%, I mean think about that…the most boring sector in the group surged by 3%! And that makes sense – the group was down nearly 7% going into yesterday…. Consumer Discretionary rose 1.2%, Real Estate up 1%, Industrials and Consumer Staples gained 0.9%, Tech, Energy, and Basic Materials added 0.4% while Communications ended flat and Healthcare lost 0.2%.

Ok – let’s move on…I beat that argument to death!

Bonds rallied just a bit – the TLT and TLH both up by 0.25%….and that caused yields to back of ‘just a bit’. The 10 yr fell 4 bps to end the day at 5.27%. This morning though, it has taken those back and yields are once again at 5.31%. The 30- yr lost 1 bp but this morning it is up 4 bps at 5.70%…. reminding us that the cost of money is getting more expensive.

Yesterday’s $58 billion auction of 3 yr note went ‘ok’…..Buyers did not demand higher yields – that’s good. Today we’ll get a $39 billion 10 yr note auction and tomorrow will bring us a $22 billion 30- yr auction. Now lending money for 10 – 30 yrs is different than lending it for 3 yrs…. So, let’s see what investors demand today.

Today also brings the September FOMC mins and like I said yesterday – expect the talking heads to pull it all apart looking for new clues on what’s next at the FED. I don’t think we will get it, but let’s see…. I think we already know the details, but between the mins and the auction – the market will have plenty to focus on.

WTI didn’t do much – ended the day at $89.45….and this morning it is trading at $89.70 leaving it in the $86.50/$100 range.

Gold rose by $25 to end the day at $4,165 – this as rates backed off a bit, but that was short lived…rates up again this morning and gold is down $45 at $4,120…..Expect this back and forth to continue as long as bond yields remain here. If they tick higher then expect gold to go lower…. Recall, the chart suggests $3500 ish, if the 10-yr and 30-yr approach 5.5% and 6% respectively.

Meanwhile, the VIX, continues to tell us that there is nothing to worry about. It is up 30 cts this morning at 15.34 but is still well within the complacent zone – which makes little to no sense. I think that is about to change….

European markets are all lower. US futures are lower…. Dow futures -140, S&P’s -10, Nasdaq is -135, while the Russell is -13 (think rates).

The S&P closed at 7,818 – up 44 pts and a new record closing high. I say sit still…. you’re invested; you have money on the side to invest that should be sitting in your gov’t mm fund earning 3.5%. Earnings are around the corner, risk is elevated. The S&P, Nasdaq and Mag 7 are kissing the overbot line on the RSI chart….which only means they are getting to overbot levels, and that suggests we should see them pullback – even if just a bit….

Now if you just can’t sit still and have to do something – do your homework, look for quality names that are under undue pressure for no other reason than the cycle…

Financials, Utilities, & Communications names are good places to start – all of those sectors are negative on the year – sift thru them, look for the opportunity… BAC is a perfect example – the stock is down 19% off the high – below it’s long term trendline – what has changed? I mean has their investment thesis changed significantly? I don’t think so but do your own analysis – see what you come up with.

If you’d like to discuss your goals, evaluate the risk in your portfolio or simply get a second opinion, give me a call at 561-931-0190 or better yet – click on this link to connect. https://slatestone.com/contact-us/

I’m always happy to provide a complimentary portfolio review and risk assessment.

Take good care,

Kp

[email protected]

Source: Bloomberg, CNBC, Reuters, Wall Street Journal

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