A Lesson in Market Gravity
Stepped-up AI capex boom has investors revising their ROI estimates.
Key Takeaways
Discretionary-to-Staples Ratio Flashes Warning: Walter Murphy told me yesterday that he discovered a great leading indicator for the stock market, which is the ratio of Consumer Discretionary to Consumer Staples stocks on an equal-weighted basis. Well, what do you know? It does have an 85% correlation with the cap-weighted S&P 500. The ratio has fallen by -10% from the nearby high to a six-month low. The relationship with the overall market suggests a test of the S&P 500 in the 5,500 area. Get your hedges in and your pencils out — for once we get there!
Cascading Unwind of Risk-On Trades: It is hard to find the headline story between the action in silver, software, or Bitcoin. It’s probably Bitcoin because the same people who loaded up on the Mag Seven trade were the ones all-in on cryptocurrency as an asset class. Both are risk-on trades, and today’s retail investor cares little about concentration risk — to their peril. Walter also told me that $74,000 was the line in the sand for the first leg down from the unsustainable peak, but having broken that support level, we are talking about another big leg down. As in, $52,000 is the next level of support in this well-defined bear market.
Market Wobbles as Bullish Sentiment Hits Extremes: The power of the buy-the-dip mentality is such that at no point prior to November 2024 has the public bought into the wonders of AI and the so-called Trump Put to such an extent. This is indeed a new era of complacency. Market Vane bullish sentiment, at 69, is pressing right against the high end of the historical range. For households, the Conference Board measure rarely, if ever, has been as bulled up as it is today. The poll shows that even with the wobbly Tech trade, nothing is going to dent investor confidence. The bull camp expanded further to 62.3% this past week from 61.5%, while the bear share has slipped to 15.1% from 15.4%. In the past, whenever this spread hit an extreme of over +40 percentage points, and today the differential stands in excess of +47 percentage points, we have seen a drawdown of significance.
