Welcome back, readers. It has been an interesting few weeks around the world - new elections, new geopolitical movements, updated data-dependent economic inputs, and, of course, inching closer to US Elections. This ongoing noise is creating choppiness in our stock and bond markets.

As I often peruse many research services towards the end of the week, I was pleasantly surprised Thursday evening with a few charts and commentary about recently perceived economic softness and the fact that bonds had rallied, giving an indication that we may see the Fed cut rates soon.  Something most investors have been anxiously waiting for.  Here is one of those Thursday night charts:
 

What a difference a day makes.

Friday morning, the jobs report for May showed that US Job growth surged and wages accelerated. Nonfarm payrolls advanced 272,000 last month, beating all projections in a Bloomberg survey of economists. The average expectation was for monthly new jobs of 175,000. Average hourly earnings climbed 0.4% from April and 4.1% from a year ago.

Job openings have now dropped to their lowest since 2021.  Also, recent reports indicate that non-native (includes foreigners and non-documented illegals) Americans may be the fastest to be getting labor jobs, part of this administration’s plan to let non-skilled labor enter our country to alleviate shortages in these types of workers.  See job opening chart below:
 

After Friday’s job report, Investors’ expectations for a rate cut were immediately extinguished, and the 10-year Treasury, which had been trading at 4.33% on Thursday night, got hammered Friday. The 10-year yields closed up 3.5% to 4.43%.

The only sanguine but helpful news was that the unemployment rate-derived from a separate survey, increased to 4% from 3.9%, rising to that level for the first time in over two years.  The news was good for the average American worker but not so much for Wall Street.  As we see it, this data further confirms that the Fed is likely to remain on hold for the next several months.  In fact, as we had suggested recently, we could even see reasons for one more hike.

Wall Street and oddsmakers ratcheted down, yet again, ANY expectations for the Fed to cut interest rates until much later in the year, perhaps after the November elections.  We wrote about this in last week’s Market Outlook and if you have not yet read it you can go here to read it.

“It’s a very Fed-unfriendly report-an easing-unfriendly report” said Jay Bryson, Wells Fargo’s chief economist.

Doing the Heavy Lifting.

On February 25, 2024, I wrote a Market Outlook that was titled “Rocket Stock”.  Nvidia (NVDA) was rocketing higher, the stock price was already up 59% for the two months since January 1, 2024.  We suggested that just based on its astronomical revenue growth and the insatiable desire from big technology companies to build their future AI data centers (Google, Microsoft, Amazon, Salesforce, and many others), YOU SHOULD OWN the stock. If you would like to go back and review that article you can click here now).

Here are some recent statistics about the company, its earnings and the stock price.  As I am sure you are aware, Nvidia Corp is involved in the design and manufacture of computer graphics processors, chipsets and related multimedia software.  Their chips are helping to propel AI development that all of the big tech companies are developing, as well as hundreds if not thousands of other tech companies around the world.

Annual sales increased 262% over the last 12 months to $79.8 billion.  Earnings increased 625% to $17.10 per share.  Leading 12-month forecasted earnings are $25.02 per share.  That puts earnings expectations at a 53% growth rate per year.  The growth of this company and the earnings acceleration are daunting.  For an illustration of just how parabolic this growth is, see below:
 

The stock closed on Friday at $1208.88 up $112.55 per share for the week, which was approximately a 10% appreciation. The stock, which was up almost 60% at the time of the February 25 “Rocket Stock” article is now up 144% year-to-date making an additional 84% increase since the end of February-2 plus months ago.

The stock will go through a 10-1 stock split over the weekend and each shareholder will begin Monday with 10 shares for every 1 share they held.

What you might not know.

Is that Nvidia is holding up the market.  It is doing the most heavy lifting of any of the mega cap stocks.  A simple analysis would show you its significant contribution through Friday. The S&P 500 is currently up approximately 12% year-to-date.  Without Nvdia’s now $3 trillion valuation and significant influence on the cap weighted S&P 500 index, the S&P 500 would only be up about 8%.  A good illustration of how much “heavy lifting” this stock is doing is also contained below:
 

The MarketGauge algos and strategies identified this early.

We have owned Nvidia in almost every one of the MarketGauge investment strategies over the past 16 months.

Our ETF Sector Plus Conservative model purchased the SMH semiconductor ETF back in 2023 and traded it several times taking several profit targets along the way..   The residual 25% position, still on, is up almost 50% so far.  The ETF Sector Plus Moderate still holds USD (Leveraged semiconductor ETF) and has reached (and taken) not less than 8 profit targets in the past year.  The USD (leveraged version of SMH) ETF year-to-date performance is up over 140% because of the huge weighting that Nvidia has in that ETF.

In the Large Cap Leaders investment model we purchased NVDA in March, 2023 and took 4 profit targets by June.  Then again in September 2023, we went back in and reached 3 profit targets within 3 months later.  It was purchased several times during 2024 so far and remains with a residual 25% position and a 37% or more profit.  (if you had been in from the start of that trade.  Everyone’s experience may be different than these numbers).

There are a few other strategies that are also currently holding NVDA, including a revised NASDAQ strategy we will be introducing shortly which is one of the most spectacular investment models we will offer.  In that portfolio, NVDA is up 43% from its February purchase.

Then, of course, there is our highly successful Profit Navigator utilizing the S&P 500 (SPY) ETF which you may now understand just how much the S&P 500 index is being influenced over 30% due to the exposure and weighting  of NVDA alone.

If you would like additional information on these or any of our investment strategies, the MG All-Weather Portfolios or our trading tools and education, please reach out to Rob Quinn, Chief Market Strategist, at Rob@MarketGauge.com.

Sister Semiconductor Surges and Shines.  The bullish cycle continues.
 

Two weeks after the February 25 Market Outlook column about Nvidia, we wrote about “Sister Semiconductor, Surges and Shines.” Sister Semiconductor is the character that Mish created to represent and illustrate her important cast from her best-selling book, “Plant Your Money Tree”. (if you would like more information on Mish’s Plant Your Money Tree go here).  In that book and Mish’s subsequent writings, which can also be found on the MarketGauge Big View updates, Sister Semiconductor has a powerful and strategic place in the development of technology in the United States and can, as it is doing so right now, influence the market.

The cycles tend to be elongated and as we showed in that particular Market Outlook on March 10. The Philadelphia Semiconductor Index (SOX) can stay in a bullish trend for quite a while, sometimes longer than expected.

Of course, there have been semiconductor winners and losers in this cycle.  Nvidia is the big winner, along with other stocks recently hitting new highs such as Micron (MU) ARM Holdings (ARM), Broadcom (AVGO), Taiwan Semiconductor (TSM), Super Micro Computer (SMCI) and other Chip companies, most of whom are involved with the development of Artificial Intelligence in computing (AI).  Some of the older chip companies not as directly impacting AI like Intel and AMD have been lagging.   Please find a chart of the SMH (Semiconductor ETF) for 2024 so far below:
 

Can this continue?  Of course, especially now that Nvidia has made their stock more attractively priced for smaller investors by conducting a 10-1 split this coming week.  However, we still believe the most prudent and skillful way to invest in these high flying (parabolic) technology stocks is to stick to our knitting and always implement STOPS and PROFIT TARGETS, knowing that stocks that go parabolic often correct and investors cannot get off the rocket ships fast enough.

The U.S. leads the way in CHIPS and will continue to do so.

Throughout the years, I have always listened attentively to commentary about how other countries want to take credit for technological advancements. Other than Israel, I don’t quite believe any country on this Earth has done more to advance the development of new technology and the science of semiconductors than the US, especially many of the advancements made in Silicon Valley.

We are smack in the next phase of technological advancements as every corporation around the world will soon be implementing Artificial Intelligence (AI) into their business models and operations.  We are on the cusp of being able to develop and manage different aspects of society by using this advanced phase of technology.  It will imprint every aspect of our lives and to do this, companies will require CHIPS, CHIPS and more CHIPS.

I believe one of the best ways the Federal Government got behind this was recently enacted by the current administration and Congress through the CHIPS Act.  This Act provides funding for the semiconductor CHIP industry to build, expand and attract domestic as well as foreign manufacturers of this technology.  A description of the CHIPS act is below:

The CHIPS Act of 2022, officially known as the Creating Helpful Incentives to Produce Semiconductors for America Act, is a U.S. federal statute enacted by the 117^th United States Congress and signed into law on August 9, 2022.  The Act authorizes roughly $280 billion in new funding to boost domestic research and manufacturing of semiconductors in the United States.  It aims to support domestic research and manufacturing of semiconductors and authorizes various programs and activities of the federal science agencies. The law provides the Department of Commerce with $50 billion for a suite of programs to strengthen and revitalize the U.S. position in semiconductor research development and manufacturing while also investing in American workers. 

You can see this demonstrated in major Semiconductor manufacturing campuses currently under construction by Intel (INTC) in Columbus, Ohio ($20 billion), and Taiwain Semiconductor (TSM) in Phoenix, Arizona (originally $12 billion but expected to grow to $65 billion).

Here is an interesting illustration of just how significant the U.S. efforts are contributing to the world’s needs for highly intelligent semiconductor CHIPS:
 

 

The Markets this week.

We are beginning to see a pickup in sideways moving market choppiness.  This summer seasonal influence along with another earnings season wrap up contributes to this type of market noise.  The NASDAQ (QQQ) and S&P 500 managed to eek out another small weekly gain as the S&P 500 notched out another all-time high on Thursday.

After the Friday hot jobs numbers, (and bonds getting hammered), the market recovered some during the afternoon.  Nonetheless, recently you will notice that the S&P 500 and the NASDAQ continue to claw themselves higher after starting off in negative territory from positive economic numbers.  This is considered unusual behavior and is much the result of money chasing the largest cap stocks, like Nvidia.  (It doesn’t hurt when Nvidia is 32% weighting and is up 10% for the week).  Therefore, sell offs are followed quickly with FOMO (Fear of Missing Out) buyers who “want in”.  See illustration below:

FOMO. "The fear of missing out on upside gains (FOMO) exceeding the fear of downside may seem irrational. But it’s happening. Since 2023 US equities have exhibited higher volatility on days equities are up than on days they are down

 

Concentration vs. returns. 

As you are probably aware by now, our firm offers investment strategies and portfolios that incorporate different investment edges, but we do so in concentrated portfolios of stocks and ETFs.  Our Active Risk Managed (ARM) approach allows us to benefit from a smaller pool of investment ideas and the long-term performance of these models has proven the power of concentration.

Right now, the markets are also overly concentrated, given that the mega cap stocks (Google, Microsoft, Meta, Apple, Nvidia) are weighted by valuation, heavily in the index (now over 50%).  “The market tends to produce returns above the historical average in periods when concentration is rising and returns below the average when concentration is falling.”  See chart demonstrating this below:
 

 

At MarketGauge, we use our Big View (newly enhanced; you have to see it) to provide a perspective on risk, accumulation, distribution, and our new color charts to show where the markets currently are.

I love the following quote from an old associate of mine who has a unique perspective on the markets.  I think this is relevant for the various market cycles we go through.

I thought it was worth sharing with you.

 

“Investing in the market without knowing what stage it is in is like selling life insurance to 20-year-olds and 80-year-olds at the same premium.”
- Victor Sperandeo

What’s going on with small-cap stocks?

As you will read in our Big View bullets below, small cap stocks sold off another 2% last week and are now in a bear phase.  I have often commented that interest rates and small-cap stocks are inversely correlated.  When rates go up, typically, small-cap stocks sell-off.  Higher interest rates remain a burden on these smaller companies as they are much more dependent on financing rates to run their businesses and to fuel future growth. The NASDAQ left small caps (IWM-Russell 2000 Index) in the dust this past week.  See chart below:

The market looks much different if you compare large cap stocks to small-caps (Russell 2000 index).  You can see the stark contrast between the health of each of these two markets in the chart below:
 

We take recent note that there are a host of savvy investors, including Stanley Druckenmiller, who believe that once the first Fed rate cut kicks in, small-cap stocks will tend to outperform in the 6-12 months following.  See the illustration below.

Are you getting ready to load up on small-cap stocks?  (just a reminder that our Small & Midcap Earnings Growth Investment strategy generated a better than 50% return in 2023 while interest rates remained high… (talk to Rob@MarketGauge.com about this strategy if you are interested).

Stocks vs. first cut. "Historically, Small Caps tend to outperform in the 6-12 months after the 1st rate cut (83% prob in Sep)."
 

After a 4% May and better than a 10% return year-to-date through May, all indications are for a positive market for the remainder of the year, according to the research from Ryan Detrick at The Carson Group.  See below:

The last bullet point for the bulls is a 4% or greater monthly gain has tended to suggest continued strength, with the S&P 500 up a year later 81.3% of the time and up a very solid 12.2% on average. This compares to the average year higher 73.0% of the time and up 9.0%. But it doesn’t end there, as I looked at all 12 months and would you believe that, historically, the very best returns after a 4% or greater monthly return take place after a big gain in May? A year later, stocks have never been lower (10 out of 10) and are up more than 20% on average
 

 

Last, as we referenced at the beginning of this article, June and the summer months can be choppy with some sideways markets reflective of traders’ vacationing and less volume in the markets.  However, in major election years, June, July and August fare much better.  See graph below:

 

We now turn it over to Keith and his team, which prepares the BIG VIEW Bullets. Make sure to watch the inspiring video that Keith produces, which can also be found below.

Good luck with your investing this coming week. Thank you for reading.

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