Markets rotate as equal-weight S&P sets new closing high – The big picture remains bullish

And so the rotation story continues…..the Dow lost 44 pts, the S&P lost 3 pts, the Nasdaq down 60 pts, the Russell gained 2 pts, the Transports lost 106 pts, the Equal Weight S&P gained 36 pts and ended the day on a new closing HIGH all while the Mag 7 added 464 pts – and this makes sense – as those names (Mag 7) are all down double digits and sitting right atop their ‘OVERSOLD’ trendlines on the RSI scale. (Relative Strength Index). While the Mag 7 is up about 8% from the beginning of the quarter – it is down 14% from the May highs. So, it feels uncomfortable, I get it, but it is not a disaster at all.

And recall what I said to Stuart on Varney & Co Friday morning…we are at the end of the quarter and there is a lot of quarter end window dressing going on, this does not feel like the ‘end of an era’ by any stretch.

So, in the end - Here’s the thing nobody wants to say out loud because it ruins the panic narrative: the broad market is FINE. The selling is concentrated - in the mega cap tech complex. Again, the equal weight S&P closed at a fresh RECORD high on Friday while the financial media accentuated the tech bloodbath.

But remember, Consumers are still spending. Businesses are still investing. Earnings estimates are still grinding higher, and the eco data is not collapsing at all. And while the market is pricing in one rate hike this year and BankAmerica is pricing in three hikes this year – the sense is that KW (Kevy Warsh) will have none of it. But neither will he be quick to cut rates either – and honestly, that’s ok.

At his swearing-in last month, Warsh singled out Alan Greenspan for praise, pointing to the prosperity without inflation that defined much of the 1990s. He believes AI-driven productivity can deliver a similar outcome today—just as the internet revolution did three decades ago.

There’s just one problem. The backdrop is the mirror image.

In the 1990s, the federal budget moved from deep deficits to a surplus under President Clinton. That relieved inflationary pressure allowed long-term interest rates to fall, and freed capital to fund the internet and telecom boom. Greenspan had the wind at his back.

Warsh has it in his face. Today’s structural deficits mean the Treasury must continue issuing enormous amounts of debt, keeping upward pressure on long-term rates even if the Fed eventually lowers short-term rates. That’s the Warsh conundrum. AI may deliver the same productivity gains, but it won’t enjoy the same fiscal backdrop. Warsh wants Greenspan’s outcome—but without Clinton’s balance sheet. Good luck with that.

Now last week’s PCE report reminded us that inflation remains sticky, and over the weekend Barron’s highlighted another issue that investors shouldn’t ignore. The AI buildout is becoming expensive. So many advanced chips are being diverted into AI data centers that supply for consumer electronics is tightening—and those higher costs are beginning to show up on Main Street. That’s inflation finding another path into the economy.

Tim Cook responded by raising prices on Macs and iPads, saying Apple could no longer absorb higher component costs. Microsoft followed with price increases on Xbox consoles.

Suddenly, politicians who spent years dismissing inflation are outraged because a MacBook—a discretionary, one-time purchase—costs more. Bernie, Lizzy and AOC blasted Apple for raising prices, with AOC even suggesting the company should be broken up. – the lack of understanding is mind boggling.

I don’t remember hearing the same level of outrage when families were paying more for groceries, gasoline, rent, insurance and virtually every other almost daily - recurring household expenses. But I digress...

Now, does that mean the AI trade is over? I don’t think so. What it does mean is that investors continue to wonder -

Has the AI trade gotten ahead of itself in the short term? I say yes, but that is not a negative at all…. After the massive 30% rally in the Nasdaq (26% in the Mag 7) off of the April lows, some profit-taking is healthy. In fact, you can argue that it is necessary. Bull markets don’t move in straight lines—they advance, pause, rotate, and shake out the weak hands, before they look for the next leg higher.

So, the real question isn’t whether AI is dead, it’s whether investors have become too optimistic, too quickly. Isn’t that always the case when stocks move so quickly? Don’t we always ask – ‘Are we ahead of ourselves?’ Yes, we do….and this is when I like to remind you of the pendulum – Markets are emotional. The pendulum swings too far to the right...then too far to the left...before eventually finding equilibrium. That’s the ebb and flow of investing. It’s not rocket science.

Long-term investors understand that corrections and rotations are not the enemy. They’re part of the process.

Need more proof? Seven of the eleven sectors finished higher. Healthcare led the way, jumping 3.3% after being one of this year’s weakest groups. Utilities, Consumer Staples, Consumer Discretionary, Real Estate, Communications and Financials all moved higher as money rotated into areas that have lagged.

Meanwhile, investors took profits in this year’s leaders. Industrials slipped 1.6% after an 18% run this year. Technology fell 1.9% but remains up 27% year to date. Energy and Materials also eased after strong advances ytd.

That’s exactly what healthy markets do. Money rotates out of the winners and into the laggards. That’s not liquidation. That’s portfolio management.

Bonds ended the day mostly unchanged…. the TLT flat while the TLH gained 0.1%. the 2-yr yield is now 4.1%, the 10 yr is at 4.37% and the 30 yr is at 4.86%.

Oil – continues to trade below $70 and this morning it is trading at $69.90 -even after the weekend drama…..for now the ceasefire is alive and well.

Gold is down $50 at $4,040 and continues to find support at $4,000. Recall what I said last week - From a technical perspective - trendline resistance now sits near $4,470. Ironically, $4470 was the old support level before gold broke down, - So, old support becomes new resistance. Now, if $4,050 fails to hold, the next meaningful chart support is the $3,500 area.

Again, I know that sounds aggressive, but it’s well within the realm of possibility if geopolitical tensions continue to ease, inflation remains under control, and investors rotate away from safe-haven assets.

So, what’s ahead - There is no eco data today that will drive any move…remember – it is a short holiday week – the BIG number – the June NFP report will be out on Thursday -as markets are closed on Friday. It is expected to show an increase of 115k new jobs, Avg hourly earnings m/m and y/y expected to remain strong at +0.3% and 3.5% respectively. The Unemployment report is also expected to remain steady at a LOW of 4.3%. This one data point will influence both Treasury yields and the market’s expectations for the Fed.

European markets are mixed this morning….

US Futures higher…. Dow futures up 250 pts, S&P’s up 66 pts, the Nasdaq is up 376 pts while the Russell is up 13 pts.

The S&P closed at 7,354... down 3 points. But don’t lose sight of the bigger picture. The market isn’t falling apart. It’s rotating. The AI story isn’t over. It’s catching its breath. And if history is any guide, the future is bright.

There are now only 2 trading days left in the second quarter – portfolio managers will continue to re-allocate ahead of the marking season. The third quarter/second half of the year – is about to begin. We are now deep into the mid-term election season…. We can expect to hear more and more about policy positions as we get closer to November. Markets will listen and react – but remember – politics can and do create short term chaos – but rarely price markets in the long term.

The VIX is down 1% at 18.20. SpaceX is trading up $3 at $156.50.

Spaghetti carbonara

This is perfect dish for the rotation we are seeing. Carbonara is like a high-wire act: you’ve got screaming-hot pasta and raw egg, and if you let them touch wrong, the eggs SCRAMBLE and the whole thing breaks. Handle it right — off the heat, tossed fast — and those same eggs emulsify into a silky sauce. And if you handle your portfolio right – it too will become ‘silky’.

Bring a pot of salted water to a rolling boil - add spaghetti - cook for 8 / 10 mins or until al dente.

While this is cooking - sauté diced pancetta in a frying pan. In a separate bowl - melt one stick of butter - set aside. In another separate bowl scramble two eggs and two yolks and mix well. Add in a handful of Pecorino Romano cheese and mix until it forms a paste. - set aside.

When pasta is cooked – add directly to the sauté pan with the guanciale – mix well to coat the pasta. Now remove from the heat - add the eggs/cheese mixture. Also add in a ladle of the pasta water – Mix until it turns glossy and coats every strand. Always have more Pecorino on the table for your guests.