Tech takes a hit, but rotation rewards the rest: Equal-weight S&P rises as Dow hits record high

Yesterday was another reminder about concentration risk. A renewed wave of tech volatility gripped Wall Street……another selloff in the mega caps tempered the optimism that we saw in the Industrials - XLI + 2.2%, Healthcare - XLV up 1.5%, Basic Materials – XLB + 1.3%, Energy – XLE + 1% and Utilities – XLU + 0.7%.

APPL leading the way lower after Timmy came out and took advantage of the ‘supply’ issues/memory costs highlighted by MU and boosted prices by $200 - $300 on Macs and iPads. MSFT followed, wasting no time to jump on that wagon too…..lifting prices on Xbox — same story, higher memory costs. And because those names carry so much weight in the index, (recall the S&P is a mkt cap index – not a price index) that the drop in the S&P’s most-influential group left that index flat on the day even as MOST of its members rose.

Which is why if you only looked at the S&P you probably came away thinking it was another frustrating day for stocks. That index went nowhere while the Nasdaq moved lower – losing 118 pts or 0.5% and every member of the Mag 7 got punched in the face - dragging that index down 826 pts or 2.6%.

And I know it’s hard to understand if you just look at the indexes but underneath the surface - the market actually got healthier.

Let’s start with the closing prints. The Dow added 72 points and traded at another intraday record high. The S&P finished unchanged, the Nasdaq gave up 118 points, while the Russell 2000 gained 20 points. But here’s the number that mattered most—the Equal Weight S&P rose again. Think about that. This is the version of the S&P that gives every company an equal vote and it outperformed the version dominated by the mega-cap technology names. It rose by 56 pts or 0.7%. All while the transports surged higher – rising 323 pts or 1.5% and the Mag 7 stumbled.

If you are in the army – the analogy is simple - The generals took a hit...the troops kept marching.

And what is really important here is that this is NOT what the beginning of a bear market looks like. This is what sector rotation looks like. I keep hammering this home and let me hammer it again.

Rotation and liquidation are NOT the same thing. Money isn’t leaving the market, because if it was – then every sector would be lower – they would be throwing the baby out with the bathwater…..they would be throwing everything out the window INCLUDING the kitchen sink! But they are not.

What they are doing is re-allocating, taking some money out of the ‘outperformers’ that may have gotten ahead of themselves – another idea I keep suggesting and reinvesting it in other sectors that have been underperforming or just offer some protection – think defensive in nature – Industrials, Utilities and Healthcare.

The Dow told exactly the same story – of the Dow 30 stocks it was everything BUT the tech names in the index that advanced…..CAT up 6%, UNH + 2.5%, JNJ +1%, MRK +4%, HON + 1.7%.

While so many people are busy staring at Tech and the Mag 7 – the companies actually building America did just fine. And to prove that point yet again – 7 of the 11 major S&P sectors ended the day HIGHER – that’s 64% of the market.

Eco data yesterday – let’s look at what happened – The headline number that the market was waiting for was the May PCE report, and the interesting thing is that this report came in almost exactly as forecast, so no surprise – elevated yes, but NOT more than expected, so no surprise.

The surprises were – Personal Income up 0.7% vs. the expected +0.4%, Personal Spending up 0.3% vs. the expected +0.2% - YET Personal Consumption came in much weaker at +0.5% vs. the expected +1.4%..... And I know what you’re thinking…. Spending was higher but Consumption was lower – help me make sense of that…. Well, it’s fairly simple…. both things can be true and are true.

Consumers are spending more dollars, but they’re not buying more stuff. Higher energy prices forced consumers to spend more just to maintain the same. For example - If gas jumps from $3.50 to $4.20 a gallon, you spend more money even if you buy the exact same amount of gasoline. Your spending rises, but your actual consumption doesn’t.

And that’s the real story. While the consumer is proving to be remarkably resilient, opening their wallets, supported by stronger-than-expected income growth, that spending is a direct result of higher prices rather than stronger demand. It’s another reminder that the consumer hasn’t cracked, but they’re certainly not getting richer every time they swipe their credit card.

The third surprise was GDP – it rose coming in at +2.1% up from the prior estimate of +1.6% and so you ask again…. How can GDP rise if Consumption fell? Simple – Imports were lower and since imports are subtracted in the calculation, the net result is a higher GDP. In addition, we saw business investment remain strong….so it was the revision to imports and business rather than the consumer that drove that move.

Oil continues to trade below $70 and this morning it is down $2.70 or 3.7% and continues to sit on the trendline…When it breaks – then $65 oil is next…and unless there is a sudden breakdown in the ceasefire talks – I don’t see any reason for oil to rise…the path of least resistance is lower, the question now is – how much longer do we have to wait to see it?

Bonds were unchanged so yields were steady…. The 2 yr is at 4.10%, the 10 yr is 4.38% while the 30 yr is now yielding 4.86%.

Gold continues to trade around the $4,050 level—a price that, based on the chart, should provide some near-term support. But unless the geopolitical backdrop heats up again or investors suddenly begin seeking safety, I’m not convinced gold has much reason to push much higher from here.

The fear trade is cooling, oil is down 27% off its highs, and if the Fed rhetoric becomes less hawkish -or at least stops getting more hawkish -we could easily see some additional pressure on gold as real yields stabilize (lower) and the dollar remains firm.

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.

Eco data today is all about the U of Michigan sentiment surveys and inflation outlooks.

Overnight the tech selloff continued…..Asian stocks ended lower…. Japan down 4.2%, Taiwan down 3.6% while the Kospi was down 5.8%.

European markets are also under pressure down between 0.8% and 1.3%.

US Futures are burning as well…. Dow futures down 52 pts, S&P’s down 26 pts, the Nasdaq is getting consumed by the flames – down 330 pts while the Russell is down 26 pts.

The S&P closed at 7,357... down less than a point. But the pre-market action tells you everything you need to know... and the calendar tells you the rest.

We’re now just three trading days from quarter-end, and that means portfolio managers are doing what they always do — raising cash in the names that have made them the most money and redeploying it elsewhere to make the books look a little cleaner during the quarter end marking period.

Now don’t confuse that with the end of the AI trade... because I don’t believe that’s what’s happening at all. In fact, I think we could see a little more pressure on tech over the next couple of sessions as this quarter-end rebalancing plays out. That could easily push the Nasdaq into an oversold condition on the RSI chart. (We are almost there now).

And here’s why that matters.

MSFT, AMZN, AAPL and several of the other mega-cap leaders are already flirting with oversold levels themselves. Those are exactly the kinds of prices that begin attracting buyers. Remember... these stocks are the institutional and retail ATM machines. When they need cash to rebalance, they sell what they own the most of... and what has performed the best.

Take Apple. Just two weeks ago it was trading around $318. This morning it’s near $275 — a 12% decline. Could it slip another few dollars before quarter-end? Absolutely. But that doesn’t change the longer-term story.

To me, this looks much more like mechanical selling than fundamental selling. Once the calendar turns to a new quarter and that window dressing is behind us, I would expect investors to go shopping.

The VIX is up 7% in the pre-mkt…which should surprise exactly NO ONE. SpaceX is down 1.2% at $151.

Pasta primavera

Now - the lesson of the day is “don’t put all your eggs in one basket,” – Diversify…. So, I’m cooking something that lives by the same rule. Pasta Primavera. There’s no single star ingredient here — no one vegetable carrying the whole dish. It’s the WHOLE group working together: the asparagus, the peas, the zucchini, the cherry tomatoes, the carrots. Every veggie pulls its weight, and THAT’s what makes it sing. It’s like the equal-weight S&P of the dinner table.

For this you need: 1 lb. Farfalle (or pasta of your choice), A bunch of asparagus, trimmed and cut into bite-size pieces, 1 green zucchini and 1 yellow one, sliced into half-moons, 1 cup of cherry tomatoes, halved, 1 cup of fresh peas (frozen is fine), 2 carrots, diced, 4 cloves of garlic, sliced – because why not??? A handful of fresh basil, torn, olive oil, butter, s&p and of course the fresh grated Parmegiana.

Bring a pot of salted water to a rolling boil. Cook the pasta to al dente, drain and set aside - save the water.

While that’s working, heat olive oil and the butter in a big pan over medium. Add the garlic - don’t burn it.

Now, here we go…. in order of how long they take: carrots and asparagus first, then the zucchini and squash, then the peas and tomatoes at the end. You want everything tender-crisp, never mushy. A few minutes each. Season with s&p.

Toss the drained pasta right into the pan with the vegetables. Add a splash of the pasta water, the Parmigiana, and the torn basil. Toss it all together until it turns into a light, glossy sauce.

Taste, adjust the s&p and finish with one more handful of cheese. Serve immediately in warmed bowls.

Here’s the trick - No single ingredient saves it, and no single ingredient sinks it. That’s the whole point in the bowl and in the book.