Tech's on Summer Break — Hotter Stocks Steal the Spotlight

Send in the National Guard! Tech stocks are red! [Morning Reckoning] June 25, 2024 [WEBSITE]( | [UNSUBSCRIBE]( Tech's on Summer Break — Hotter Stocks Steal the Spotlight Baltimore, Maryland June 25, 2024 [Greg Guenthner] GREG GUENTHNER Good Morning Reader, Send in the National Guard! Tech stocks are red! The tech sector plummeted nearly 2.5% on Monday following weeks of melt-up action. And the main culprits were some of the same stocks responsible for dragging the averages higher this year, specifically the semiconductors. The VanEck Vectors Semiconductor ETF (SMH) continues to fill those gaps, dropping more than 3.4% yesterday — its third straight decline. It’s now fallen nearly 8% from last week’s highs. But a funny thing happened as tech stocks took a beating… The rest of the market started to perk up. All those forgotten stocks the semis steamrolled in June are suddenly attracting fresh buyers. You’ve probably heard rumblings about the market’s little breadth problem recently. Despite the impressive win streaks posted by the S&P and Nasdaq, recent action hasn’t looked very healthy. It’s the same old story: A small number of massive stocks have consistently driven the market’s gains. Under the surface, most stocks were struggling. The Bulls had an opportunity to take control following the May CPI release and positive Fed minutes earlier this month. Instead, we were treated to more than a handful of false moves as stocks gapped higher, only to fail and slip lower. They fumbled the ball, and the semis and mega-caps picked it up and ran with it. Like most indicators, breadth doesn’t matter… until it does. And if the market can keep the party going, it will be because the laggards catch higher as overbought tech resets. To be clear, trading a market rotation doesn’t mean you should sell all your stocks and hide under the bed. Instead, you should attempt to find and exploit the sectors that are perking up and beginning to outperform. We’ll get to the details in just a minute… But before we get down to business, we need to pause for a moment to reflect on the insane market strength we’ve witnessed so far this year — and where it might be headed next. [URGENT: Regarding Your 2024 Strategic Intelligence Membership Dues!]( Hi, I’m Matt Insley. I’m the Publisher at Paradigm Press. Just moments ago, I just got off the phone with Jim and we agreed: it’s time we start charging more money for access to his newsletter. That’s why we may implement a massive price hike for all subscribers in the coming days. But if you [click here now]( you can lock in your current subscription price at 80% off – and never have to pay the potential new price of $500. Don’t waste any time. [Just click here now to claim this special offer.]( [LEARN MORE]( Crowded at the Top Barring a huge move in either direction this week, the Nasdaq Composite will finish the first half of the year sitting pretty with a gain of almost 20%. The S&P isn’t too far behind, clocking a year-to-date gain of more than 15%. Of course, historic performances from some of the biggest stocks on the market have played a major role in the market’s first-half surge… Semiconductors and the Magnificent Seven mega-caps have foiled the bears at every turn and powered this most recent push to all-time highs, even as breadth has deteriorated and other stocks and sectors have failed to keep up the pace. Simply put, it’s getting a little crowded at the top. Here’s a telling passage from a recent MarketWatch piece: The 'Long Magnificent Seven' trade has kept its spot as the most crowded trade for the 15th month in a row, according to Bank of America's Global Fund Manager Survey, which shows 69% of fund managers now view it as the most crowded trade, versus just 51% in May. The bet on the seven high-performing tech stocks is now viewed as more crowded than any comparable trade since the 2020 dotcom rally when fund managers repeatedly cited 'Long U.S. Tech' as the most crowded trade, including in July (74%), September (72%) and October (80%) that year. The result of this mega-cap dominance has been an incredibly smooth ride higher — a rally devoid of the typical gut checks and resets that keep investors honest and punish anyone who gets the itch to take profits too early. Here’s a fun tidbit making the rounds: The stock market has now gone almost 380 days without a one-day selloff of at least 2%, which CNBC notes is its longest stretch since the Great Financial Crisis. The kicker is that the S&P hasn’t posted a 2.15% gain over this same stretch, either. Volatility is virtually nonexistent as stocks quietly push higher. The most recent comparable conditions would be the low-volatility melt-up months of 2017. Seven years ago, the S&P notched “just eight daily moves of more than 1%, while the VIX fell to historic lows below 9.” according to CNBC. But Summer is here — a time when more difficult market conditions could prevail. That doesn’t necessarily mean we’re going to see a big move lower. But I expect choppy action at the very least, even if we do see a bigger market rotation begin. If markets do remain choppier for longer, I don’t want to be fighting gravity. Yes, we’ll be looking to add downside plays if breakouts fail and stocks begin to trend lower. But that doesn’t mean we won’t find solid long opportunities. Rotating the Bull While most investors and the financial media can’t take their eyes off NVDA and the semis right now, we’re starting to see some viable rotation trades brewing. For starters, the Dow is in the midst of a five-day win streak as some of its non-tech components fight higher. Financials and industrials — two groups that have not posted new highs this month — continue to firm up. Both finished Monday trading in the green. Energy is another strong contender for a summer rotation play. Crude has retaken $80 and the big oil and gas companies posted market-leading moves to kick off the trading week. You might recall that the energy sector posted a huge breakout move in April. XLE rallied double-digits, only to run into trouble in early April — and it’s faded ever since. What about small caps? The Russell 2000 looked like a world-beater during the Q4 melt-up rally as it posted a 20% move off its lows. But it’s been a choppy mess for the past several months after it failed to extend higher in the first quarter. Can it finally break free of its choppy range and extend higher? Remember, it’s grossly underperformed the major averages for nearly two years. Yesterday’s gains were a start… but it needs to follow through. Bottom line: Don’t sweat the semis. They’ll reset and potentially offer strong buying opportunities once they blow off some steam. For now, concentrate on the names that are showing signs of life as tech fades. And of these plays could quickly become market leaders this summer. Best, [Greg Guenthner] Greg Guenthner Contributing Editor, Morning Reckoning feedback@dailyreckoning.com [Buy this Sub-$5 Play on Elon Musk’s Final Masterpiece]( After revolutionizing space exploration and the auto industry… Elon Musk is now planning to revolutionize MONEY with this new venture. [Click here to see the details because once Elon flips the switch…]( Which could happen in the next 24 hours… It could send [this sub-$5 play skyrocketing in the coming months](. [LEARN MORE]( In Case You Missed It… The Whys of Home Ownership Sean Ring, Editor [Sean Ring] SEAN RING Dear Reader, Many financial commentators, including my esteemed colleague, James Altucher, poopoo the idea of owning a home. They have good reasons to do so. Homeownership has become exceptionally expensive in desirable areas, and many houses have become money pits. As a recent homeowner, I can attest to the benefits of owning your own property when done right. By 'right,' I mean being mindful of your budget, choosing the right location, and having a financial cushion for unexpected expenses and improvements. But first, let’s go through the reasons not to own a home. It’s Too Expensive One primary deterrent to homeownership is the sheer cost. In many markets, housing prices have skyrocketed, making it increasingly difficult for average earners to afford a home. However, it's important to remember that with careful planning and financial discipline, homeownership is still within reach for many. This expense isn't limited to the purchase price alone but extends to maintenance, property taxes, and unexpected repairs. The financial commitment required strains budgets, especially for first-time buyers who don’t have significant savings or equity from a previous property. With rising living costs, allocating a large portion of income to housing leaves little room for other essential expenses and savings goals, such as retirement or children's education. Mortgage Rates Are Too High In recent years, mortgage rates have significantly increased. High rates mean higher monthly payments, reducing affordability for many. This situation discourages prospective buyers who might otherwise take the plunge into homeownership. Higher rates can also impact the total amount of home loan one can qualify for, leading to compromises on the type and location of the property. The volatility of interest rates adds another layer of uncertainty, making it challenging for buyers to plan their finances accurately. For those with variable-rate mortgages, fluctuating rates can lead to unexpected spikes in monthly payments, causing financial distress. Ongoing Costs Are Punitive Owning a home is not a one-time expense. Ongoing costs like utilities, insurance, and property taxes add up quickly. Maintenance and repairs are inevitable, and these costs are usually frequent and substantial. Regular maintenance, such as plumbing, electrical work, and roof repairs, requires time and financial resources. Unexpected issues, like a broken furnace or water damage, can lead to significant, unplanned expenditures. Homeowners must also consider the cost of landscaping, pest control, and other services to keep the property in good condition. These continuous financial demands can strain budgets and create stress for homeowners. You Can’t Move Homeownership ties you to a location, which is a significant drawback for those whose careers require frequent relocations or who simply enjoy the freedom to move around. Selling a home is usually lengthy and complex, making it difficult to move on a whim. Market conditions, such as a downturn in the housing market, further complicate selling, potentially leading to financial losses. The emotional and logistical aspects of moving—finding a new home, adjusting to a new community, and dealing with the physical move—can be daunting. (Trust me, we didn’t factor in this cost… and it’s enormous.) This lack of flexibility is a significant disadvantage in a rapidly changing job market or personal life circumstances. And finally… The Government Has You Right Where It Wants You There’s a perception that owning a home places you under the government's thumb, with property taxes being a continual financial obligation. Additionally, government policies and zoning laws significantly impact property values and the feasibility of making home improvements. Changes in tax laws or property assessments can lead to unexpected increases in tax bills. Zoning regulations restrict homeowners' ability to modify their property to suit their needs or increase its value. Moreover, local governments often impose fees for various services and permits, adding to the financial burden. This perception of control and unpredictability is unsettling. So why would you ever buy a house? Here are a few reasons: Buying Well (You Didn’t Pay More Than 3x Your Income) In an [earlier edition of the]( Reckoning]( I wrote: Never spend more than three times your gross annual income on a house. I’m in the process of buying a house right now and I’m well within this rule. My down payment is ready and won’t empty my account, and my monthly payments are easily manageable. Far too many people only calculate what their monthly payments would be at the current rate of their mortgage. But if you’ve got an adjustable-rate mortgage, that could easily end in tears. There’s no need to overpay for a McMansion. The key to intelligent homeownership is buying within your means. If you’ve purchased a home that costs no more than three times your annual income, you’re less likely to be financially overextended. This approach allows you to comfortably manage your mortgage and other expenses. Following this rule ensures that housing costs remain a manageable portion of your budget, leaving room for other financial priorities. Additionally, buying within your means reduces the risk of foreclosure and financial distress, giving you greater peace of mind. It also allows for the flexibility to handle unexpected expenses without jeopardizing financial stability. This strategic planning gives you a sense of control and empowerment over your financial future. Increasing Your Down Payment Lessens the Sting of High Mortgage Rates A higher down payment reduces the principal amount of your mortgage, reducing the interest you pay over the life of the loan. This strategy makes homeownership more affordable even when mortgage rates are high. It also means you’ll build equity faster. Putting down a larger sum upfront lowers your monthly payments, making your financial obligations more manageable. Additionally, a substantial down payment can sometimes lead to better loan terms and lower interest rates, further enhancing affordability. Building equity quickly provides a financial cushion, which owners can use for future investments or emergencies. Maintenance Capital Expenditure Regular maintenance and upgrades enhance the value of your property over time. Wise capital expenditures prevent more significant, more costly issues down the line and ensure that your home remains a valuable asset. Regular maintenance keeps the house in good condition, preserving its market value. Upgrades, such as energy-efficient appliances, modern fixtures, and landscaping improvements, can increase the property's appeal and value. Preventative maintenance, like roof inspections and HVAC servicing, reduces the risk of major repairs, saving money in the long run. These investments maintain and boost your property's worth, making it a more valuable asset over time. These costs sound onerous, but if you own an asset, you’ve got to keep it well. You Can Still Move, But Smarter While homeownership does tie you to a location, it doesn’t mean you’re immobile. Renting out your home is viable if you need to move temporarily. Additionally, selling a well-maintained property in a good market can provide the capital required for your next purchase or move. Renting out your home offers flexibility and can generate additional income. Selling strategically during favorable market conditions ensures you maximize your investment return. Moreover, advancements in technology and services, such as property management companies, make renting your home more manageable. These options provide mobility while still enjoying the benefits of homeownership. The Government Isn’t Nearly As Big a Problem As You Think While it’s true that property taxes and regulations are part of homeownership, they’re not insurmountable obstacles. Many homeowners benefit from tax deductions on mortgage interest and property taxes. Furthermore, government programs often assist first-time buyers, making homeownership more accessible. Tax benefits significantly offset the cost of homeownership, providing financial relief. Government incentives, such as grants and low-interest loans, help make home-buying more attainable for many. Additionally, understanding and navigating local regulations can minimize their impact. Proper planning and knowledge make the perceived government burden manageable and less daunting. Again, get an accountant and lawyer who understands these things and can advise you on the best course of action. Wrap Up Buying a home is deeply personal and situational. Weighing the pros and cons helps prospective homeowners make informed choices that align with their financial goals and lifestyle preferences. Despite the challenges it may present, homeownership remains a cornerstone of economic stability and personal achievement for many. For those who buy wisely and plan strategically, the rewards of owning a home can far outweigh the drawbacks. It’s essential to approach homeownership with a clear understanding of the financial commitments and responsibilities involved, ensuring a prosperous investment in your future. All the best, [Sean Ring] Sean Ring Contributing Editor, The Morning Reckoning feedback@dailyreckoning.com X (formerly Twitter): [@seaniechaos]( Thank you for reading The Morning Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Greg Guenthner] [Greg Guenthner, CMT,]( is chief strategist at Forge Research Group. He has spent the better part of the past two decades developing long-term and short-term strategies with a single goal in mind: to help everyday investors generate outstanding returns and control their financial futures. Greg’s charts, analysis, and insights have appeared in Marketwatch, Forbes, Yahoo Finance, and many other financial publications. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2024 Paradigm Press, LLC. 1001 Cathedral Street, Baltimore, MD 21201. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. 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