2023’s Hot Play Is Falling Apart

By tradesmith-research-team

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The deconstruction of the Magnificent 7… Amazon de-humanizes warehouse work… Two new S&P 500 entrants… Year-end price targets raised (again)… Don’t ignore the gold breakout… Get an automated trade stream for the “Ultimate Asset”…

By Michael Salvatore, Editor, TradeSmith Daily

The “Magnificent 7,” for all its grandeur, never felt like a phenomenon that could stand the test of time.

When such a huge portion of overall stock market gains are concentrated in just a small handful of stocks, cracks will eventually appear. (To be clear on just how concentrated it’s been, the seven accounted for more than half of the gains of the entire U.S. stock market in 2023.)

It was a bizarre, rare case of the generals charging into battle, leaving behind their infantry and cavalry… and not only surviving, but winning.

2024 is thus far a different story. What was once a stalwart group is starting to fall apart, as Wall Street picks favorites…

Google (GOOG), Apple (AAPL), and Tesla (TSLA) are all underperforming the S&P 500 in 2024, and all are negative on the year. Meanwhile, Microsoft (MSFT), Amazon (AMZN), Meta Platforms (META), and especially Nvidia (NVDA) have kept their magnificent status.

Our take in TradeSmith Daily? The only thing you can count on is uncertainty.

Trends fall apart just as fast as they take shape in financial markets. As significant as one idea may seem one year, it can become utterly worthless the next.

We probably won’t end 2024 with the Magnificent 7 taking up such a large chunk of market gains. At least, not all seven. The issues facing Apple (slowing China growth and the EU’s recent $2 billion antitrust action), Google (generative A.I. controversy and slowing ad revenue), and Tesla (an earnings report miss on auto revenue, not to mention a distracted CEO) appear long-lasting.

Always resist the very real temptation to project current surface-level trends out to the future. Instead, zoom in on what’s happening in these stocks… and let that show you the winners.

Amazon’s in the news this week with a promising, if a tinge dystopian, development for its logistics business…

❖ Amazon’s bringing in the robots…

You might remember a few years ago that Amazon faced controversy for the conditions employees faced in its warehouses. Long hours, short breaks, and a brutal mix of backbreaking labor and tight quotas made for a stint of unrest and PR poison.

Well, Amazon took a big step this week toward a solution… by replacing human workers with never-tiring robots.

Agility Robotics’ Digit robot is designed to pull boxes from shelves and place them on conveyor belts… and that’s about it. It’s a refreshingly simple, practical use case for a robot after Elon Musk has promised humanlike robot assistants with good bedside manner and Boston Dynamics has machines doing increasingly complicated backflips.

Source: Amazon

For the time being, the Digit robots are testing at just a single facility and aren’t even hauling real goods. But Amazon’s investment shows that it’s serious about automating its complex logistics network, hoping to eventually rely less on human labor.

These real-world applications of robotics and A.I., especially at high-quality companies like Amazon, is a theme worth watching closely.

We may not like the fact that robots can replace humans, but it’s a potential boon for profit margin expansion — one of the big tells of a winning stock. And Amazon has been aggressively growing its margins by… cutting staff in the last year.

Looks like a great buy from our view.

❖ A serious hat tip to Lucas Downey…

Contributing TradeSmith Daily editor Lucas Downey recently highlighted two of the hottest stocks in the market — semiconductor company Super Micro Computer (SMCI) in January and outdoor apparel retailer Deckers Outdoor (DECK) in October.

He highlighted the latter for its continued growing earnings, revenue, and institutional support, and the former for its strong momentum off a “beat and raise” earnings report.

Those calls are turning out prescient, as both stocks are set to join the S&P 500 — nudging out Whirlpool Corp. (WHR) and Zions Bancorporation N.A. (ZION).

This news just reinforces an important point about investing. Through all the noise the market throws our way each week, there are certain factors that reign eternal.

If you follow stocks that grow their earnings, revenue, and raise their earnings guidance, you’ll have an unstoppable portfolio.

And as you can see, reading TradeSmith Daily will help you find those stocks long before the crowd hears about them on CNBC.

❖ But don’t ignore the price action in defensive sectors…

Beneath the service of major price gains in A.I. stocks and bitcoin, we’re starting to see investors shift toward defensive sectors.

Notably, utilities stocks are reversing their downtrend to start the year, turning over 2% higher thus far in March. Utilities are a notoriously defensive sector, tending to do well when the riskier end of the market spectrum sells off.

Even more importantly, gold has printed a new high… trading at $2,125 as I write. Silver, while still well off its 2020 high, could soon follow.

Why is this important?

This shift in positioning is an early tell that investors are losing their risk appetite, placing their chips on sectors that can tolerate volatility well. And they’re doing this while riskier plays such as bitcoin and A.I. stocks continue to dominate the market narrative.

Nobody ever went broke taking profits, even early profits. If you’re sitting on a big gain somewhere that you wouldn’t like to lose, considering cashing out a bit and using the opportunity to diversify into the areas of the market starting to outperform.

❖ Wall Street can’t raise its price targets fast enough…

File this under “yet another sign of euphoria in stock prices.” From Bloomberg:

Five Wall Street firms have already lifted their forecasts for the S&P 500 Index, which is up 7% to start the year after rising 24% in 2023. In the past week alone, Piper Sandler & Co., UBS Group AG, and Barclays Plc boosted their targets. Two firms — Goldman Sachs Group and UBS — have done it twice since December.

At 5,096.27, the index is already beating the average year-end forecast of 4,899.40, a figure it eclipsed just 24 days into 2024. Even the loftiest calls of 5,400 are just another 6% away.

It’s reminiscent of last year, when the S&P 500’s surprising strength also caught Wall Street prognosticators off guard. The difference is in 2023 they held off until the summer to start adjusting their outlooks — in 2024 they aren’t waiting that long.

Two months in, and the S&P 500 is a full 4 % ahead of the average year-end price forecast. Bank of America was out this week with a 5,400 price target for the index.

You might notice that TradeSmith analysts don’t issue price targets on the benchmarks. Ever wonder why?

Quite simply, our goal is to generate alpha — defined as gains that beat the broad market — for you. And spending so much time deciding where the market will end up just isn’t a good use of time in pursuit of that goal.

That’s why we spend less time covering the benchmarks and more time on the standout stocks within them… Or the alternative assets, like bitcoin, that don’t even play in the same yard but still outperform.

At the same time, the contrarian in me sees Wall Street’s scramble to publish the most optimistic number as something of a warning sign.

We’ve been warning of a potential pullback to strike stocks through the first half of the year, and there’s plenty of hesitancy in prices right now. That’s why we’ve continually advised focusing on the stocks with the historical qualities that generate alpha — revenue and earnings growth, capital efficiency, and momentum.

And once you’ve found those stocks, it’s also important to understand that there’s more than one way to profit from them.

❖ Have you heard about what TradeSmith CEO Keith Kaplan calls “The Ultimate Asset?”

Think again about all these big moves in gold, stocks, bitcoin.

Every one of them is directly tradable with the right tools, and in a way that accelerates both the profit potential and the speed those profits can come.

I’m talking about derivatives… an asset class so large, it approaches $1 quadrillion in notional value… But most specifically about options.

Options are the haven of deep-thinking investors. They let you hedge risk against the market, generate income, amplify directional moves, and a whole lot more.

Options360 generates a constant stream of options ideas for you to take advantage of every trading day.

That help is easy to find within Tradesmith Finance: Just click on the green Help button at the top right of any page within your platform.

Click here to log in to TradeSmith Finance.

To your health and wealth,
Michael Salvatore
Editor, TradeSmith Daily