How to “Own the Bubble”
Own the Bubble?
Market bubbles are both euphoric as they form and dangerous when they pop. While FOMO, the “Fear of Missing Out,” drives investors to push markets higher with irrational exuberance, eventually “Buy the Dip” no longer works, and momentum flips to the downside. “Buy and Hold” certainly takes you over that waterfall. Even classic momentum’s 12mo. simple moving average offers little solace as it is generally too little too late. We developed the “Own the Bubble” concept over a decade ago and posted a detailed article and a working “Own the Bubble” Portfolio here. It’s a worthy read.
While there are always perma-bulls and perma-bears, many prominent economists currently believe that the economy will still soon experience a significant recession that has only been (1) delayed by the government’s trillions of dollars of COVID-19 stimulus checks and increased deficit spending, and (2) interrupted by the exuberance of AI’s embryonic but potentially world-changing technology temporarily.
This edition of the Newsletter will review the meaning of a few economic indicators and offer three well-designed Strategies for AI technology that employ “Own the Bubble” principles to better navigate volatility dips without meaningfully sacrificing the potential of the audacious returns this AI market bubble offers.
Where the Market is Headed
The market has recently continued its climb to ever-higher highs. However, it is quite bifurcated into the very moderate performance of the majority of stocks and the anointed Magnificent Seven AI darlings that are reminiscent of the Tech Bubble 24 years ago. Despite continuing recession warnings from multiple technical indicators that investment professionals rely on, the allure of near-tern returns particularly from emergent AI technologies currently outweighs recession fears.
While the Fed had sparked hopes for an earlier-than-anticipated 2024 decline in interest rates, they have since strongly pushed back on the excess optimism of the media and investors. Furthermore, the recent CPI report again showed an uptick, and employment continued higher, confirming that we still have a hot economy that has not yet cooled. The Fed will certainly increase rates later this year if these trends persist. A Fed rate increase would deliver painful medicine to the market that could pop the developing bubble and send us quite rapidly into recession.
6 Months
6 Years
Bullish Market Direction Holds
StormGuard turned on a dime last November to reflect the remarkably strong bullish conviction of investors that the Fed was done raising rates. In the three months since then, economic indicators have remained surprisingly robust. Many now think our introductory love affair with AI has further inflated an existing bubble that will be painfully popped by the Fed in its mission to truly control elusive inflation.
Divergent Magnificent Seven
In recent months, the so-called Magnificent Seven AI stocks have diverged significantly from the pack based on expectations of their emergent AI technology and its projected commercial future value. However, until these markets develop and sales expectations are realized, most of the value of these AI stocks remains hypothetical. Some may remain a significant player but with little or no further growth as competitors catch up. This divergence is likely exaggerated and may seriously reverse itself in a recession.
Good News is Bad News
The two most recent months of the jobs report came in hot. Together with the higher inflation report, it means this is bad news for any expectation that the Fed will contemplate taking interest rates down any time soon. At the same time, bankruptcies are strongly on the rise. Many companies barely making it are unable to renew operating loans at higher interest rates. They are lovingly referred to as zombie companies: the walking dead.
Two Hot Employment Months: Bad News
Zombie Companies on the Rise
Median Consumer Price Index now Favored
According to research from the Cleveland Fed, the Median CPI provides a better signal of the inflation trend than either the all-items CPI or the CPI excluding food and energy.
Median CPI Jumps to 6.5%
M2 Money Supply Growing Too Fast
M2 is a measure of the money supply that includes cash, checking deposits, and other types of deposits that are readily convertible to cash, such as CDs. When the money supply grows faster than population plus inflation it can contribute to further inflation growth.
The Fed is no longer trying to limit growth of the money supply… is that because it is an election year? Just asking.
M2 Money Supply
I’ll Gladly Pay you Tuesday…
It was bad enough when our Federal deficit was about $1T/yr from 2010 to 2020. But since 2021 the deficit has ballooned to $2T/yr. While that may keep the economy juiced, it will further exacerbate inflation resulting in rate hikes that may give us 2022 all over again. Of course, if we stop kicking the can down the road and start paying for our “burgers” with real money, bubble-stocks will come back to earth, but inflation will be tamed.
I’ll Gladly Pay you Tuesday for a Hamburger Today
How to “Own the Bubble”
Here is your cheat-sheet for playing in the waves responsibly as a market storm approaches.
Own the Bubble: AI ETFs
One of the advantages of investing in AI through ETFs is the inherent risk mitigation provided against the implosion of any single stock. This strategy includes a quite diversified set of candidate funds that address semiconductors, server farms, AI platforms, and commercial applications.
You can import this strategy into your account by creating a new Strategy, clicking its blue “S” icon, and searching the list of posted Strategies for “AI ETFs.” This will likely not be the last AI bubble – stay prepared
Own the Bubble: AI ETFs – (Click to enlarge)
Own the Bubble: AI Chips
Momentum investing in AI through individual companies inherently produces higher returns than through diversified ETFs, but there is greater single-stock risk. This is a pure play on the semiconductor chips at the very core of AI processors throughout every server farm. Semiconductors have long been important and will continue to be so into the future.
You can import this strategy into your account by creating a new Strategy, clicking its blue “S” icon, and searching the list of posted Strategies for “AI Chips.” This will likely not be the last AI bubble – stay prepared.
Own the Bubble: AI Chips – (Click to enlarge)
Own the Bubble: AI Code
Momentum investing in AI through individual companies inherently produces higher returns than through diversified ETFs, but there is greater single-stock risk. This is a broad play on AI software companies that spans root AI operating systems through end applications in media, machinery, and customer service.
You can import this strategy into your account by creating a new Strategy, clicking its blue “S” icon, and searching the list of posted Strategies for “AI Code.” This will likely not be the last AI bubble – stay prepared.
Own the Bubble: AI Code – (Click to enlarge)
We’re always “doing something for you lately.”
It’s what we do! 😎
Patience, not panic! Rules, not emotion!
May the markets be with us,
Scott Juds
Chairman & CEO, SumGrowth, Inc.
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Disclaimers:
Investing involves risk. Principal loss is possible. A momentum strategy is not a guarantee of future performance. Nothing contained within this newsletter should be construed as an offer to sell or the solicitation of an offer to buy any security. Technical analysis and commentary are for general information only and do not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of any individual. Before investing, carefully consider a fund’s investment objectives, risks, charges, and expenses, and possibly seek professional advice. Obtain a prospectus containing this and other important fund information and read it carefully. SumGrowth, Inc. is a Signal Provider for its SectorSurfer and AlphaDroid subscription services and is an Index Provider for funds sponsored by others. SumGrowth, Inc. provides no personalized financial investment advice specific to anyone’s life situation and is not a registered investment advisor. See additional disclaimers HERE.
