Market Journal: The Week Ahead
Market Journal: The Week Ahead
The Great Global Tech Rotation.
Disclaimer: For informational purposes only.
Please see here and here for more information about The Weight of the Evidence.
Discussion
For context, this Week Ahead builds on the last four:
On a micro tactical level my conclusion that SPY was likely to peak around the September 18-20 OPEX was wrong: SPY initially peaked at $572.88 on September 19 and then went on to grind higher to $574.71 on September 26. More broadly, the September 1 call for SPY to peak at $565-570 in the wake of a dovish September 18 Powell was more accurate, with SPY at $574.71 less than 1% above the upper end of that range. With Powell speaking Monday, the last day of the month/quarter, there is a good chance SPY ramps to new highs, perhaps even into the first trading day of October - especially if the market views the weekend news that Israel took out Hezbollah leader Nasrallah as a bullish sign of the Israel-Iran conflict moving closer to its end than the more sinister scenario of an escalation to all-out war between Israel and Iran proper (in the former case, Friday’s ramp in VOL pricing will need to be unwound, forcing a buyback of dealer SPX index hedges). But with three reversals lower in a row for SPY, sticky CDXs in US and Europe, a very uncertain US election coming up, critical NFP and CPI events on October 4 and 10, and most importantly developments out of China this past week, odds are high SPY heads down to $540-550 ahead of Election Day, if not lower in the event the Fed cannot arrest the decline with the threat of 50s.
The US Tech sector in all its forms is not only likely to drive the tactical pullback in SPY, it is likely to grind SPX down to 4500 fair value by late 2025 for two reasons:
China
US electricity production
NDX relative strength analysis confirms.
Global Tech Rotation
As discussed this week, developments out of China from both the PBOC and Politburo are likely to underpin The Great Global Tech Rotation out of QQQs and SPOOZ and into KWEB. Very simply, the global investment community is overweight NDX for AI exposure, and underweight/short KWEB due to the risk of President Xi unilaterally taking down business models…just as BOTH factors have inflected the other way.
MANY will dismiss paying more than passing attention to David Tepper’s CNBC interview, but that’s the exact wrong approach. Market participants such as Tepper and Druckenmiller are plugged into the most high-impact market drivers, more often than not well in advance (think Tepper flagging COVID risk in Jan/Feb 2020). On Thursday Tepper spelled out his concern with AI names hitting their out-year numbers as a result of electricity generation constraints. Coincidentally, the WSJ just authored a lengthy piece on the issue. It’s a big deal, to say the least. And with Tepper flagging the issue, market attention on the impact on AI’s out year numbers should quickly build, enhancing the urgency with which foreign equity capital is likely to exit NDX to fund KWEB exposure.
For market cap context, the MSCI China Index market cap is less than $3 trillion versus a combined market cap of almost $10 trillion for AAPL, MSFT, and NVDA. Obviously there are profitability, quality, and governance differences - the most important of which is governance as a result of President Xi’s anti-business push since 2021 - but the scale of the fuel available for a global rotation from US Tech to China Tech is still staggering given Xi’s stance on Chinese business has quite literally shifted over night to one of encouraging stock buybacks funded by central bank largesse.
The relative strength profile of NDX and its key components strongly suggests weakness continues to build beneath the surface of an otherwise ebullient US equity market. Weakness that I believe will manifest into absolute price declines for QQQs and SPOOZ as investors rotate into KWEB.
Dracarys.
