“Not Buying Dips Here… Yet” – Starting The New Year “Mildly Bearish”

Authored by Peter Tchir via Academy Securities,

Starting The New Year

As we start the first trading day of the year, a few “familiar” themes are in the headlines and driving price action:

Chips and China

Some chip stocks are trading lower pre-market as stories circulate about pressure from the U.S. government to block sales to China ahead of the January deadline. I am looking for some “thawing” in the U.S. / China economic relationship to start the year (as well as some stimulus out of China) but neither have occurred. In any case, high end chips will remain under careful scrutiny of the U.S. government for national security reasons.

The So-Called “Magnificent 7”

The Nasdaq 100 has re-balanced so it is not as lopsided to start 2024 as it was at the start of 2023, and certainly nowhere near as overweight as it got last year. Two stocks are just under 10% of the weighting in the index (or at least in QQQ, the Nasdaq 100 ETF). No other stock is above 5% of the weighting, and even the 7th largest holding is under 4%. So, even if the “so-called” Magnificent 7 stumble, it won’t hurt the index the way it would have last year. I’m still trying to figure out the implications for that, though I suspect trades like long QQQ vs Short IWM (Russell 2000 ETF) won’t perform intuitively.

In any case, I think some of the “compression” trade we saw from November on will continue as “laggards” outperform, but I think it will be in a bearish overall market, rather than a rallying market.

Energy

I like energy for both “good” and “bad” reasons. The realization that we need a strong domestic energy industry seems to have gathered momentum. Yes, at the height of inflation fears, the government was pressuring the industry to produce, but at the same time was threatening “windfall” taxes and other actions to hurt the industry longer term. While not everyone is embracing energy, even the more extreme elements of the “sustainability” community seem more willing to accept that the transition to other energy sources will be longer and require more traditional energy than previously thought. Realism will help us get there, which is good. Vision is important to that success, but planning is too, and that balance seems much better to me as we start 2024.

On the “bad” side of things is heightened tensions in the Middle East. The threat that Iran will become fully (and officially) engaged, sending some shockwaves through the oil industry seems more real by the day.

I continue to believe that the energy companies of the future are the energy companies of today and it is the sector I am most overweight now (out of all the laggards).

Bond Yields

The 10-year traded as low as 3.78% during last week’s “holiday” trading. It traded as high as 3.96% overnight (before 8 am) – pushing us back to levels not seen in a couple of weeks.

The market has gotten ahead of itself at the front-end (too many cuts priced in) and gotten ahead of itself in the long-end (inflation risks remain – driven by geopolitical and supply chain inflation, and the whole “debt fiasco”/”supply” story that pushed us to 5% on 10’s has not been resolved).

Bottom Line

Starting the year, where we ended the year (see The Party is Over) – mildly bearish bonds and stocks, with a preference to own the “laggards” but defining the “laggards” more narrowly.

Not buying dips here, at least not yet!

Happy 2024!