AI, tight markets and the new T.I.N.A. RIA (2023)

AI hunting has created a very small market. IfBob Farrell once joked:

„The market is strongest when diversified and weakest when constrained to a few blue chips.”

It depends on the width. A small jump indicates limited participation and a higher-than-average probability of failure. The market can't rely on just a few large-cap stocks to keep it going(Generally)go ahead Small and medium caps(Army)It also has to be attended to give credibility to the rally. a race"Bind All Messengers"Predicts far-reaching power and increases the chances of further wins.

As Bob pointed out, the graph below shows the ARMS index. Developed by Richard W. Arms in 1967, this volume-based indicator determines market strength and breadth by analyzing the relationship between rising and falling stocks and their respective trading volumes. It is often used as a trading indicator to measure short-term market strength. However, when the index is smoothed to the 34-week moving average, extreme lows often coincide with short-term market highs. That's what we see now.

This year's rally was very close. like last week about„K.I.-Revolution:“

“The AI ​​boom and hype is strong. So much so that without the AI-hot stocks, the S&P 500 would have fallen 2% this year. Not by +8%.”–general society

We can do this by looking at stocks in the S&P 500 as"He thoughtin the last three months. As you can see, the largest stocks in the index by market cap keep the index in positive territory.

Unfortunately, investors also hold by far the most expensive stocks based on the price-to-sales ratio.

This of course raises two questions.

• Why?
• What's happening now?

The new T.I.N.A. is not the old T.I.N.A.

what isTina?TINA is an acronym for a phrase"There is no substitute."

For asset managers, achieving performance is the limit"Occupational hazard."If a manager has underperformed its relative benchmark index over an extended period of time, this may not be the case"Profession"in the wealth management industry. There are currently two reasons to look for mega-cap stocks. First, the stocks are highly liquid, allowing managers to deposit and withdraw funds quickly without large price fluctuations. The second is the passive index effect. When investors put money back into the market, it flows unevenly to the largest stocks in the index by market cap.

As the chart shows, for every dollar invested in the S&P 500, $0.32 goes directly into the top 10 stocks. The remaining $0.68 will be allocated to the remaining 490 shares. The"Passive Indexing Effect"Changing market dynamics in the last decade.

Looking at the past performance of the top 10 stocks, it becomes clear where the overall performance of the index is coming from.

As my colleague Doug Cass recently pointed out in his consistently excellent daily review.

“Today, TINA arguably correlates with a small group of big tech stocks: Microsoft, Meta, Apple, Alphabet, Nvidia, and Amazon.For many, these six stocks have little choice, and their leadership is as compelling as the last limited market performance in history... TheNifty Fifty.

The chart below highlights the year-to-date outperformance of the unweighted Nasdaq versus the equally weighted index. The NDX > NDXE spread is now up 11% year-on-year, the widest 4.5-month spread in the last 18 years. "

As Jefferies recently pointed out, bullish technicals are an extremely overbought and overbought trade right now.

„For the past few days we've been talking blah blah blah blah about how the US tech industry is working on a very compelling fatigue setup.Of course we don't want to repeat the same thing over and over again, but it's fair to say that it's currently the only compelling chart setup for almost every market and asset.

Given this exhaustive outlook, we cannot say whether we will react immediately or whether trade will continue to be choppy. However, it is safe to say that at this point it will be difficult to move higher from current levels.„

This massive overbought condition in the tech sector relative to the restRelative performance analysis of SimpleVisor.

It is worth noting that this period of outperformance was ultimately unsustainable.While this does not mean that the market should undergo a minor correction, it does suggest that there will be at least some shifts to other sectors of the market.

One thing is for sure: the old T.I.N.A. stock hunt for zero interest rates is not the new T.I.N.A. performance hunt.

AI Pursuit might take longer than you think

as discussed“Through the AI ​​revolution”These speculative market phases can last up to ten years.

“This economic boom brings great opportunity as innovation offers great investment opportunities to capitalize on these advances. Each phase brings with it huge markets that will last a decade or more while investors seek new opportunities for returns.”

We are witnessing another speculative "boom" as "generative artificial intelligence" captures investors' imaginations. The chart below compares the 1999 "dot.com/internet revolution" to the 2023 "generative AI" revolution in the Nasdaq Composite.

Of course, these speculative periods have been repeated over the past forty years as investors' imaginations have exceeded the underlying fundamental reality.

Past investment bubbles like “Boncom“Causing investors to chase a small portion of a stock in hopes of unrealized future gains.Investors today are looking for established companies that expect significant future earnings growth to justify sky-high opening valuations.

von AI Liefje

A good example is Nvidia (N.V.D.A.), the heart of the AI. Revolution. Nvidia is currently trading at 29 times sales. That's 300% more than Scott McNeely said of the folly of investors paying 10 times sales for Sun Microsystems at the height of the dot.com bubble.(Read the full quote here)

Nvidia has a long history of trading at high valuations, with a long-term average of about nine times sales.

The problem with selling at 29x is that by the end of 2033Nvidia's revenue needs to grow 1% a month over the next decade without a change in its stock price over that period.There are two problems here. First, Nivida's monthly revenue growth rate since 2002 has been just 1.26%. Revenue growth at this rate is very different at $2 billion than it is at $33 billion today. Second, even if Nvidia were able to sustain this uninterrupted growth rate, meaning Nvidia owned 100% of the GPU market, it would only drop its valuation to the still-expensive 9x sales.

In other words, at a 29x return, fundamentals should have investors ready to lock in zero returns for the next decade. Against this backdrop, chasing AI stocks seems far less attractive.

While fundamentals do not support current investor expectations,"Manic"a phase"melt"It may take longer than you think.But like every other bubble period in history, this one will come to an end.

As an investor, it is crucial to be a part of these market developments.However, it's equally important to remember to sell when expectations exceed basic reality.

In other words, in the famous words of legendary investor Bernard Baruch:

"I made money too fast by selling."

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23.05.2023

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