‘FEAR TRADE’: This metal has been ‘overplayed,’ says equity strategist

Market Update: Tech Rotation, Disney CEO Change, and SpaceX Acquisition - February 5, 2024

Key Concepts:

• Market Rotation: A shift in investor preference from one sector or asset class to another. Currently, a rotation out of technology (specifically AI and software) and into real commodities (gold, silver) and potentially smaller-cap stocks.
• VIX (Volatility Index): A measure of market expectations of volatility over the next 30 days, often referred to as the "fear gauge." A rising VIX indicates increased investor anxiety.
• Crowded Trade: An investment strategy that has become overly popular, leading to inflated valuations and increased risk of a correction. Technology stocks are currently considered a crowded trade.
• ISM Numbers: Institute for Supply Management manufacturing indices, indicators of economic health. Recent numbers were reported as “good.”
• EPS (Earnings Per Share): A company’s profit allocated to each outstanding share of common stock. A key metric for evaluating a company’s profitability.

I. Market Overview & Initial Downturn

The markets experienced a reversal of Monday’s gains, with technology stocks leading the decline. The Dow Jones Industrial Average briefly reached an intraday all-time high but ultimately closed down 353 points. Specific companies dragging down the Dow 30 included IBM, Salesforce, Nvidia, Amazon, and Microsoft. This downturn is attributed to a rotation out of AI and software names. Conversely, the Dow Transports are on track for their eighth record close of the year, indicating strength in the industrial sector.

II. Commodity Rebound & Volatility Spike

A “flight to real commodities” is underway, with precious metals – gold and silver – rebounding significantly. Gold is approaching the $5,000 mark (currently at $49.44), and silver has risen by approximately 9% to $83.99. This movement is correlated with a spike in the VIX, which is currently over 16% and nearing 19 points, signaling increased market volatility. The rebound in gold was partially influenced by the announcement regarding Kevin Wars’ nomination for the Federal Reserve.

III. Disney Leadership Transition & Stock Performance

The Walt Disney Company announced Josh Dearo, the current theme parks chief, as the successor to CEO Bob Iger, effective March 18th. Chairman James Gorman stated that “four individuals were considered for the top job” and that the board evaluated candidates based on future potential, stating, “Josh has the chops.” Despite the announcement, Disney’s stock has fallen over 8% in the past year.

IV. Palantir’s Strong Performance

Palantir, a defense tech and software company, reported a “blockbuster” fourth quarter, with revenue jumping 70% year-over-year. The company also provided 2026 guidance with 60% year-over-year growth, exceeding analyst expectations. Palantir’s stock is up 5.25% as of the report.

V. SpaceX & XAI Merger – A $1.25 Trillion Valuation

Elon Musk announced the acquisition of AI startup XAI by SpaceX in a private transaction valued at $250 billion. This merger creates a combined entity valued at $1.25 trillion. The acquisition precedes a planned SpaceX IPO later this year.

VI. Expert Analysis: Shifting Market Dynamics

The segment featured commentary from Acuvest CIO and portfolio manager Aaron Clark and Slatestone Wealth chief equity strategist Aaron Gibbs.

• Aaron Gibbs: Emphasized the importance of refocusing on fundamentals amidst market volatility. While acknowledging the gold rally, he cautioned it may be a “fear trade” and potentially overextended, given the relatively strong US economic indicators (good ISM numbers, positive inflation data). He suggested investors may have already adequately allocated to gold.
• Aaron Clark: Noted that the technology sector has been underperforming for months and represents a significant “crowded trade” (estimated at $4 trillion in tech ETFs). He advocated for selective investment in high-quality tech companies, citing Netflix, Spotify, Amazon, and Google as potential opportunities. He also highlighted the potential in undervalued software names.
• Gibbs (further elaboration): Advocated for looking beyond headlines and focusing on the underlying economic strength, particularly the benefits of tax cuts leading to increased capital spending. He identified an opportunity in smaller-cap stocks, which are less susceptible to downside risk and exhibit higher forecasted growth rates (approaching 20% EPS growth) compared to large-cap stocks.
• Clark (final comment): Pointed to Walmart reaching a trillion-dollar market cap as an example of defensive strength alongside growth opportunities.

VII. Data & Statistics Mentioned:

• Dow Jones Industrial Average: Down 353 points.
• Gold Price: $49.44 (approaching $5,000).
• Silver Price: $83.99 (up approximately 9%).
• VIX (Volatility Index): Spiking over 16%, nearing 19 points.
• Disney Stock Performance: Down over 8% in the past year.
• Palantir Revenue Growth (Q4): 70% year-over-year.
• Palantir 2026 Guidance Growth: 60% year-over-year.
• SpaceX/XAI Merger Value: $1.25 trillion.
• Tech ETF Assets: Approximately $4 trillion.
• Walmart Market Cap: Reached $1 trillion.
• Small Cap EPS Growth Forecast: Approaching 20%.

Conclusion:

The market is currently undergoing a rotation away from technology and towards commodities and potentially smaller-cap stocks. Increased volatility, as indicated by the rising VIX, is contributing to investor uncertainty. Experts advise focusing on fundamentals, identifying high-quality companies within the tech sector, and considering opportunities in smaller-cap stocks with strong growth potential. The SpaceX/XAI merger represents a significant development in the AI landscape, but the broader market appears to be losing its appetite for technology risk in the short term. A balanced portfolio with both growth and defensive elements is recommended.