Polcari on Market Volatility: Fed, AI, and What Comes Next

TD Act Trader Live - February 29, 2024 Summary

Key Concepts:

• Market Volatility: Increased uncertainty driven by economic data, policy changes (potential Fed Chair appointment), and tech sector performance.
• Sector Rotation: Shift in investment from high-performing tech stocks to cyclical sectors like Industrials, Financials, Energy, and Basic Materials.
• AI Capital Expenditure (Capex): Concerns surrounding large investments in AI by companies like Google and Qualcomm, and whether these investments will yield returns.
• Global Memory Shortage: Impact on Qualcomm’s outlook due to high demand for memory from data centers fueling AI development.
• Fed Policy & Balance Sheet: Concerns about the interplay between potential rate cuts and balance sheet reduction by the Federal Reserve.
• Technical Analysis: Utilizing chart patterns and key levels to predict future price movements in the Dow Jones Industrial Average and Reddit.
• Options Strategies: Utilizing uncovered puts and long put butterfly spreads to capitalize on market volatility and directional price predictions.

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Market Overview & Volatility (0:00 – 3:30)

The broadcast began with a snapshot of market conditions, noting a 3/4% decline in the S&P 500. Significant pressure was observed in large tech stocks. January saw the worst start to the year for US layoffs since 2009. Bitcoin also experienced volatility, trading below $70,000. The heat map highlighted underperformance in major tech companies like Microsoft, Nvidia, Google, and Amazon.

Deep Dive: Google & Qualcomm (3:30 – 5:30)

Google (Alphabet) reported a beat on both earnings and revenue for Q4, but the market reacted negatively due to a projected capital increase of $175-185 billion for AI development – more than double their 2025 spending. This highlights a shift in investor sentiment, where high AI spending is no longer automatically rewarded. Qualcomm’s outlook was negatively impacted by a global memory shortage. Their customers (smartphone manufacturers) are hesitant due to the high cost of memory, which is being absorbed by data centers driving AI.

Guest Commentary: Kenny Pulkari (SlateStone Wealth) – Market Drivers & Rotation (5:30 – 20:30)

Kenny Pulkari, Chief Market Strategist at SlateStone Wealth, joined the program to discuss the market’s current state. He attributed the volatility to a combination of fear (particularly regarding tech valuations), uncertainty surrounding the new Fed Chair appointment and its implications for policy and the balance sheet, and concerns about the effectiveness of large AI capital expenditures.

Key Arguments & Perspectives:

• Pendulum Swing: Pulkari believes the market is overcorrecting, swinging from excessive optimism to pessimism.
• Sector Rotation: He emphasized a clear rotation out of tech and into cyclical sectors like Industrials, Financials, and Consumer Staples. As of February 29th, Industrials were up 9.5%, Financials were up (specific number not stated), Energy up 18%, and Basic Materials up 12% year-to-date.
• Long-Term vs. Short-Term: He advised long-term investors to view the downturn as a buying opportunity for quality names, while traders should capitalize on the increased volatility.
• AI Investment: While acknowledging the potential of AI, he cautioned against overspending without guaranteed returns.
• Quote: “It’s gone way too far to the right. Now, it’s going to come back to the left. It overcorrects on one side and it overcorrects on the other side.” – Kenny Pulkari

Further Discussion: AI Disruption & Nvidia/OpenAI (20:30 – 28:30)

The conversation shifted to the potential for AI to disrupt existing tech companies. The news surrounding Anthropic’s development of a large language model (LLM) triggered a broad sell-off in software, semiconductors, and even private equity. Pulkari suggested that while AI is transformative, it’s unlikely to completely displace existing tech giants. He believes AI will primarily augment human capabilities rather than replace them entirely.

The discussion also touched on speculation that Nvidia might not fully honor its investment commitment to OpenAI. Pulkari downplayed the risk of an OpenAI collapse but acknowledged that a breakdown in this circular financing arrangement could lead to a repricing in the industry.

Economic Data & Defensive Plays (28:30 – 33:30)

Pulkari highlighted the strength of the US economic data, including robust job numbers, expanding PMIs (Purchasing Managers' Indices), and rising wages. He noted that the shift towards defensive stocks (Consumer Staples, Utilities) indicates increased investor caution but doesn’t necessarily signal an impending economic downturn.

Precious Metals & the Dollar (33:30 – 37:30)

The discussion turned to gold and silver. Pulkari believes the recent parabolic move in gold was driven by a weakening dollar and central bank buying. He anticipates a potential pullback in gold prices if the dollar strengthens, particularly with the potential appointment of a more hawkish Fed Chair (Kevin Walsh).

S&P 500 Technical Analysis (37:30 – 41:00)

Pulkari predicted the S&P 500 could end the year up 10-12%, targeting 7650-7700, despite current volatility. He identified key support levels around 6860 and resistance at 7000.

Technical Take: Dow Jones Industrial Average (41:00 – 48:00)

The technical analysis focused on the Dow Jones Industrial Average. The Dow has been in a bullish channel since mid-July, but is currently testing the lower channel boundary at the 21-day moving average (around 49,000). Key resistance is at 49700, and potential support lies at 48500. The ratio of the Dow to the NASDAQ has broken above 2, indicating outperformance of the Dow.

Reddit Earnings Preview & Options Strategies (48:00 – 58:00)

The segment previewed Reddit’s earnings release, noting expectations for 56% year-over-year revenue growth but a slowdown from the previous quarter. The discussion centered on the importance of monitoring advertising revenue, daily active users, and data licensing deals.

Options Strategies:

• Uncovered Put (Bullish): Selling a put option at the $130 strike price to collect a net credit of $555. Break-even price is $124.45. Max loss is significant if the stock goes to zero.
• Long Put Butterfly Spread (Bearish): Buying a $145 put, selling two $125 puts, and buying a $105 put. The trade costs $4, with a break-even price of $141. Max profit is $1600 if the stock closes at $125. Max loss is $400.

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Conclusion:

The broadcast highlighted a period of market uncertainty driven by economic data, policy changes, and concerns about the AI boom. While volatility is high, Kenny Pulkari emphasized the importance of strategic investing, sector rotation, and a long-term perspective. Technical analysis suggests potential support and resistance levels for the Dow Jones Industrial Average, while options strategies were presented for both bullish and bearish scenarios on Reddit. The overall message was one of cautious optimism, with a focus on identifying opportunities amidst the market turbulence.