Daily Brief - What is even going on in the market??

TLDR: Market shenanigans seem to focus on profit taking for tech stocks. The bull is not over yet.

So Tesla posted a big beat on revenues, and yet its stock fell hard. It is possible that Musk’s shenanigans and political leanings might have led to concerns about his main company. And following the Crowdstrike debacle, the market feels thin and fragile.

But is it really? In reality, we’re barely 2.8% off the latest (and all-time) intraday high in SPX.

The reality is that a large swath of market is neither expensive nor overbought. Sure we’re in the middle of a momentum phase but don’t get swayed too much by peak 21x P/E valuations, those are mostly driven by the Nifty 7 tech stocks.

We face a classic conundrum in bull markets - to hug the trend or take profit.

Luckily for us, we have a guide in the form of the Federal Reserve. The central bank is clearly looking for an excuse to cut rates - and finding none. As a rule, the first rate cut coincided almost to a t with the peak of the equity market. That’s because the Fed needs to see a slowdown to cut rates.

So until the Fed really goes for the cut, stay true to equities.

Note also that we have a positive catalyst ahead of us - the presidential election. If Trump wins, that’s a pro-corporate presidency which is good for equities. If the Democratic candidate wins (so presumably Harris), then it’s a pro-globalism, business-as-usual presidency that is good for equities.

So in spite of the late-summer volatility, equities are not done yet.

How to trade it

If you are a trader, and you want to deploy risk on the long side, we recommend keeping an eye on our leading indicators email and waiting for at least one bullish indication.

If you are a trader and bearish, then we stick with the idea of using 1x2s. Keep an eye on the Peak Indicator as that might be a good gauge for a real drawdown.

If you are an investor / allocator - that includes you too, who manage your own personal portfolio - then think about leaning into bonds. They are the perfect counterpart for your equities in this phase of the monetary cycle.

Earnings Spotlight: IBM shares jump post earnings

Last night, International Business Machines Corp. (IBM) reported significant growth in its AI business, with bookings for AI consulting and software surpassing $2 billion since mid-2023, doubling the $1 billion reported in April.

IBM's second-quarter sales rose by 2% to $15.8 billion, slightly exceeding analysts' estimates, driven by a 7% increase in software unit revenue to $6.7 billion. The company's transformation from a legacy hardware provider to a software and services leader continues with strategic acquisitions, including the proposed takeover of Hashicorp Inc. and last year's purchase of Apptio for $4.6 billion.

Red Hat, another IBM acquisition, posted 7% growth, signaling potential improvement for the second half of the year. However, IBM's consulting segment saw a 1% revenue decline to $5.2 billion.

Market Movers: Tailwinds for the rest of the industry?

Here is the historical 1-month response from Semi-stocks when IBM has previously beaten EPS expectations by $0.20:

1. Nvidia: 6.93%
2. Micron: 4.15%
3. Broadcom: 3.52%
4. Taiwan Semiconductor ADR: 0.35%
5. Texas Instruments: -0.26%
6. ASML Holding ADR: -0.81%
7. AMD: -2.32%
8. Intel: -3.75%
9. Applied Materials: -4.26%