How the markets performed in H1 … the winners and losers across asset classes and sectors … why trading won big … Tom Gentile’s warning to AI investors today
Last week marked the midpoint of the year.
Today, let’s get a 30,000-foot perspective on what happened during H1 (half one), then shift our gaze to what’s coming in H2.
The top headline is the S&P’s monster 14.5% return – the best first half to an election year in almost 50 years, punctuated by 31 different record-high closes.
Now, if you’re not seeing a similar return and series of high-water marks in your portfolio, there’s a good reason – a select few tech/AI stocks are behind most of those gains.
For example, Nvidia’s 149.5% surge was responsible for roughly 30% of the S&P’s climb. Throw in Microsoft, Apple, Google, and Amazon, and that group of five tech dominators accounts for 62% of the S&P’s gains.
Meanwhile, the average stock in the S&P, as illustrated through the S&P 500 Equal Weight Index, climbed just 4% in H1.
You can see the striking difference below.
If we focus our analysis only on the second quarter, the spread between the S&P 500 and the S&P 500 Equal Weight Index clocked in as the third widest since the Equal Weight Index’s inception in 1989. The only two wider spreads were in Q4 1999 and Q1 2020.
Over in the tech-heavy Nasdaq, the H1 gains were even bigger – an 18% return. However, here too, there was a wide differential between the top stocks and “all the rest.”
As you can see below, in the shadow of the Nasdaq’s 18% climb, the Equal Weight Nasdaq 100 Index added less than 5%.
Of the major three indexes, the Dow brings up the rear, climbing less than 4% as big names such as Nike, Intel, and Boeing all collapsed more than 30% in H1.
However, they all fared better than the market’s biggest loser, Walgreens, tanking 52% after horrendous earnings. Another dog that has a home in many investor portfolios is Lululemon Athletica, which dropped 42%.
In small-cap land, the underperformance continued as the iShares Russell 2000 ETF climbed barely 1.5% after spending much of H1 underwater.
Here’s a visual from Nasdaq.com’s Market Intelligence Team to give us a bird’s eye view on all this:
If we break down the market’s overall performance into quarters, we see very different behavior.
In Q1, the market as a whole did well. It was a “rising tide lifts all ships” environment. But in Q2, the performance narrowed, leading to the “tale of two markets” that we’ve referenced many times in the Digest. The percentage of S&P stocks making 12-month highs topped out in March.
Why the shift?
Late-March/early-April was when Wall Street realized that the Fed wasn’t going to be saving the day with the avalanche of rate cuts that had been priced into the market.
You’ll recall that the first three months of the year all featured inflation data that came in “hotter than expected.” It was this March/April stretch when Wall Street finally begrudgingly concluded that the inflation data weren’t playing nice.
At a sector level, real estate continued suffering in H1, coming in negative, while – no surprise – technology took first place.
Overall, while 10 of the 11 sectors ended H1 in the green, it was really a story of Technology (up 28%) and Communication Services (up 27%) soaring, followed by everything else…
The sleeper sector-trade of H1 goes to Utilities.
After a rough 2023, Utilities bounced back, jumping 9% as everyone realized that powering AI is going to require enormous amounts of energy.
A quick tour through the rest of the investment universe
Gold had a great H1, adding 13%. But its companion metal, silver, crushed it, jumping 23%.
Digital gold, also known as bitcoin, popped 48%. This was just behind Ethereum’s 50.5% gain.
Finally, “black gold,” also known as oil (so many gold references – might that be a clue to own some gold?) added about 14% in H1 due to geopolitical conflict and supply shortages.
Over in Treasuries land, yields were volatile, but shifted higher overall. The 2-year Treasury yield climbed 50 basis points to 4.75% while the 10-year Treasury yield added 52 basis point to 4.40%.
Here’s how that climb looked for the 10-year Treasury.
As to the Federal Reserve’s interest rate policy and the timing of rate cuts, Wall Street came into the year with high hopes.
In early January, traders put 62% odds on the Fed cutting rates in March. About that time, the going expectation was for six quarter-point cuts this year.
That prediction aged about as well as “transitory inflation.”
On that note, for a little bit of fun (and to remind ourselves that even our “experts” can be wildly off-the-mark), let’s rewind to this gem from MarketWatch and Minneapolis Federal Reserve President Neel Kashkari back in September 2020:
As to inflation itself, while the going presumption is now that we’ll see the first rate cut in September, a review of H1 inflation calls that into question – at least for me.
As you can see below, the most recent Personal Consumption Expenditures price index reading came in at 2.6%.
How did that compare to the same PCE reading back in December just before we began the year?
The exact same.
I’ve added a black line connecting the December 2023 reading and our latest reading from May.
Remember, the Fed is “data dependent,” wanting to see a clear, sustainable path down to 2% before it cuts rates.
Are you seeing such a clear, sustainable path? But this is a topic for another Digest.
The winning market approach in H1 – and why it deserves caution as we look to H2
Without a doubt, the best market approach this year has been momentum trading.
As we highlighted in the Digest last week, this market approach boils down to “buy what’s been winning and sell what’s been losing.”
Well, here in 2024, AI has continued winning. So, momentum investors that keyed in on AI in January and February are having an extraordinary year – a historic year, in fact.
From Bloomberg:
Using S&P measures for the US, momentum’s tear on the back of artificial intelligence is on a scale never seen before — its relative performance has at last surpassed the high set during the dot-com bubble in 2000
But as we look ahead, increasing caution appears needed…
History shows that when everyone piles into the same side of a trade, that’s usually about the time the trade capsizes under the weight, resulting in a sudden and painful drawdown.
Master trader Tom Gentile is concerned about this very thing
If Tom is a new name to you, he’s a multi-decade veteran trader who’s the latest addition to our corporate family. He’s pulled millions out of the market by identifying reliable stock price patterns in historical data, then placing calculated wagers that those patterns will repeat.
Unfortunately, the reliable stock pattern that Tom is seeing today is bearish for the very same AI stocks that have propped up the market this year.
Here’s Tom:
Something huge is headed for Nvidia and the biggest AI stocks in the market.
Thanks to one of history’s most consistent market patterns, anyone holding these stocks could lose their shirts…
The biggest names are headed for a crash in the same way the trendiest internet stocks did more than two decades ago. And those who aren’t prepared could get wiped out…
To be clear, Tom’s analysis isn’t all bad.
In fact, he writes that over the coming months, we’ll see more profits in AI than we’ve seen in the last five years. Think of it as a period of hyper-returns, crammed into a brief window of time – and Tom is ready to take advantage of it. However, his primary concern is what comes afterward:
The music is going to stop, just like it did at the end of the dot-com boom.
If you don’t know how to play it, you could end up losing all your profits. It will happen so quickly that you won’t be able to sell until it’s too late.
Tomorrow night at 8 PM Eastern, Tom is holding a live event to explain why he’s concerned. Using historical charts and patterns, he’s going to walk through what’s coming, why, how to protect your AI gains, and even how to squeeze as much profit out of this near-term boom as possible.
If you’re up big this year in AI, I’d encourage you to sit in on Tom’s presentation minimally to understand why a market veteran is concerned. Click here to reserve your seat for this free event.
Coming full circle, it’s been a fantastic H1
And though we’re optimistic about H2, we maintain the same undercurrent of caution that’s been our background noise during the last two quarters. There are growing red flags and signs of weakness in both the economy and various corners of the market.
Of course, regular Digest readers already know our gameplan in the face of this…
Mind your stop-losses, use wise position sizes, and diversify effectively. But with those precautions in place, keep riding this market for as far as it will go.
Here’s to an even better H2 2024.
Have a good evening,
Jeff Remsburg
