【US Election Series #05】 Major Rotation Begins, How to Handle the Upcoming Market?

Welcome to the fifth installment of Tiger_Academy’s US Election series!

First, let’s review the recent market data:

Last week, except for a slight decline in the Nasdaq 100, all major global stock indices posted positive returns. U.S. small-cap stocks surged by 6%, and Chinese stocks rebounded collectively, with the Nasdaq Golden Dragon China Index up over 4%. In the bond market, June’s U.S. CPI fell month-over-month, strengthening market expectations for a Fed rate cut, leading to a continuous decline in U.S. Treasury yields and a rebound in prices across major bond asset classes. In the foreign exchange market, the dollar index slightly declined.

However, the recent market action has reached a critical point, and Tigers riding the momentum should start to be cautious!

Last Thursday, the seven giants saw a broad decline, but the Russell Index surged by 3.59%, making small-cap stocks the darlings of investors. With rate cut expectations heating up, institutions have flocked to buy small-cap stocks. The Russell has surged for five consecutive days, with a cumulative gain of 11.52%, the best performance since April 2020. Over the past four trading days, small-cap stocks have outperformed the Nasdaq 100 to the greatest extent since 2011.

In contrast, tech giants have shown signs of pulling back. Even before earnings season officially starts, META, AMZN, MSFT, and GOOG have all fallen below their lows from last Thursday. AMZN has posted seven consecutive declines, AAPL has seen two high-level down days, and TSLA has formed a hanging man pattern. From a technical standpoint, it appears the tech giants may struggle to rally in the short term.

Speculation:

On Wednesday, before the market opened, ASML reported Q2 earnings that beat expectations, but its Q3 guidance missed, and its 2024 bookings guidance exceeded expectations. Nevertheless, the stock still fell in after-hours trading due to sentiment. Experienced investors might find this scenario familiar. It seems likely that "sell the news" could be the main theme for tech stocks this earnings season.

Summary:

Small-cap stocks are surging, and tech giants are oscillating at high levels. It appears that a major market rotation is underway. How should we respond to this trend?

Here are two strategies:

1. Follow Election Trends for Trading Opportunities

On July 13, during a campaign rally in Pennsylvania, former U.S. President Trump was attacked, his right ear was pierced, but fortunately, he was not critically injured. This event shocked the world. Trump's calm and resilient response not only provided a photo that could be featured in textbooks but also garnered widespread support from the American public. Judging by the approval ratings, Trump has almost secured his victory in the election.

Following the assassination attempt, several financial tycoons openly supported Trump. Elon Musk even referred to him as "Mr. President" and compared him to Roosevelt. We believe that while polling data may be biased, the choices of these influential figures are worth trusting. Emotionally, Bitcoin, Trump Media (DJT), and Tesla, which are directly related, may attract significant investment in the short term.

Related ETF: Huaxia Bitcoin ETF (3042.HK)

• Fund Name: Huaxia Bitcoin ETF

• ISIN: 3042.HK

• Fund Description: This fund tracks the performance of the CME Bitcoin Index by directly purchasing and holding Bitcoin. It does not invest in Bitcoin futures or indirectly through other exchange-traded products, ensuring controlled risk.

2. Invest in Relatively Certain Assets

June’s U.S. CPI was weaker than expected, reinforcing the probability of a rate cut in September.

Last week, the U.S. released June’s CPI data, which was fully below market expectations. The nominal CPI for June fell by -0.1% month-over-month, not only well below the expected 0.1% but also marking the first decline since the pandemic began. Currently, the three-month annualized rate for CPI is only 1.05%, and the six-month annualized rate has fallen to 2.79%.

By component, the unexpected decline was mainly due to falling energy prices and declining rent inflation. Specifically, energy prices fell by 2.0% month-over-month, and housing inflation, previously a major component, only rose by 0.2%, significantly lower than the 0.4% average of the past four months. As a result, it is almost certain that the Fed will begin cutting rates in September, potentially benefiting bond assets in the future.

Related Fund: Barings Global High Yield Bond Fund (USD: IE00BFM0MQ22) (HKD: IE00BFM0NS11)

• Fund Name: Barings Global High Yield Bond Fund

• ISIN: USD: IE00BFM0MQ22, HKD: IE00BFM0NS11

• Fund Description: This fund primarily invests in high-yield bonds in North American and European markets. It aims to provide investors with high interest income through a diversified portfolio and to achieve capital appreciation by flexibly seizing trading opportunities based on market conditions.

Investment Path: Open the Tiger International app, click on the search bar, enter the fund code, select “Fund,” and choose “Purchase” or “RSP”

Leave a comment in the comment section with the assets you are most optimistic about in the U.S. election for a chance to win Tiger Coins!

Disclaimer: This article is purely an analysis of current events. The author merely presents investment data and logic and does not represent any investment advice!