To The Moon

WHY PLAY DEFENSE?

1. Market is shifting from inflation fears to growth fears.

We are seeing deterioration in some leading economic data such as ISM new orders.

Economic surprise index is negative - economists may have caught up to expectations.

Consumer Discretionary has also lagged Staples.

2. Animal spirits are weakening.

We blend a couple factors into a composite signal.

That signal went 'risk off'.

You can see this in the lackluster performance of tech stocks ex-Nvidia, Meta, and Google.

You can also see this in the decline of Crypto Exchange volumes.

3. We have had several parabolas that are now deflating: Software, Restaurants, EVs, Utilities like $CEG, etc.

The GLP1 theme continues to work... but it's also a wrecking ball for other categories and names (see Weight Watchers, Planet Fitness).

The AI theme continues to work - but the benefits are narrowing around $NVDA and friends.

4. Nvidia is forcing a re-rating of technology stocks.

Simply put, there's $NVDA and then all of the rest.

This is the 'Nvidia Correction Hypothesis'

Nvidia is the new 10-Year - it's the safe haven tech trade for a bit.

(It's also overbought.)

5. Equity valuations are high and investors are at their limits.

Evidence:

- High yield bonds spreads are tight. (This is one of my favorite quick methods to gauge valuations.)

You can approximate the equity risk premium by looking at high yield credit spreads.

- Investors realized they are going to have to wait 100+ years to get a return on capital for SAAS

- Chipotle was more expensive than Nvidia on Forward PE

7. Higher for longer is still making its way through assets re-pricing growthy stocks

8. Policy uncertainy is high due to election season (see China vs. Energy for example)

There was a Trump Bump effect. China's rally suggests that may be fading.

9. The Momentum Factor is 2 standard deviations overbought and rolling over.

This is why high flying names like $CAVA and $CMG are struggling, and also why we see a worst to first dynamic.

Negative momentum names like $FSLR are coming back.

10. There is no 'Everything Go Up Rally'.

That capital is in.

It's a bifurcated market, and the breadth is narrowing.

11. Earnings expectations are high while nominal GDP is slowing.

Overall, I believe it's worth having a defensive posture prioritizing companies that have high free cashflow, low valuations, and can compound.

Boring stocks that compound - Buffett type names that have good valuations I expect will do well - including quality small caps.

Technology stocks outside a handful of names are higher risk.

There may be good bargains that pop out in the next few weeks.

Mexico is on sale today, and energy.

I expect names more expensive than $NVDA (weird that this condition even exists and Mr. Market is now fixing it) to continue to re-rate.

Figure we have a few weeks to price all of this in - maybe just before July 4th. Hard to say.

If the Fed were to have dovish comments, I'd change my view.

I don't expect that to happen though, although the public can hallucinate.

There's still a lot of money on the sidelines... and overbought markets tend to have shallow pull-backs.

There's no major shock, but there is increasing risk aversion.

I see drawdown risk in the 5% ish range give or take at the index level.

Overall, we're in a bull market.

That said, the risk / reward at the moment does not appear favorable.