The Slumping "Magnificent Seven" It has been a dismal October with Treasury yields surging to multiyear highs and the S&P 500 benchmark set to close out its third-straight negative month. The tech-heavy Nasdaq has declined more than 3% month to date, and is also on pace for its third negative month in a row.
The “Magnificent Seven” used to refer to the 1960 Western film featuring Yul Brynner, Steve McQueen, Charles Bronson, and 4 other leading men of the day.
But stock market investors in 2023 recognize the term as the set of seven big tech stocks, namely Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla. It so happens they occupy the top spots in the S&P 500 index, as well as the Nasdaq.
The “Magnificent Seven” used to refer to the 1960 Western film featuring Yul Brynner, Steve McQueen, Charles Bronson, and 4 other leading men of the day.
But stock market investors in 2023 recognize the term as the set of seven big tech stocks, namely Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla. It so happens they occupy the top spots in the S&P 500 index, as well as the Nasdaq.
Here’s how these stocks have been performing of late (as of Friday, October 27, 2023):
It’s little wonder then that the S&P 500 and the Nasdaq are both in correction territory, down 10% or more from recent highs (the S&P 500 poked its head up just above that mark on Monday).
Now, seven slumping stocks does not a market make. And regardless, all of this could change in a heartbeat. In fact, Monday was a good start toward that change, with the major indices up well over 1% each. The start of an on oversold bounce? Maybe. But this week has some major hurtles: the Fed’s FOMC meeting and rate decision on November 1, Apple quarterly earnings on November 2, and a jobs report on Friday, November 3.
Where does the market go from here?
As per usual, it depends on who you ask. Some see the markets in terms of the Israel-Hamas war, political uncertainty in Washington, an uncompromising Fed. Others look to positive historical trends, inflation moving in the right direction, a pretty decent earnings season (so far), the UAW autoworkers strike apparently over.
Glass half empty:
Morgan Stanley’s chief investment officer Mike Wilson, one of Wall Street’s most prominent bears, believes an end-of-the-year rally is unlikely. In a note to clients this past Sunday, Wilson identified “narrowing market breadth, falling earnings revisions, and fading consumer and business confidence” as key culprits, arguing that monetary and fiscal policy were “unlikely to provide relief” for traders as they could still tighten further.
Ed Yardeni, president and chief investment strategist of Yardeni Research, says, “The S&P is not likely to regain what’s been lost since July over the rest of the year.” Is a year-end rally still possible? “Yes,” says Yardeni, “but between now and Thanksgiving it’s easier to see downside given the developments in the Middle East and jitteriness in the bond market.”
Glass half full:
Jeremy Siegel, professor emeritus of finance at University of Pennsylvania’s Wharton School of Business, believes we’re gearing up for a year-end rally. There’s the seasonality angle: “In the last 25 years, November is the second best month of the year, just behind April.”
Siegel also thinks the market’s valuation is “persuasive” based on the S&P 500’s current PE (price-to-earnings) ratio, a general barometer for determining whether stocks or stock funds are fairly priced. Finally, “The Fed is not going to do anything on Wednesday.”
Tom Lee, Fundstrat Global Advisors co-founder, sees small cap companies looking relatively stronger in the market, with quarterly earnings key. “The FANG has disappointed in terms of market reaction [to their quarterly earnings], but the rest of the market has actually been OK and I think that is what’s going to help us get through the rest of the year.”
Lee is also heartened by those recent dovish comments by assorted Fed officials, and is sticking to his guns when it comes to a year-end prediction of 4,825 for the S&P 500. That’s a 15% upside from here.
Crazy, yes. But with this market, you can’t count anything out.
And For What It’s Worth…
American painter Bob Ross's first ever TV painting called A Walk in the Woods recently sold at auction for $9.8 million. The painting, an autumn-like scene with a pond in the woods and the artist’s signature transcribed in red on the bottom left corner, went to an anonymous buyer. It was the first of more than 400 paintings that Ross created, painting them in just 30 minutes.
Through the miracle of YouTube, nostalgia buffs can watch Ross create that very painting 40 years ago on Season 1, Episode 1 of The Joy of Painting.
_____
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
Best always,
David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
- Apple 15% off yearly high
- Microsoft 10% off yearly high
- Alphabet 13% off yearly high
- Amazon 12% off yearly high
- Nvidia 19% off yearly high
- Meta Platforms 10% off yearly high
- Tesla 30% off yearly high
It’s little wonder then that the S&P 500 and the Nasdaq are both in correction territory, down 10% or more from recent highs (the S&P 500 poked its head up just above that mark on Monday).
Now, seven slumping stocks does not a market make. And regardless, all of this could change in a heartbeat. In fact, Monday was a good start toward that change, with the major indices up well over 1% each. The start of an on oversold bounce? Maybe. But this week has some major hurtles: the Fed’s FOMC meeting and rate decision on November 1, Apple quarterly earnings on November 2, and a jobs report on Friday, November 3.
Where does the market go from here?
As per usual, it depends on who you ask. Some see the markets in terms of the Israel-Hamas war, political uncertainty in Washington, an uncompromising Fed. Others look to positive historical trends, inflation moving in the right direction, a pretty decent earnings season (so far), the UAW autoworkers strike apparently over.
Glass half empty:
Morgan Stanley’s chief investment officer Mike Wilson, one of Wall Street’s most prominent bears, believes an end-of-the-year rally is unlikely. In a note to clients this past Sunday, Wilson identified “narrowing market breadth, falling earnings revisions, and fading consumer and business confidence” as key culprits, arguing that monetary and fiscal policy were “unlikely to provide relief” for traders as they could still tighten further.
Ed Yardeni, president and chief investment strategist of Yardeni Research, says, “The S&P is not likely to regain what’s been lost since July over the rest of the year.” Is a year-end rally still possible? “Yes,” says Yardeni, “but between now and Thanksgiving it’s easier to see downside given the developments in the Middle East and jitteriness in the bond market.”
Glass half full:
Jeremy Siegel, professor emeritus of finance at University of Pennsylvania’s Wharton School of Business, believes we’re gearing up for a year-end rally. There’s the seasonality angle: “In the last 25 years, November is the second best month of the year, just behind April.”
Siegel also thinks the market’s valuation is “persuasive” based on the S&P 500’s current PE (price-to-earnings) ratio, a general barometer for determining whether stocks or stock funds are fairly priced. Finally, “The Fed is not going to do anything on Wednesday.”
Tom Lee, Fundstrat Global Advisors co-founder, sees small cap companies looking relatively stronger in the market, with quarterly earnings key. “The FANG has disappointed in terms of market reaction [to their quarterly earnings], but the rest of the market has actually been OK and I think that is what’s going to help us get through the rest of the year.”
Lee is also heartened by those recent dovish comments by assorted Fed officials, and is sticking to his guns when it comes to a year-end prediction of 4,825 for the S&P 500. That’s a 15% upside from here.
Crazy, yes. But with this market, you can’t count anything out.
And For What It’s Worth…
American painter Bob Ross's first ever TV painting called A Walk in the Woods recently sold at auction for $9.8 million. The painting, an autumn-like scene with a pond in the woods and the artist’s signature transcribed in red on the bottom left corner, went to an anonymous buyer. It was the first of more than 400 paintings that Ross created, painting them in just 30 minutes.
Through the miracle of YouTube, nostalgia buffs can watch Ross create that very painting 40 years ago on Season 1, Episode 1 of The Joy of Painting.
_____
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
Best always,
David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
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