#956 - Is the Record Stock Rally Overextended? With Tom Thornton

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0:34Is a record stock rally overextended? Hi, everyone. Welcome to the Real Vision Daily Briefing. with me today is Tommy Thornton, founder of Hedge Fund Telemetry. Hey there, Tom. Happy Friday. Oh my God. I'm so happy it's Friday. I feel like we all feel like that at the end of all of these weeks. But I have to set the record straight. In your note today, Tom was wondering whether we tried to shove him at the end of the week because he's a bear and nothing could be further than the truth. We only book the people we really like for Fridays because we're heading into the weekend and some people are rolling up with drinks.

1:10Everyone's in the chat saying TJIF. So that's why we put you on Friday, Tom. I always get booked on other channels, like on a Friday before a three-day weekend. It's usually how it works. Oh my goodness. Well, I mean, this was a good Friday. It's a good Friday to have you on because we saw big gains, strong move in US stocks, all the indices higher, Dow, S &P, and Nasdaq all up on more than 1%. Let's see. I think they're settling there. Yeah. Holding on to those gains. And S &P had an all-time high, tech leading the way. NASDAQ 100 also had a new high. So it's funny, Tom, because when I saw you talking about yourself as a bear, I know you're not a perma bear.

1:48So I'm imagining that you are talking about stocks. So are you skeptical or are you bearish about this move we're seeing? Well, in my fund, I'm net short about 30%. So I do have shorts. I can't say that it was a banner day for me. My longs went up, which is, you know, that's gratifying, but definitely had a rough day. But, you know, look, it's it's these things happen. I think we're sort of in a market right now with a lot of euphoria, a lot of FOMO, some irrational moves that I think are going to be raising the bar pretty high going into earnings next week. and the following weeks, and we really haven't had any tech names report earnings yet.

2:38So we'll see how that goes. But you have, you know, look at, I don't have a position in NVIDIA or AMD, but NVIDIA has gone up, I think, almost$300 billion in just like the last month. And that's about three times the revenue for they're expecting in 2025. So it's, you know, look, it's a great company. It's really the best of the breed of AI. But it gets to a point where trading at 32 times sales, it's just a bit much. So, you know, we'll see when that starts to roll over. And it's rolled over every time they report earnings or last few times they've reported earnings. It's gone down after good numbers.

3:30So we'll see if that happens again. And if that happens, you know, I think there's a lot of people that have chased this higher. Yeah. And in fact, Christopher's in the chat saying, hi, hope no one got hurt by today's face ripper. And it's I'm still here. That's right. Everyone is. but it is, you know, there is a lot of skepticism. Well, actually, I should rephrase that. We hear people sort of make the argument you made, Tom, that like, listen, some of these numbers, I mean, I don't care how much you like the company, they're just getting to the point where it's really hard to rationalize it. And yet we see the MAG7, which everyone thought would roll over, kind of leading again.

4:10Does it seem like that can continue? Is that, or are more stocks participating and we don't know it? What does the rally look like under the hood? I don't think everything's participating. And I run attribution studies and I did one today on my note that people can look at on Twitter. I unlocked it. Look, I think that you've had, you know, a huge amount of gains with the usual suspects. Ex-Tesla. Tesla is down on the year and doesn't look very good heading into Wednesday's earnings. I am short Tesla still and profitable. at that as well. And I think that the bar is extremely high. I mean, we have, I mean, Microsoft is now, I think it's the largest market cap name with just above Apple and that's trading at 35 times earnings.

5:04I think that's extended. That's historically very high for Microsoft. You've had a lot of multiple expansion. In other words, you've had the P go up and you haven't really seen the E go up on the PE ratio in line with that. So I think there's still a lot of AI optimism and seeing the earnings results out of that. It's going to take time, I think, and prices are a bit overextended. And look, I am thrilled for people that have made a lot of money in all these. That's great. I'm happy for everybody that makes money. I just think that we're getting to a point right now that a lot of technical indicators that I look at, for example, the S &P on a DeMarc signal has a DeMarc countdown 13 today, which is a sell signal.

6:01That's on a weekly timeframe. And the last time we got the S &P with a weekly countdown 13 was at the end of 2021. On top of it, this isn't a short-squeezed rally or that people aren't really getting squeezed on the short side. The Goldman Sachs short basket over the last five days is down 8%. So shorts have actually made money and the S &P is up 1.2 % in that same period. And so I think that this is a chasing type market. This is long only buying. And that sometimes occurs late in a move. Yeah. You pointed out in your note, and by the way, it's excellent if you want to go to Tom's Twitter and check it out.

6:53It's so comprehensive. It was just such a pleasure to read. But you pointed out in your note something we talked about with with Jim Carson last week, big options expirations happening as well. Do you feel like that is impacting the trade action this week, or is it just one factor that you're keeping an eye on? Is that influencing some of what we're seeing? Sometimes you see it like after the expiration, you see Delta hedges come off. Actually, there's a covered call strategy, some ETFs that they rolled their positions yesterday and today. And some of us thought that we'd see a pullback as they were selling calls against the latest month out.

7:40But no, didn't happen at all. The one thing that's been kind of weird, excuse me, is that breath hasn't been that great. And today, breath was negative all day until like the last half hour. And for the last three days previous, even though the markets indexes went up, a breath was negative. And you haven't really seen that broadening out that a lot of people towards the end of the year were really getting gangbusters excited about the Russell 2000. And the Russell is down actually for the year. I'm just looking right above on that screen. I mean, yeah, it's down on the year. Oops, wrong one. I mean, we have a lot of things that are down on the year, which is crazy.

8:26They're buying basically what's worked. I mean, semiconductors for the year up 7%. They were up 3.8 % today. XLK up 4 % on the year, up 2.3 % today. And again, IWM. Yeah, and some of the, Oliver pointing out, some of the semi-action came after, right? Taiwan Semiconductor reported, SMCI, they increased guidance. So there was some positive actual news that seemed like they got people excited again. Yeah, the Russell's down 4 % on the year. Yeah, and a lot of people have been telling us they're watching that. If you don't get confirmation in that, it rallied today, but it hasn't been participating on some of these days when you've had the other indices higher.

9:08Yeah, you've had more stocks in the S &P year to date down. And it's not even close. I mean, it's really like 175 up and the rest down. And the Russell, it's like 400 up and the rest down. The Russell 2000, the rest down. The NASDAQ 100 is almost like 50-50 up and down. So you really haven't seen like this huge participation. You have the mega cap names. You have an Apple yesterday got an upgrade. And I think Apple's having a tough, tough time right now. They have they've had three quarters in a row of negative growth or really the phone. iPhone's really not selling that well. And this last note really got all the bulls excited and it just jammed it right back up.

9:59And I am short Apple, and it didn't feel good. But I'm going to hold it short going into the earnings because they don't really have a needle-moving product in 2024, nor does Tesla for that matter. So I think that you're probably going to see more price cuts with the iPhone. You started to see some price cuts in China. I wouldn't doubt to see some price cuts on the iPhone in the U.S. And it may be sort of disguised with carrier subsidies as well. So I think that it's like you've had a lot of multiple expansion. But again, we really need to see more of the E rather than the P. Hey, everyone, we're going to take a quick break right now to hear a word from our partners.

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11:52Yeah. You included a couple of charts from Bank of America's Global Fund Manager survey that we thought were really interesting. And one of them was a list of the most crowded trades. And not surprisingly, the Magnificent Seven is still sitting right at the top. Were you surprised to see that? Or is it just, again, everyone just piling into what's working? It's been that way for the last few months and actually all last year. But it gets to a point when these get so crowded that you really run out of people to buy. And if earnings don't keep up and you see these growth rates, I mean, look, in December, we saw a few really notable tech companies like Oracle, Adobe fall down.

12:39And those are sort of AI plays. They really just didn't have the earnings to keep their stock momentum going. So it could be a big sell the news type of thing with some of these tech names. Yeah. So are you, when you look at that, you mentioned that you're short Apple. So are you just steering clear of tech because you worry about it being overextended and too crowded, the trades, or are you actively shorting a lot of tech stocks? Well, I'm short some tech stocks. Again, I've avoided a few of the ones that have gone nuts. And I'm not in Microsoft. I'm not in Apple, but not in the semis right now.

13:29That's not something I'm in. But I think those are getting extended. XLK, which is the tech ETF, that also has a weekly combo and sequential cell countdown 13. And the last time we had that as well was towards the end of 2021. So those indicators are more intermediate term in nature. So you could have a bit of wiggle room on the upside. And then eventually we start to see those fall off. And, you know, look, I think that the other thing I talked about is the Fed. And I don't think the Fed is going to come out and be as dovish or, I mean, it would be kind of silly to do that. as dovish as they were in December, I think they're going to be a lot more on the hawkish tilt and really throwing cold water on the rate cut for March.

14:24I think that you're already starting to see the expectations for March to go lower. And it just makes really no sense to me when you have a really strong labor market. That's going to stay strong, I think, for a few more months. And I think when you see inflation sort of stalling at these levels here, it's not, you know, we're not at the target rate yet. And having the stock market go up, that's inflationary. That will keep the labor market strong as well. So I think that you really need to see economic weakness for the Fed to get involved or some sort of market dislocation, which I think you've had the markets get excited for any sort of downtick in inflation or economic weakness, which we really haven't seen much.

15:18So I think that there's going to come a point where the bad news actually turns into bad news. And we're not there yet, but that's something that happens in the cycle. I want to throw two other charts from that same survey that you included. And one was what people are expecting, what the managers are expecting from the economy, the US economy, and the majority of them say no recession. The fund managers think that we're going to see it's at the record high for rates. They expect rates to go lower. Yeah. I mean, maybe go lower. They think there's no recession and they acknowledge that the Fed's the biggest mover.

16:01There's something contradictory in there. Well, right. I mean, if there's no recession, there's no reason for the Fed to cut rates. Well, why not? As some people will say, why not just cut rates? They're going to preemptive. It seems like they're sort of bending the narrative around that, though. Although and I will say, by the way, with the no recession, there's plenty of stats for everyone to grab onto because we saw consumer sentiment really strong today from the University of Michigan. But we also saw December home sales slumping to close out the worst year since 1995. So there's a little bit for everybody still in this data, which I think is making it difficult.

16:43Yeah, just a note, I did buy a house in 1995. I did, actually. And it was a very good price that I more than doubled my money on not too long after. But that was... You're not stealing that house, are you? I want to buy that type of thing. But look, house prices aren't, you know, bad housing market because people are stuck in their houses because they have the fortunate benefit of having a very low interest rate. So that's good. The Fed has to or the Treasury has to issue about$2 trillion more of they have a huge amount of issuance. The Fed has$2 trillion more over last year's issuance. And that's, you know,$2 trillion.

17:36That's a big number. I mean, for a couple of people on Real Vision, that's like an odd lot, but that's a lot. And I think that's going to keep rates elevated. And I don't think that you're going to see the 3 % 10-year yield. I mean, anything is possible, I mean, I guess. But I think that it would be really sort of strange for that to happen. And if you get the soft landing, I don't think 3 % is coming. And you've got this extra$2 trillion in issuance that's coming. I just think that rates are going to stay higher. The deficit's real high, really, really high. Warren Pies, who I am a big fan of, mentioned, he put a tweet out last week showing the GDP or GDP versus the deficit has never been, it's never been at these levels if we go into a recession.

18:33And usually when you go into a recession, there's a lot of firepower with the government stimulus and the Fed. And I don't think they really have the firepower. And you can cut rates, but I think really it's going to take QE again to do that. And the Fed's balance sheet is still crazy elevated. I don't think they have the, you know, the COVID type firepower that they had. And even if they cut rates, sometimes there's a lag effect, as we know. And there's going to be a lot of people that will say, well, if they're cutting rates, I'm going to hold off on purchasing a house or this and that and wait for rates to go lower.

19:16But I'm not sure that's necessarily going to go that way. Yeah. And if we you know, in history, you always have a soft landing narrative. There's always a soft landing, always a soft landing. And we talked about it last time that, you know, a lot of people are saying it's like 1995. I just don't see that because in 1995, the Fed started cutting rates. Things were really starting to, you know, you know, soften in the equity markets. You also had a peace dividend with Soviet Union was out of business. Well, we're certainly moving in the opposite direction on the geopolitical front. You can't think of a time where there's less chance of anything looking like a peace dividend anywhere.

19:57Yeah, I mean, look, that's another concern. I mean, there's lots of catalysts that are sort of out there in the horizon that if they start to heat up, things could get really dangerous. And I think the market being at these peaky type levels, it's like a balloon. OK, so the bigger the balloon gets, the thinner the membrane is of the balloon. And just the slightest little thing popping it could really derail stuff that's happening and what we've just had. And, you know, sometimes when the bubble or the balloon is sort of not fully, you know, blown up, it's thicker and it can handle some of the negatives out there.

20:40But we're sort of priced to perfection here with the equity markets. They're not cheap. The leaders are not cheap. And they're extended. And I also, in my note, I showed some internals that are starting to slip. They're starting to turn down. And when you start to see internals start to weaken and equity prices remain high, that's a sign of a very narrow-based market. So I think there's still risk there. You know, we really haven't seen anything, you know, everybody's going to look at the equity market. And, you know, the Drudge Report has, you know, stocks at all-time highs. You know, take that for what it is with a sentiment read right there.

21:19It gets everybody feeling pretty good. People put money into the market. Oh, it's a new highs. They're breaking out. You know, I've got a lot of signals that I use that show exhaustion and those have worked fairly well over the years for me and a lot of other people. So I think it's a place where you don't want to get too far over your skis with your exposure. If you have gains, don't lever yourself up and go nuts and say, oh, S &P is going to go to 5 ,500 or 5 ,000 or whatever. We're already at a lot of the strategist price targets for the end of the year, and it's the middle of January. So, you know, it's a long year, so we have a lot to watch.

22:05We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

22:17So a couple great questions or comments in here. Oliver's is along the lines of what I was going to ask, because we're talking a lot about the risks you see and the things you don't like. So what's the opportunity? Oliver's saying, what sectors or stocks do you see doing well in 2024? What do you like here? Good question. I do think energy, you've had a really actually a good opportunity to buy A lot of the energy stocks lower. I think there's still 2024. We'll still see a lot of consolidation. You'll see announcements getting it through the government approvals. Another thing I was long U.S. Steel.

23:10I've been talking about that for months. I was long as my largest position. And that got bought out. I told everybody, I said, I am selling this thing immediately on any sort of deal news. And I did at the highs, which I was very happy about. That sort of made my December. But I think that energy still has a consolidation to happen. Those will probably get pushed through and they'll probably work. I think that as much as everybody hates China and Chinese stocks, I think Alibaba trading at about eight times earnings is really a good value right here. And it's one of those things where instead of saying what could go wrong, which I think a lot has gone wrong, and I haven't been really bullish on China for a long, long time.

23:59I was actually short a lot of China stuff. stuff, I think it's actually getting to a place where you can own Alibaba. The revenues are 10 times today what they were when they went through their IPO and the stock's lower than when they debuted with their IPO. Yeah, that's been moving less on fundamentals and more on the fact that G's not interested in seeing the whole government crackdown, right? Does that factor into how you think or is it you think that all that is priced in already? No, I can't say it's all priced in. There's risks, of course. Because that's the risk, right? That has nothing to do with your business outlook.

24:38Anytime you buy something, I mean, the risk is that you're buying something that's in an overbought market and it's an oversold stock, you run the risk. And anything can come out of China from the government that sort of pooh-poohs any sort of rally. But I do think that they're interested in – they're getting less restrictive on some things. I mean they just came out with a ban on some gaming stuff, and then that was quickly reversed, which sort of gave me a hint that perhaps the government is trying not to be as so restrictive to some of these companies because they see the risk there too because they may have to lay off people, which it's a communist country.

25:29And that's, you know, that's illegal. They need growth. So that's the counter to that. By the way, Peter Bookfar is in the chat. Hi, Peter. And he says, Tommy, my call in the beginning of the year, which is very wrong as of today, is that the Hang Seng would outperform the S &P this year. Yeah, it's a little early, but, you know, year over year, it's down, well, 29%. And it's down a nice 10 % so far year to date. So nothing's really changed there. I still think it's early in the year. And, you know, we'll see if China comes out with a stimulus, which I think is totally possible ahead of their new year in the next few weeks.

26:10And, you know, they, again, I think these are cheap. And I've seen also a lot of interesting call spreads in FXI and some other big trades that are sort of going out there. And again, what could go right? You know, any little bit of good news in this sector or country could take these things higher. And I don't think it's going to take much. And there's still a fair amount of shorts involved. I was just going to say, we talked about the most crowded trade is long, the MAG-7. The second most crowded trade is short China in that survey, right? Yeah. Look, I'm a contrarian, so if they're short, you know, I may be short the Mag 7 completely soon and be long China because, again, everything's priced really extreme in the Mag 7, except Tesla.

27:10And China, nobody likes it. So there's that, you know, possibility that we can get this, you know, sort of, you know, this change. And China was actually really, on the Bank of America Fund Manager survey, it was well-liked at one point last year that people thought that this was going to work. So it's a work in progress. Let's see what happens. It's not tomorrow or Monday for everybody. But I think that over the year, I think it could be something that can work. George pointing out Year of the Dragon, by the way, in China. We went down the rabbit hole, Brian, Super Mario, and I the other day on Year of the Dragon and trying to figure out there's also all sorts of elements that go with that, depending what your year is.

27:58So it's a lot of fun. G Blackburn asking a question. How about a catalyst for non-US stocks? The value differential is extreme. He wasn't. G, you weren't identifying which non-US. We just talked China. So maybe let's assume it's Europe, Tommy. How are you looking at a catalyst or thoughts about non-U.S. stocks? Well, Europe is similar to the U.S. and it's had quite a big run. And that's actually pulled back somewhat so far this year. And look, I think they're sort of in the same, hoping that the ECB cuts and Christine Lagarde sort of threw cold water on that. looking towards the summer. Some of the other ECB officials have pushed back on rate cuts as well.

28:50And look, I've been in the camp that you're going to see higher for longer with the Fed. And that's actually been right. You've had the Fed basically not do anything for quite a while. And we'll see what happens in Europe. But look, I think European stocks, and many of them have been cheaper than what you have here in the US. But look, overwhelmingly, foreign investors are also along US as well. I mean, it's been clearly the best markets to be in and most liquid and some of the best companies. What are you looking at all? We have a quick question. We get the question all the time now, especially in light of the news that just happened.

29:38Are you looking at Bitcoin or Ethereum? I know you're not usually in that. No, I look at it and I post, every morning I post the chart of Bitcoin. I posted a chart of Ethereum today. Ethereum has a Demark sequential cell countdown just from the other day. And look, I think it really comes down to Bitcoin holding 40 ,000. I think sometimes you look at a big round number and as unscientific and seemingly as it is, I think if you broke that number, you're going to have a lot of people talk about it like, oh, they broke 40 ,000. I mean, I don't think that the big catalyst of the ETFs has worked out so well.