Transcription
Hello, and welcome back to Braavos Research. This is your host, Peter. I'm filming this video around market open on April 2nd, the big Liberation Day, as Donald Trump says, where he's going to be announcing a few new tariff policies. This is, of course, an event that's going to be closely watched by investors around the world. The stock market sell-off, in large part, has been driven by anxiety around tariffs, and I think a lot of investors are split regarding the Market's reaction to Donald Trump's speech—whether it's going to be taken as a sign of relief and lead to a big rally, or lead to another big decline as investors price in the full magnitude and the full impact of tariffs for another leg down.
Just as I say with individual government data releases or Federal Reserve press releases, our job and our edge in trading is not to try and anticipate what is going to happen on a given day. Now, we've given our overall gut feeling and our overall analysis on the technical structure of the S&P 500. Today, it seems like it is closer to a bottom than anything else, with the RSI having printed a Divergent low here—with the RSI making a clear higher low while the price has made a lower low. That's called a bullish momentum Divergence, suggesting that the trend is slowing down, that a lot of the bad news has potentially been priced in, and the initial driving force behind this correction is no longer as strong as it was at the beginning. So, suggesting that we're potentially heading towards a local bottom here.
But we've also mentioned that in today's technical structure, with the recent breakdown of the bullish technical structure that we had in place throughout 23 and 24, we used this opportunity to take out quite a few of our more aggressive positions. We're keeping our exposure to Gold so far, although we're going to talk about that in this video because that may be about to change, and Chinese stocks as well. We have quite a bit of exposure to that. So, generally, we're quite happy with just waiting to see what is going to happen on this Liberation Day—how is the market going to react, what kind of technical developments do we see?
There's a few different options, of course. First one would be to see a huge, huge rally as the market believes that the tariffs are actually not that bad, and that once the uncertainty around tariffs clears up and investors become more confident to invest back into the market, that creates a big thrust up. We want to see high volume on that kind of move; we want to see rate-sensitive sectors like home builders outperform on that move; you want to see things like gold coming down if that happens, as uncertainty comes down. And so, if all of that happens, that could put us in a position where we get back into the stock market more aggressively on a kind of breakout above 5800 points. So that's scenario number one.
We'll call it scenario number two: of course, we have a big technical breakdown—big, big red candle with volatility spiking to extreme levels—stock market breath seeing a huge, huge decline. In which case, after perhaps a couple of days, maybe 2–3 days of very heavy downside, in that scenario we'd also be looking to pick a bottom. Now, there's many things that we'll be looking at in that type of scenario for potentially picking a bottom; one of them being the VIX that we've highlighted. We're watching for a potential spike to 36, which is typical in very garden-variety corrections—classic stock market corrections. You see the VIX spike as investors panic out and sell out of the market. You can see a spike to those kind of levels. We have not yet seen that in this correction, and in our opinion, a spike to 36 would probably be an opportunity to take advantage of a buy entry at a very cheap point for stocks—either shorting the VIX itself or going long on a leveraged ETF.
We'd also be watching this indicator right here, which is the S&P 500 stocks above their 200-day moving average—so the percentage of stocks within the S&P that are trending above their 200-day moving average. This has been correcting recently. We have not yet reached an oversold reading. What I call an oversold reading is at about 20%; that's when most S&P 500 Corrections typically reach their endpoint. You can very briefly see that head all the way down to maybe 15%. It's only during the Great Financial Crisis and during COVID where you actually saw the number of stocks trending above their 200-day moving average go down to about 2%. So, those are the two key indicators that we're looking, looking at in the Doomsday scenario. You know, you can call it a doomsday scenario, but I call it just a classic correction. We've seen this many, many times since the financial crisis—lots of Corrections see a panic sell with most stocks ending up below their 200-day moving average, and that tends to mark an extreme state of panic for investors where you're really seeing all stocks selling off, no matter what their fundamental backdrop is—even great stocks are, are selling off in this environment. That's really when buying opportunities rise; that's also when we want to be getting more aggressive in initiating long positions on setups that we find constructive.
Now, our base case right now—and of course, by the time that you see this video, you may already have seen the price action and what I'm about to say is ends up being completely wrong—and of course, guessing these types of things is all we're doing is guessing and presenting a base case—but my base case right now would be to see a slight negative reaction, maybe an undercut of the low, but within the week, I would say S&P 500 being able to regain those levels and eventually bouncing as the market realizes it's not the end of the world. That would be the base case with a negative initial reaction at an additional spree of panic selling from retail investors. If the market is able to hold that kind of third test of the low, that would really be a constructive structure where you really have waning momentum to the downside and setting up for a rally. So that's the position that we're, we're in. Again, we're biased by the fact that we don't see the macro environment right now deteriorating in a significant way, so we're staying in a mindset where we think that this will end up being a correction, not a brand new bear Market that's going to lead to a much more substantial decline in stocks and where we really should be using any opportunity to de-risk.
It could be that our opinion on that changes; it could be that new data comes in and that we shift towards a more long-term defensive approach where we completely remove, move our exposure to stocks. And that's definitely not what we're looking to do right now. In fact, I do want to talk about a specific opportunity right now in Market that I think has a reasonable chance at being the sector that leads the market higher in this next phase, and that is the semiconductor sector. Now, semiconductors—this ETF called SMH—has been lagging behind the S&P 500 since June of 2024 when it peaked in July of 2024. It peaked, and it's down about 25–5% since—after, of course, having melted up here in 2023 following the release of chat GPT, which created an AI frenzy, created a lot of anticipation of demand for semiconductors as you have this AI Revolution needing huge amounts of infrastructure and benefiting this semiconductor sector.
Now, of course, the performance of semiconductors is extremely dependent on the overall stock market, right? So, if stocks panic here, semiconductors will panic as well; if stocks recover, semiconductors will recover. So, we're really talking about what sector do we want to be exposed to when we start to really look to get more aggressively long on stocks? Are semiconductors a good option for that? And I think the answer is yes, and I'm going to show you why by looking at this ratio right here—SMH relative to XLK. This is the performance of semiconductors relative to the large-cap Technology sector—just the technology ETF. This is what it looks like going back to 2001. This is quite a fascinating chart because, as you can see, since 2005, we've had what looks like a huge bottoming process on the semiconductor sector relative to the XLK sector. We've generally been in an environment, for the most part, where large-cap stocks—mostly software companies like Meta, Google, Amazon, Netflix, Spotify—software companies have thrived. Now, seems that we're potentially seeing the tide shift towards Hardware companies—at least we saw a big, big breakout of Hardware semiconductor stocks relative to Classic technology bets represented by XLK—breakout here. This type of bottoming pattern is a bullish technical pattern in technical analysis that would suggest a lot more potential upside for semiconductors relative to Tech. So, we have about an 80% outperformance of semiconductors relative to Tech here. If this pattern were to play out fully.
Now, if you think about the secular forces that would drive that, you could say it is represented by a shift from investors rewarding software to rewarding Hardware. Of course, AI—artificial intelligence—accelerates this shift. In a world where AI can code, can write software, it democratizes software; it increases competition for software companies, and that democratization of software makes demand for Hardware increase. We're clearly seeing in big a big pickup in sales for Semiconductor companies, especially in America, with demand really accelerating higher. So, there does seem to be a secular theme here that's at play with semiconductors. You can see there's a long-term uptrend, a secular uptrend—this is a weekly chart—and over the last few months again since June of 2024, so it's been almost a year where semiconductor stocks have been consolidating here, underperforming the technology sector by around 15 percentage points and coming back in to test this secular uptrend. If the S&P 500 does climb higher and that we're indeed not heading into some kind of a big bear Market, I would suspect that semiconductor stocks will be leading the next leg higher and potentially outperforming technology—the traditional technology sector—by as much as 30 percentage points if it were to take out that previous high.
So, we're still seeing exactly how to bet on semiconductors. We may just bet on the semiconductor ETF. I, I believe there's leveraged ETFs that also give exposure to semiconductor stocks, and then, of course, there's the individual companies such as Nvidia, Broadcom, Qualcomm. So, depending on the individual bets there, we may also do that. Now, to be clear, the technical setup right now on SMH isn't perfect. We're seeing the moving averages on the daily chart roll over, and they're clustered together, which isn't a great look. This can be where that kind of sector is more at risk of seeing a large unwind. You also have a potential topping process here that's been developing and that's ready to break down. So, there's still potential for a flush down here, right? So, we're not in a rush to be initiating new trades on semiconductors; we're still in that defensive posture, still waiting to see what happens—which way is the market going to resolve? Is it going to be bottoming out and beginning to form a basing pattern to move upwards, in which case we can catch semiconductors as they recover, maybe as they recover back above these moving averages like this, or are we going to get a buying opportunity on a big, big panic sell-off?
I would say this technical structure that we have here is not unlike what we had here in 2018. Let me zoom in a little bit closer here, but you can see we had kind of the same thing in 2018 where semiconductor companies were also printing this topping process here after having outperformed the S&P 500 and the tax sector in general significantly in 2016 and 2017, broke down here, and and the moving averages really began to curl downwards. It was a little bit more downside, but ultimately they did resolve upwards. This selloff here, for example, wasn't such a bad area to be picking up some SMH, depending on your investment horizon. Now, on a relative basis against the S&P 500, also in quite an interesting posture because semiconductor stocks right now are retesting a broken resistance level right here—a broken resistance that you could argue goes back all the way to 2001—that we've seen this breakout and that it's retesting right now on this recent pullback. Of course, if we see a big breakdown here, that wouldn't be such a great sign from a technical standpoint. You really want to see this hold. This kind of breakdown would suggest that well, demand for semiconductors is actually not going to hold up that well, and that these companies have actually been bid up too much—too much demand has been extrapolated and they're ready and they should be deflating back to maybe a more reasonable trend, perhaps all the way back down here. But I would be careful to expect that or to already be betting on that kind of underperformance given the tailwinds that we currently see on the semiconductor sector.
This is not just speculation that we're seeing on the sector; this is real hard growth that has materialized in 2024 with a parabolic runup in semiconductor companies that is centered in America. So, this is clearly an industry that is based in America that is being subsidized by the, the government. And when you look at the profit margins of semiconductor companies, they're going through the roof right now; they're at all-time highs and rising steadily, which is pretty constructive. It means that these companies have pricing power; they don't have a lot of competition, and so they can increase their profit margins while still steadily growing their revenues. When you look at the forward PE of the S&P 500 semiconductor sector, it's currently sitting at about 22, which is not cheap, of course, but it's also not incredibly expensive. And if we're heading into a world where this is going to be the sector that received the greatest capital allocation as investors realize that it's benefiting from long-term tailwinds, then you can't imagine higher valuations than this. The forward PE ratio of technology companies in 1999 went all the way up to 50.
So, semiconductor stocks are interesting right now given their recent underperformance, the fact that this is a sector that has cooled down on a relative basis against the S&P 500, on a relative basis against technology stocks, and also on a nominal basis. We're seeing some pain right now; investors that have been flocking into semiconductor stocks have not earned the return on investment that they were likely looking for when they initially made their investment in late 23, early 24. This has been a very disappointing part of the market despite the sector seeing record earnings growth during this period. I mean, these companies peaked in June or July of 2024, and their earnings per share—their forward earnings per share, which is estimates from analysts—have not stopped growing since July of 2024. Meaning that in order for analysts to raise their earnings estimates, companies need to provide positive forward guidance; it means that these companies are still positive on the future outlook of sales and profit margins. So, this is an opportunity, and it could be an even bigger opportunity if we see a broader selloff occur in the market right now.
Now, one of the charts that I wanted to show you in this video was the S&P 500 to gold ratio. This is something that we often take a look at because these are, of course, two of our favorite asset classes—the S&P 500 representing stock market, so risk-on positioning, betting on economic growth, betting on a steady, stable, healthy Market environment, and gold betting on just the opposite—betting on uncertainty, betting on low growth, high inflation, difficult and stagnant economic conditions. So, these are very antagonistic asset classes, which I believe should be integral to any investment strategy. It's also very important to understand the secular forces that drive the fluctuations on the S&P 500 to gold ratio. You have periods of exceptional long-term economic growth, periods of long-term economic stagnation. We had another period of exceptional performance between 1982 and 2001, and 2000, and then from 2000 all the way to 2011—period of stagnation. We've been in this kind of bounce since 2011, and it seems more and more like this is resolving to the downside. This was our base case for quite some time. We've been talking about this ratio resolving to the downside for years now—that gold would outperform the S&P 500. That does seem to be playing out. It is going to be interesting to see whether we see a complete collapse of this ratio here, either fueled by a larger correction in the S&P 500—we've already seen some of that here—is that going to continue over the next few months or melt up—more aggressive move up in gold prices. Alternatively, if we get back to the daily chart, we could see a more reasonable trend occur on this S&P 500 to gold ratio. We're currently testing support right now or close to support; it's quite well defined by these two big peaks and this key reaction here. I would suspect that there is some kind of a reaction that occurs around this. Now, again, whether that is a big bounce on the S&P 500 or a selloff on gold, it's definitely going to be interesting to watch, but it's in these kinds of setups where our bias instinctively begins to shift from, "Hey, we want to have a lot of gold exposure to be hedged against uncertainty in the market," to perhaps, "We want to be booking profits off of those trades on gold and allocate more towards the stock market."
So, when you look at the RSI on this chart, which is useful because it gives us an idea of how much panic there is on the S&P 500 to Gold—how much is the S&P 500 selling off relative to Gold that's rising—and currently we're seeing the RSI be at quite overextended levels as this support level is being tested—similar levels to what we had in March of 2020 and what we had in September of 2011. Now, there have been moments in the past where we've had multiple RSI oversold readings, like here between October of 2007 and between March of 2008, where you just had pretty much a compl, complete collapse of this ratio despite lots and lots of oversold readings. But in general, most of these have led to bounces in the ratio, even if it was just a temporary bounce like this one in 2002 or more durable bounces like here in 2011 and here in March of 2020. I think it's time for us to begin shifting our allocation towards perhaps less gold and more stocks. Again, we're hesitant to do that too quickly given the breakdown that's occurred and the uncertainty that we have right now, but that's what we're leaning towards, and it could be that you see quite rapid shifts in our list of active trades that has been pretty much stable over the last couple of months here, but that you see us adding some more traditional stocks back into our list of active trades.
Now, one part of the market that we haven't taken a look at in quite some time is natural gas. Natural gas prices broke out above a big head and shoulder bottoming here from 23 to 24 and trending up quite steadily throughout 24 and have kept up throughout 2025 as well. It looks like natural gas prices are potentially ready to continue this trend up. It's definitely held up; moving averages have caught up to the trend; prices have basically just consolidated around this area. And if I can remind you, the target of this Head and Shoulder bottoming pattern was all the way up to $5.7, which was not hit in the recent move up, so there is potentially room for one more leg up on natural gas—something to watch out for if some of you are interested in the natural gas trade.
So, those are the main things that I want to talk about in this video. This is definitely a fascinating macro environment—lots of very interesting things happening and tile shifts happening underneath the surface like this potential secular rise that we're seeing in semiconductors. These companies could gradually become a larger, larger part of the American economy—the American Stock Market. This is evidently a sector that has lots of potential for upside. So, if you enjoyed this video, by the way, make sure to click on the like button down below; that really helps us understand if you guys are enjoying the content of these videos—the analysis. If you have any questions, comments, feedback, make sure to leave them in the comment section down below. In the meantime, I wish you good luck on your trading, and see you next time.