Transcription
Hello and welcome back to Braavos Research. This is your host Peter and today we're going to step back a little bit from the pure macro that we have talked about in the last couple of episodes and we're going to take a look at what's happening underneath the surface under the hood on the market today.
There's some big shifts happening despite the markets overall being quite calm. seeing large rotations taking place, things that we're not necessarily used to seeing. And that can also give us a good understanding of what to expect in the next few weeks, few months, help us form a view and opinion on the health of the market.
Today, the S&P 500 is down today, 0.5%, and it's generally been struggling here over the last, well, really since the start of the year. Performance has been underwhelming of the S&P 500 index here in the first two weeks. That's alongside a equal weighted S&P 500 index that has been melting up in the first two weeks of the year. Right? If we take a look at the RSP here, you can see since January 1st, we've had a 3.5% rally on the equal weight S&P 500. It's also taking out what seemed to be a kind of roof here, capping the gains on the equal weighted index and what looks like maybe the market trying to push past this and unlock a steeper trend here on the RSP. And we see the same thing happening by the way on the IWM index that is up today despite the market being down, which is of course quite unusual. The S&P 500 and the IWM index tend to move up and down together. It's very rare that you see the IWM index being up on a day where the S&P 500 is down.
And so the story today, and it's been that way really again since over the last couple of weeks, but really since over the last couple of months, is that the large cap stocks have been actually weighing on the index. We can see that by looking at the S&P 500 against the RSP. So here we're looking at the cap weighted index against the equal weighted index. And so essentially measuring the performance of the larger companies within the S&P 500. So the top 10 or maybe top 20 constituents of the S&P 500 index against the rest of the basket of stocks. And if you remember back in early December, we talked about this breakdown that was happening here and the fact that it wasn't necessarily a very constructive sign for those large cap names and that that made us a little bit concerned. Right? We don't have a very strong opinion on whether these large cap stocks should outperform or underperform from a fundamental or macro standpoint. Generally, when you look at Nvidia, you look at Meta, Microsoft, those stocks are growing their earnings quite strongly. They're not at Ford PE valuations that are extreme. Sure, they're priced a little bit higher than the rest of the market, but these are also extremely strong and fast growing companies. But from a price action standpoint, we did see this as a little bit of a concern. The fact that we were breaking this pretty well- defined uptrend here on the S&P 500 against the RSP. And so we're seeing a continuation of that today.
Nvidia, for example, being down 2%, nothing dramatic. It's not free falling, but it is down more than the S&P 500 index is. And by the way, it's also down quite significantly from its peak, right? still down 14.5% from its all-time high back in October. So, this has definitely been and this is the largest weighted stock in the S&P 500 index. So, by far the biggest drag on the market here over the last few weeks and probably explains a good chunk of the underperformance of the cap weighted versus the equal weighted index. We have the same thing on Meta here that's down 1.5% not looking particularly good from a price action standpoint. Again, you can see clear lower highs being made while despite the S&P 500 index being at all-time high. So quite again quite different to anything that we've seen in this bull market really throughout this entire bull market. We've had Meta being one of the strongest performing stocks right up until August where it started to top out. Microsoft, same thing, right? One of the strongest parts of the market during this entire run turned into an underperformer. big double top here and again is down 1.1% today, continuing to trend lower. And finally, the other big stock that's down significantly today is Broadcom. That's down 4% today. Also down significantly from its all-time high here, roughly 18%. So together, those stocks that I just talked about make up almost 20% of the S&P 500's performance. And all of these are down today and causing that underperformance on the market.
Now on the flip side, what we have on the IWM which is an upday, the RSP that is also up. We have sectors like the transportation sector that's extremely resilient, extremely strong. We have the industrials sector that is also continuing and holding its uptrend. Absolutely not showing any weakness today. If copper, copper prices, right? Dr. Copper often used as a barometer for economic health because of its correlation to the industrial activity. Copper is up almost 1% today. So this seems to be an issue primarily centered on the large cap stocks, more specifically the large cap tech stocks and we've talked about our view on this is that generally there's not a huge cause for concern. You have these types of rotations take place. It's a natural part of how the markets work. Does it necessarily mean that these stocks are due for large collapses? I don't think we're there yet. In fact, when you look at the S&P 500 to RSP ratio, you could very much see these stocks bottom out when the bottom of this channel gets tested and then these stocks begin to start to look good again. In fact, we have exposure to Amazon. Amazon is also down. It's also a large cap tech company. We're extremely constructive on the Amazon story. We think it does have more upside. And when you look at, for example, Meta, Meta has been growing its earnings rapidly even in the latter half of 2025. And it's currently at a PE ratio of 21 on a Ford basis, which is not the cheapest it's ever been, but it's definitely at the lower end of the range where it typically trades in since between 2019 and present day. It's generally traded between a PE ratio of 20 and 30. And a lot of the bottoms in meta have occurred at a P ratio of 20 quite systematically. The same thing can be said about Microsoft. That's looking quite good here. Again, earnings still growing. Obviously a company with a very very strong track record of earnings growth just more recently in the last quarter they've been projected to increase their profit margins even further and their PE ratio as the stock is falling and earnings are rising the valuation is coming down now it's not cheapest stock right still expensive but on a Ford PE basis we're now roughly at the same level on Microsoft and this is updated for January 13th so it's not taking into account the down day that we have today but we're roughly at the same valuation as we were at during the April sell-off or during the 2022 sell-off. So, there is this disconnection that's happening right now between Microsoft that's growing its earnings and a stock that's falling. Now, obviously, that suggests the market is a little pessimistic about its ability to grow earnings in the future. But unless you're expecting a downturn, a slowdown, you should generally expect those expectations to resolve to the upside because again historically Microsoft grows its revenues. That's just what the company does. Now, by no means are we as bullish on Microsoft as we are in Amazon, but it's just to highlight that this large cap story, large cap weighing on the index story seems to us quite temporary and quite short-term.
Now, I know a lot of people are quite concerned about the markets breaking down right now. And absolutely, we're seeing on a technical basis, we're seeing a little bit of a breakdown here. The NASDAQ 100 that you can see here is breaking below some key levels of support. That's not particularly constructive to see and it could mean that the stocks that I just mentioned see some more downside and that also could weigh on the rest of the market, but we expect this to turn into a much larger correction. That's probably something that we're a little bit more skeptical of with those other parts of the market that are much more accurate at understanding and evaluating the economy and earnings health than just a handful of tech stocks. And by the way, another great way to see this is by looking at the semiconductor sector against the tech sector. You can see we've had a huge divergence build between those two right here. So the market is not afraid at all of getting involved in high growth and parts of the market that are experiencing tailwinds and where they can actually discount higher growth rates. That's a sign of health, right? Semiconductor stocks are extremely capital intensive. They're great forward indicator of the economy. We've talked about their potential to kind of foresee downturns in the past. You often see heading into corrections. You often see semiconductor stocks underperform. You often see them making lower highs heading into downturns because they're much higher beta. They're more risk. They're more economically sensitive. So investors are going to dump these stocks before they dump those large cap well- diversified huge cash flow machines like Meta and Microsoft. Again, we covered this before, but we've seen this divergence many times before. Like in 2018 here, the market semiconductor stocks were topped out before the top in the market and the top in the NASDAQ 100. Today we're seeing the opposite happen where these stocks are actually melting up and breaking out. So yes, they're weakening a little bit here because obviously these are stocks that are very tied to the performance of these larger technology companies that are spending a lot on the semiconductor sector. And so if you have a Meta, you have a Microsoft that's seeing the value of their shares declining substantially, that gives them less room to go on these huge spending sprees as we've seen in the last few months, spending sprees on chips. So of course, the semiconductor sector does not like to see a tech correction, but you look at the trends, you look at the broad direction of these, and it's not a particularly worrying look. If you start to see a big false breakout like this, well, from an intermarket standpoint, that would not be a great sign. And by the way, we have a similar signal on homebuilders. We've talked about homebuilders before, but homebuilders have been very, very strong in the last few trading sessions in the last couple of weeks. This has been one of the strongest performing sectors of the S&P 500 index. Now it is down today but overall this has been quite constructive and this for now does not look like it's damaging the strong look on homebuilders. We do want to see follow through. We do want to see home builders breaking higher here and that would really be a strong confirmation of everything that I just mentioned so far in this video. We want to see this happen because if that does happen, it's a sign again, an intermarket sign from a highly economically sensitive, highly rates sensitive sector that things are looking up, right? This is why you often see homebuilders bottom before the rest of the market like they did here in June of 2022. They bottomed six months before the S&P 500 index and they topped out a few months before the S&P 500 index topped out. So again, we want to see more strength here. Weakness from here would not be a great sign, especially if there's also weakness on those other parts of the market that we discussed.
But I think this is also a great moment to talk about Bitcoin because believe it or not, Bitcoin is also a great intermarket tool because it's about as high beta risk on pure speculative bet as it really comes as at least for Wall Street. I know it's be controversial to some people to say that Bitcoin is speculative, but when it comes to the majority holders of Bitcoin, it remains a speculative asset, and those are going to be the people that are making the day-to-day price action of Bitcoin actually move. And you can see it is highly tied to the performance of homebuilders. This is probably the sector in the S&P 500 that has the highest correlation to Bitcoin. And quite often you can actually use divergences in this as a way to anticipate or time reversals in Bitcoin. Great example of that is in 2020 here where Bitcoin was still consolidating. Yes, it was trending higher but slowly and the home building sector was making a new all-time high. Ultimately, Bitcoin caught up and quite violently, right? And the same thing can be said about this divergence right here. FTX. The FTX collapse triggered one last drop on Bitcoin and homebuilders were going in the very opposite direction as that was happening, suggesting the macro and the general environment was favorable for Bitcoin at the time. In fact, again, as I mentioned earlier, homebuilders had bottomed already in June of 2022. And so, there was this larger divergence that had taken place and ultimately Bitcoin followed and resolved to the upside. I'll just highlight one more divergence right here where homebuilders again were making new all-time highs. Bitcoin was consolidating and moving steadily lower and ultimately that resulted in a snap back up on Bitcoin which was then quickly ended as homebuilders were actually underperforming foreseeing or at least partly warning that Bitcoin would top out a few months later again. So it also works the opposite way. But right now we did have a so far what looks like a significant bottom here on homebuilders that took place right around the same moment that Bitcoin bottomed and first couple weeks of the year look really good for homebuilders. So again these divergences can last weeks, months, right? In this case for example it was from July all the way up until October, right? a few months of divergence perhaps we see Bitcoin make another run for the lows and if we see further upside on homebuilders in the meantime that's the type of divergence where we could really take advantage of a trade and step in early and with a high level of confidence. So perhaps some things in the making here. And this, by the way, reminds me a lot of an episode that we talked about already, which is this correction in 2021 where you also had homebuilders underperforming, Bitcoin underperforming. And ultimately, both of these bottomed out and headed back to all-time highs, right? And this was in the context of a broader bull market in stocks. During this entire correction on both homebuilders and Bitcoin, you can see we can add the S&P 500 index. The S&P 500 index during that time was just slowly grinding higher, slowly making all-time highs. Now, nothing repeats exactly. Nothing ends up being exactly the same. But this is kind of what we've been going through, right? We've been going through a weakness of both Bitcoin and homebuilders here with the stock market just basically grinding up to new all-time highs. In which way is this going to resolve? Our opinion has generally been that it's going to resolve with Bitcoin and homebuilders by the way to the upside. And that seems in the first couple weeks of the year again from homebuilders it seems to be that's what's getting laid out.
Now before we take a look at a few trades I want to discuss trip.com our closure of that and a couple of others but I also wanted to take a look at oil very quickly because we've talked about this being a big risk to the market and we have had a breakout on oil. So, we're watching the energy sector as a potential way to hedge against this breakout on oil. But overall, our conclusion is still that energy is trending down. And we've had countless moves up, countless counter trend moves like this. And so far, all of them have resolved with oil moving back down. And so far, we don't really have strong enough evidence to suggest that this is going to be any different. If we start to inch up and really see oil prices being able to hold above these moving averages in a sustained basis, that starts to look a little bit more worrying for the market, right? Because that starts to put some upwards pressure on CPI, on interest rates, and all that. The real danger is something like this again. So something we're looking out for closely. It could change everything if there's real strength on oil, but for now, it's not the end of the world.
Now, let's talk about trip.com. We had a trade on that a couple days ago as the stock by the way looked really good from both a price action and fundamental standpoint. We took a starter position right in Trip.com upon seeing a follow-through on the breakout that we had right here and anticipating to see a larger breakout right here on the weekly chart. You can see we have a larger potential breakout. And what we love is what our trading style is all about is having those really greatlooking charts from a technical analysis standpoint combined with a strong fundamental tailwind, strong fundamental story. And that's what Trip.com had. It had exposure to China that we think we still like today. And so it checked all the boxes right now. Today we had an announcement from the Chinese government that they were investigating trip.com on the grounds of monopolistic practices which of course investors hate and triggered a large selloff a large gap down. Now this type of development especially so soon after a trade is initiated is rare but it will happen. That's part of trading markets and it's not something that we could have predicted unfortunately. On the more positive side this was a lower allocation to what we usually have. So the damage as a percentage of what we're usually risking was actually roughly the same as what we usually get stopped out of. But yes, this is definitely an unfortunate turn of events for Trip.com. That does not take us away from our opinion on China. That is a constructive opinion. And you can see despite the move on Trip.com, the Chinese ETF looks very strong here. and whether we increase our exposure directly through the Chinese ETF that's obviously more liquid and less susceptible to being influenced by these one-off events or these investigations or that sort of thing or we take another jab at an individual Chinese stock will be keeping you guys up to date on that. But these types of events, whether that's on China, whether that's in the US or anywhere in the world, you're always going to have that risk when trading individual stocks. Now usually the larger the company, the more established and the more liquid also the stock is, which is usually associated with a larger market cap, right? The lower the risk of that type of a large gap down taking place, right? With smaller stocks, smaller market caps, you're going to have from time to time these one-off events creating huge gaps in the price, which can offset your gains very rapidly, especially if you took a larger than usual position. And this is one of our rules is we generally don't try to go too aggressive and too high of a weight in a stock that has a high risk of that type of event. But in terms of the Trip.com trade, this is a large company well established that has a huge volume of transactions per day. So on a risk profile basis, it definitely was quite low.
Now let's take a look at trade that we initiated yesterday. I R E N. This is a stock that we like from a fundamental standpoint as well as a technical standpoint. First of all, very very strong stock that has consolidated here in the last few months and seems to be emerging nicely out of this consolidation. This is a data center stock that has been able to take advantage of the trend in the last year or so. And so if we overlay the semiconductor sector against this stock, let me put this as a line chart. You generally see that the two are quite closely related which makes sense right data centers and semiconductor stocks are very interconnected. One is required for the other and so this is a stock in that theme that could potentially be taking advantage of this run of optimism that we're seeing on the semiconductor sector itself. So in terms of the trades that's about all I wanted to highlight.
Again, just to recap here, we're seeing a little bit of a breakdown on the S&P 500 index, and generally, yes, that could weigh on the short-term price action. It's absolutely possible that that takes place. What is reassuring again is the fact that this does not seem to be spread across the index, but concentrated in large part on a handful of extremely large cap companies. And while these could drag the performance down, we don't think they really matter, at least for now, in terms of the economic cycle and the macro environment and where all of that is heading. Our take would be that if this does turn into a breakdown, it would end up being quite shallow and ultimately bought up. Hopefully, this provides some good context, some good color regarding what is happening in the markets today along with our strategy. If you have any questions, comments, feedback, make sure to leave them in the comment section down below. If you enjoyed, make sure to let us know. Now, in the meantime, I wish you good luck on your trading and see you next.