“Davidson” submits:
Magnificent 7 are no longer driving SP500 higher as industrials regain prominence. It is in the daily details of market behavior. The context was set for some time that the 30yr minus 2yr Treasury rate, the preferred Momentum Trader Yield Curve indicator through daily rendition in the media, of a coming recession. The only equity strategy worthwhile, they said, were the Mag 7. In 2023, Bank of America analyst Michael Hartnett began using the phrase the “Magnificent 7”. CNBC’s Jim Cramer literally pounded a table saying “buy, buy, buy!” The Magnificent 7 were then offered as the Mag 7 ETF(MAGS) Apr 2023 for retail investors.
Part of the theme was that a recession was inevitable based on the low PMI(Purchasing Managers Index) and would drive all issues lower but for the MAGS issue. Rates were expected to fall sharply, and a hedged strategy was in place to benefit. That hedge drove the Yield Curve inversion to record levels. The counter-vailing issue was if the 30yr minus 2yr Treasury rate “disinverted” or went positive, then economic expansion was indicated and all bets for recession were off. In 30yr minus 2yr Treasury Rate, MAGS ETF there are three instances of this indicator rising briefly above 0.00%. Note that each resulted in short corrections for MAGS. The early threats of a “disinverted Yield Curve” were first seen just prior to Apr 2023. This was a month before the MAGS ETF was issued. There is a pattern here in that Cramer supported the MAGS theme to his viewers constantly once the term and the ETF were coined. The more retail investors could be drawn in, the better for media advertising revenue, the easier for institutional investors to exit. I note that corporate insiders were massive sellers of holdings and frequent guests on CNBC and elsewhere promoting their companies. This is classic Wall Street/media behavior to create an exit for institutional investors through a retail product offering. Institutions produce the fodder for the media. This has occurred thousands of times in the past. Institutional investors exit with huge prior gains while retail investors are encouraged to enter using a simple one-and-done security. If you recognize the pattern, you are not taken advantage by it.
The first sign that the other 497 issues of the SP500 were beginning to regain prominence occurred when the Jul 10th peak in MAGS at $49.30 was followed by a peak in the SP500 at $5667.2 on Jul 16th. The MAG 7 was already correcting by Jul 16th(see SP500 vs. MAGS ETF) as the SP500 made a new high,. Suddenly, issues other than MAGS were the driving force behind the SP500. This was more evident when the MAGS made an intermediate peak on Aug 21st $45.34 followed by intermediate peak in the SP500 Aug 23rd of $5634.61. MAGS was having less influence on the SP500. Finally, this week the SP500 makes a new all-time high ending the week $5,728.17 with MAGS at $47.22 or 4%+ lower from its peak.
The institutionally favored 30yr minus 2yr Treasury rate Yield Curve indicator is now solidly positive ending last week at 0.54% or 54bps. The traditional 10yr minus 3mo Treasury rate Yield Curve indicator is rapidly catching up. Momentum Investors are now responding as if the Magnificent 7 issues are no longer the favorites and seeking other opportunities. This is how markets progress or how ‘the sausage is made’. It is messy with thousands of strongly provided forecasts ready to shift as they appear not to fit the narrative of the market’s fundamentals.
My view is to invest long-term recognizing the rapid shifts in market psychology but holding to economic and business fundamentals as the ultimate driver of prices. From my perspective, a major turn in psychology is in process. The underpinnings of economic growth have been there all along. In a rush to generate returns, Momentum Investors missed seeing this growth and focused on high-tech themes whose storylines garnered the most attention to excess, extreme excess by my analysis.
We appear set for a new series of SP500 record prices the next couple of years. Once Momentum Investors do a complete buy-in, it will not surprise me if we see the SP500 print $8,000 before 2027.