Fundstrat's Tom Lee expects the choppy pattern the S&P 500 has traced over the past week to end in the next day or so, and he thinks the index will finish July above current levels. The benchmark closed Monday up just 0.02%, 2.6% below its early-June record, while memory-chip makers Micron Technology and Sandisk shed 22% and 44% over the past month.
Tom Lee, the typically bullish head of research at Fundstrat, thinks the choppy pattern the S&P 500 has witnessed over the past week is going to end in the next day or so, and that the market will end July higher than it is now. Friday is the last day of the month.
Chip stocks take the brunt
Monday's tape looked dull: the S&P 500 closed up just 0.02%, leaving the Wall Street benchmark 2.6% below the record high hit at the start of June. But the semiconductor sector took a battering. Memory-chip makers Micron Technology and Sandisk added to recent declines at the start of the week that left them down 22% and 44%, respectively, over the past month.
Lee argues the latest slide was triggered by specific news rather than investors calling a top on the artificial-intelligence trade. He points to Chinese chip makers reportedly making machines that compete with ASML, and to Nvidia's announcement that it will guarantee $250 billion for a data-center project by OpenAI, a move that raises circular-spending concerns.
Oil and the Fed behind the swings
An important cause of the market's recent vacillations has been the surge in oil prices amid growing fears about an escalation in the U.S.-Iran war, according to Lee, with the bump in energy costs pushing up Treasury yields as traders worried about inflation. That stood down, he says: in a video update released late Monday, Lee noted oil has since fallen $10, yields have dropped by almost half of the recent rise, and the odds of the U.S. invading Iran have dropped to 25%.
Those inflation concerns dovetail with another factor Lee thinks has rattled the market in recent sessions: the possibility of a rate hike from the Federal Reserve. The probability of a 25-basis-point increase on Wednesday sits at 27% in the prediction markets and 38% as reflected in Fed futures — a big increase from where that likelihood stood three months ago. Lee calls it a binary event on which markets cannot find equilibrium, so someone may be hedging, and he thinks the odds of a hike are very long.
A Cisco lesson from the 1990s
To illustrate why investors should not get rattled by sharp pullbacks in AI plays, Lee reaches for Cisco Systems, that darling of the internet boom, from 1994 to 2000. Cisco went from 80 cents to $9 by 1997, then fell 40%, and a year later it went to $18. It then fell 41% to $9 in 1998, but two years later it was at $80 — a 100X move Lee thinks the AI trade is set to repeat.
Lee also pointed investors to a saying of the late Charlie Munger, longtime vice chairman of Warren Buffett's Berkshire Hathaway: "The big money is not in the buying and selling but in the waiting." He continues to buy the dip, and calls this the most hated V-shaped rally.
Source: MarketWatch
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