Risk-off sentiment picked up steam again this past week and in a pretty decisive way. Utilities and long-term Treasuries both gained roughly 1.3%, while large-caps, small-caps and tech all dropped around 2.5%. Gold was up more than 1% again and bitcoin gained more than 10% following a big Monday rally. Lumber was at least flat on the week, but junk bonds trailed long-term Treasuries by a fairly wide margin. This is exactly the type of risk-off intermarket behavior you’d expect to see heading into a potentially major market correction. It’s not unusual to see this kind of consensus signal happen over any single week. The fact that this has been going on for several weeks in a row where virtually every defensive asset class is leading this market, some by a wide margin, tells me that the event I’ve been warning about for a while could finally be here.
One lesson that a lot of investors learned the hard way this week is that mega-caps giveth and mega-caps taketh away. Everybody was willing to ride the “magnificent 7” wave when AI mania was taking off, but last week’s tech bust, fueled by earnings disappointments from Alphabet and Facebook, showed that expensive stocks can get hit hard on even the slightest bit of bad news. This has been one of the market’s larger underlying risks - a market rally driven by just a few stocks can be driven down just as quickly by a few stocks. Investors have treated mega-cap tech stocks as sort of a quasi-safe haven throughout this bear market that started in 2022, so there’s a possibility that they manage to hold on here. The past few weeks, however, demonstrate that there really aren’t any safety valves out there right now.
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