How to Trade a Hated Rally (wIth Jared Dillian)

TL;DR

A bearish sentiment towards tech stocks is leading to a potential sell-off, with a rotation into other sectors such as energy anticipated.

Transcript

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Key Insights

• 🧑‍💻 A rotation out of tech stocks and into other sectors, such as energy, is expected.
• 🤑 Negative real rates have caused misallocations of capital, taking away money from productive use in the economy.
• 🤨 The Federal Reserve's hiking campaign and persistent bullish sentiment on stocks contrast with weakening data, raising concerns about potential missteps.
• 😀 The Cannabis market faces challenges from the black market until law enforcement steps in, hindering the growth of legal businesses.
• 🧑‍💻 A correction in the market, primarily targeting tech stocks, is anticipated, with a potential 10-12% sell-off. However, the timing of the correction remains uncertain.

Questions & Answers

Q: Has tech sentiment reached a level where it's time to sell and move into other sectors like healthcare and staples?

Dillian believes that a rotation out of tech into other sectors, especially energy, is likely to occur. He points to the inverse relationship between energy and tech stocks and the frustration of conservative hedge fund managers who have been waiting for this trade to work.

Q: Why do people hate this market rally so much?

Despite the market rally, many investors remain bearish due to a variety of factors, including concerns about lower earnings against high valuations. Dillian also mentions the phenomenon of latecomers piling into the market, which often precedes a correction.

Q: Is there a risk of a hard or steep correction in the market?

Dillian believes that a 10-12% correction is possible, primarily targeting the tech sector. However, he also notes that a more significant correction would depend on factors such as a much more hawkish stance from the Federal Reserve or a widespread economic slowdown.

Q: What sectors do you like in anticipation of the rotation out of tech?

Besides energy, Dillian mentions the potential for a bullish outcome in the Argentina market. He believes that regardless of the election outcome, dollarization is likely to occur, which would benefit the country.

Summary & Key Takeaways

• Jared Dillian, editor of the Daily Dirt Nap newsletter, predicts a correction in the market with a potential 10-12% sell-off, primarily concentrated in the tech sector.

• Dillian highlights the dominance of tech stocks in the S&P 500, suggesting that a rotation out of tech will bring down the index.

• He also discusses the misallocations of capital caused by negative real rates and the potential for a correction to shake out late longs and restore technical health to the trend.