The July Dip Paid Off, September Sets Up the Next One
Clients told to buy the July dip should have seen a strong bounce from July to now. Going into September, the outlook turns cautious after a strong rally off the lows. Several factors point to more volatility: the war, a new Fed, inflation likely reaccelerating in September a week before the Fed meeting, a midterm election year, and weak September seasonality. The market should trend down in September and give another buyable dip.
The new Fed has boxed itself in with the 2% inflation target it doubled down on over the last two meetings. Going into a third meeting, it may tighten in the form of the balance sheet. The dip will be buyable because the economy should reaccelerate in the latter part of this year and earnings should stay strong. This is a short-term tactical call.
How Deep and When to Buy
The pullback should not exceed 5 to 7% on the S&P 500, with 7% likely the deepest. The plan is to buy a little each week on down weeks through September. Toward the end of September and start of October, fears of worse inflation and Fed hawkishness should peak in sentiment. That is likely when the market bottoms and starts the expected year-end rally.
What to Buy
Target the areas that take the biggest hit. The tech trade will fall hardest on an inflation scare or a rise in yields, and that is where exposure should increase since the position is currently underweight.
Gold - Very bullish. Bought a little more today. On days when yields spike and the dollar rises, gold drops, creating buy points. Plan to buy in steps over the next few weeks. The dollar should stay weak for the foreseeable future, which supports gold upside.
Micron (MU) - Liked on the memory side, still well off its highs, likely to take a hit in September.
Marvell (MRVL) - Favored over Nvidia (NVDA) on the semis for more upside, though with more volatility. Nvidia has beaten expectations for years and is now a very large-cap, top name in the market, so its moves up and down should be smaller than Marvell's.
CrowdStrike (CRWD) - Still liked among cybersecurity and software names, showing tech is more than just semis.
Marvell vs Nvidia Into Earnings
Both report within about 25 hours. Marvell is preferred for the greater upside. The problem semis face this earnings cycle is that expectations are already so high it will be hard to beat or surprise to the upside. That is why the dips over the next three to six weeks are opportunities - the pendulum should swing back in favor of semis in the fourth quarter and first quarter next year.
Healthcare
Holdings include XLV and Eli Lilly (LLY). Healthcare has been a strong place to be. It stands to benefit heavily from AI, which is starting to show. The sector may be turning so it stays strong even as a defensive sector, with possible accelerated growth over the next 12 months. There is no plan to sell healthcare when the market shifts to a more risk-on environment.
Eli Lilly (LLY) - A GLP-1 obesity drug play. The company is accelerating growth and expanding globally. The obesity problem in the country should keep demand accelerating, a lasting tailwind. Supply and demand dynamics are very favorable. The biggest risk is healthcare reform that changes reimbursement, which would hurt the stock and force a change in the position. Other recent healthcare drivers, like Moderna (MRNA) and Revolution Medicines (RVMD), are more tied to oncology.
The Trade Outside of AI
A top client question is whether any trade exists outside AI, since industrials, materials, and even financials have all become AI-adjacent trades, with financials funding much of it. The answer: yes, and it is flying under the radar. Over the last couple of months the equal-weight index (RSP) has outperformed on a relative basis by a wide margin.
The setup is a Goldilocks scenario with an economic productivity boom, which lets strategy broaden out. Financials should be a strong place to be, along with industrials and more of the equal-weight side. For these areas the earnings bar is not set high, making beats easier over the next two quarters. That low bar is also why small caps keep doing well. There is exposure to these areas, and no change is planned, because this becomes a broad-based story once the market clears the September seasonality and midterm election season.
