VIDEO: How This Market Breather Might Spiral into a Bigger Tradeoff

In today’s Daily Rundown video, Chris Versace shares why the market is taking a breather today, what we’re watching that could signal a more meaningful retrenchment ahead and how we’re preparing for that possibility. 

Chris also reviews today’s portfolio trimmings in Elastic ESTC and Dutch Bros BROS shares. And he discusses Amazon’s AMZN record holiday weekend shopping figures and breaks down one Wall Street firm’s new price targets for two holdings.

Transcript

CHRIS VERSACE: Hey, friends. Chris Versace here. December 3. I hate to say it, but after the market set some new highs, both for the S&P 500 and the NASDAQ composite last night, capping a very, very strong run since the start of November, we are seeing a little bit of a lull in the market today.

And in our comments to you this morning, we did note the conditions of the market. It being short term overbought according to the short term S&P 500 oscillator as well as a number of other indicators that confirm that, yeah, there is some froth, some heaviness in the market. We did share that we would not be surprised if we saw some short term focused folks take some profits in the next day or two.

You have to remember, to our concern that the market might once again be just a little bit ahead of itself. Technically, the market is not overbought, whether it's the S&P 500 or the NASDAQ. The relative strength index or RSI levels are not over 70, they're still somewhat away from that level, even though they've been moving towards it over the last several trading sessions.

So we do have some data coming really with tomorrow's ADP employment change report, the ISM services PMI for November, all the way through Friday's November employment report, and then even next week's November CPI and PPI data that could lead the market to rethink the expectations for a December rate cut. In our morning comments, we laid all that out to you.

The concern and really the question that we're asking is does the Fed need to deliver another rate cut after delivering a cumulative 75 basis points in cuts between its last two meetings when the economy is simply humming along? The latest Atlanta Fed GDP now model pegs at around 3.2% for the quarter. But again, that's a rolling forecast, which means as we get more of this data this week, next week, it will be revised.

If the data, particularly, the November ISM services PMI is strong, shows that part of the economy can just remains vibrant. And it leads the Atlanta Fed GDP now model to be revised higher. I would argue that the odds that the Fed needs to deliver a rate cut in December will come down. It's that recalibration of expectations that I think could set the market up for a short term retrenchment.

That's the way I would think. I don't think we would see a correction. We are in a seasonally strong time of the year for the market. December tends to be one of the best months, but that doesn't mean that there won't be some days of softness during December.

So we have to be vigilant, we have to continue to watch the data. That is something we will continue to do. We will also continue to be prudent investors, you know us to be that. For that reason, we use the severely overbought status for elastic and Dutch pro shares to dial back the positions exposure in the overall portfolio, locking in another slice of very profitable gains.

We are crediting that back to cash in the short term. And if we do see this market lull become something just slightly more, we will have some additional firepower to put to work. I suspect that we will be revisiting the bullpen over the next couple of days, kicking some things out, potentially bringing some things in with our eye towards 2025.

But I also want to talk about some other things with you. Yes, after the close, we do have Marvell reporting, we shared our thoughts with you yesterday. All in all, it should be a very positive report, and the outlook that we'll be looking for should be one of continued AI in data center chip strength, as well as the continued rebound in the company's enterprise networking and communication, excuse me, infrastructure business.

Our thought remains, I know I've shared it. You're probably sick of hearing me say it, but it's important to report that we continue to see those two businesses rebounding as AI adoption continues to drive digital network and digital infrastructure capacity tightness. That means we should see better capital spending levels in 2025 for those types of equipment.

I also want to touch quickly on Amazon. Yes, we came out and we heard today that Cyber Monday was a $13 billion day, extremely strong. And when we cap it with all the shopping between Black Friday and Cyber Monday, a lot of wallets were open. Amazon, you know that we expected them to benefit from the shift to digital shopping, as well as shoppers looking to maximize their spending dollars.

Well, they came out and they said that the November through December 2, sorry, November 21 through December 2 this year was its biggest ever compared to the same 12-day shopping period ending Cyber Monday in prior years. Now, that means that some folks are probably going to revisit their forecast, revisit their expectations. Odds are, we're likely to see some folks across Wall Street take that learning and bump up their price targets closer to our 240 price target.

That's right, our price target of 240 is currently above the current market consensus price target of 230. So I suspect we'll be hearing some positive developments on Wall Street price targets for Amazon shares based on what we see and based on what we hear from Marvell tonight. Because remember, Marvell is working with Amazon on proprietary chips for AI and data center. Based on what we hear, we will look to revisit our Amazon price target as needed.

Quickly shifting gears to Applied Materials. Yesterday, the White House announced incrementally tighter chip export controls, mainly to China. But after reviewing the changes, Applied sees no reason to change its prior guidance.

Now, on the one hand, we continue to see chip industry capacity tightening. We've talked about this, but again, it bears repeating. When we look at the demand for AI, data center chips, the rebound in the PC market, the smartphone market, and the adoption of industrial IoT, I would not be surprised to see the need for further incremental capital spending on chip equipment into 2025, possibly beyond.

Remember that TSM has already said that they were going to spend more in the fourth quarter than they previously expected, and odds are they would see even higher capital spending in 2025. That's a very positive sign there. But we have to remember, too, that we will finally start to see the reshoring dollars, both in the US and in Europe and elsewhere, really start to kick in the coming quarters.

So all of that keeps us long term bullish on Applied Materials. But I will say this that, yes, the chip export controls were tightened. We will have to revisit the trade situation once, excuse me, President Trump rolls into office as it relates to tech and tech related equipment. We just have to be mindful of it and we will revisit that as needed.

Finally, on another positive note, we are seeing some price target movements higher for the shares of Morgan Stanley and Bank of America shares. Firm Keefe, Bruyette, upped its Morgan Stanley price target to 138 from 121, and Bank of America to 57 from 50. Now, I would argue that some of that's a little bit of ketchup on the firm's part. But as we've discussed even as recently as last week, that we are going to let the IPO and M&A activity be our guide when it comes to our Morgan Stanley and Bank of America price targets.

So as that activity picks up, which is something we do expect will happen, you can rest assured that we will revisit our price targets on both Morgan Stanley and Bank of America shares as needed, as warranted, based on the robustness of that activity. With that in mind, my friends, we do have, as I said, Marvell's earnings after the close today. So we've got some other things that we want to share with you as well today.

So please continue to check your emails, check your alerts. If we make any moves with the portfolio, we want to make sure that you are right there with us. Thanks for watching.

At the time of publication, TheStreet Pro Portfolio was long ESTC, BROS and AMZN.