The Weekend Edition is pulled from the daily Stansberry Digest.
Is the 'Great Rotation' Already Coming to a Close? By Corey McLaughlin
 Some are calling it the "Great Rotation"...
I wrote about the idea of "rotation" earlier this week. Small-cap stocks and industrials had soared over the past week or so – though that trend paused on Wednesday – and mega-cap stocks sold off, including popular names like Nvidia (NVDA). The small-cap Russell 2000 Index was up more than 10% since July 9 through Wednesday. Meanwhile, the Dow Jones Industrial Average was hitting new all-time highs. But since July 10, the tech-heavy Nasdaq Composite Index was down more than 3% and the benchmark S&P 500 Index was down a little more than 1%. Even by rough math, it looked like a textbook "rotation." MarketWatch shared the following commentary Wednesday morning... Andy Constan, who runs the macroeconomic and commodity research firm Damped Spring, points out over the last five trading sessions, the Magnificent Seven market cap dropped by $349 billion, while the Russell 2000 rose by $324 billion. That's representative of capital moving around the market, not out of it. And as the so-called "Godfather of Technical Analysis," Wall Street veteran Ralph Acampora, has famously said, this kind of action – money flowing around the market among different sectors and styles but not out of it in a panic – is the "lifeblood of a bull market." But now it appears that "everybody knows" – a phrase that our colleague Dan Ferris often talks about. When "everybody knows" one thing, it's time to think differently. That story is already priced into the market... And it looks like everyone knows about this rotation now. On Thursday, "everything" sold off, including small-caps and industrials. What's going on? Today, I break down the latest market action. I'll discuss what led to this "Great Rotation," and then shift gears to examine the pause we're seeing in the AI trend...
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The same headline writers and mainstream analysts who were quick to pick up on the phrase "Magnificent Seven" to describe the big-tech market leaders last year are now using the term "Great Rotation" to describe the trading action lately... The catalyst for this rotation has been the rising odds of a Federal Reserve rate cut coming in September. Just a few weeks ago, many investors didn't consider a rate cut a certainty. But Fed Chair Jerome Powell started laying breadcrumbs on July 2. And last week's consumer price index report for June included a "whiff of deflation"... which ratcheted up expectations for a rate cut as soon as September. More comments from Powell this week have only reinforced the idea of a rate cut. A possible rate cut is just about fully baked into the market now, with federal-funds futures traders putting almost 94% odds on it, compared with 70% a week ago and 57% a month ago. So traders and investors are taking gains in tech and putting money to work in beaten-down, capital-intensive, and rate-sensitive small-cap businesses, which could get a boost from an easier monetary environment. That makes me wonder... Is the suddenly popular "Great Rotation" closer to its end than the beginning now that "everybody knows" about it? Perhaps. Small caps have been trending higher, with volatility, since late last year. But time will tell if the clock has struck midnight on this latest move. Shifting gears, interest-rate-sensitive sectors and the AI megatrend took a breather earlier this week... Biotech stocks and other interest-rate-sensitive sectors that have been on the move, like homebuilders, were down on Wednesday. For example, the iShares U.S. Home Construction Fund (ITB), which rose 11% last week, was down about 2%. The AI megatrend is also taking a breather... thanks to politics, in part. Former President Donald Trump laid his cards on the table about an important piece of the AI story... a geopolitical hot spot in the South China Sea. Trump said in an interview with Bloomberg Businessweek published Tuesday that Taiwan – home to key microchip maker Taiwan Semiconductor Manufacturing (TSM), which makes chips designed by Nvidia – "should pay us for defense." That idea raises questions about Taiwan's future security should Trump win the White House in November. The mainland Chinese government, across the Taiwan Strait, considers Taiwan its territory, but the democratic island nation has disputed that claim since the Chinese Civil War decades ago. Concerns about a potential Chinese invasion of Taiwan, and U.S. involvement in a conflict, have grown over the past few years, as China has built up its naval capabilities. And now the market is thinking about potential Trump policies again. Shares of TSM dropped more than 7% on Wednesday given a fresh round of uncertainty. Nvidia shares fell more than 6%. If anyone needed an excuse to "rotate" out of these popular chip stocks, they found it this week. Is it time to panic about AI? Good question. In fact, our friends over at our corporate affiliate Altimetry have a few urgent thoughts on the matter that they just shared with the public. Altimetry founder Joel Litman sat down to host what he called the "AI Panic Summit." Joel shared everything he thinks you need to know about the AI sector right now and what you should pay careful attention to moving ahead. If you missed this event, don't worry. You can watch a replay of the conversation right here. All the best, Corey McLaughlin
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