Closing Bell - Closing Bell 7/20/23

Episode Date: July 20, 2023

From the open to the close, “Closing Bell” and “Closing Bell: Overtime” have you covered. From what’s driving market moves to how investors are reacting, Scott Wapner, Jon Fortt, Morgan Brennan and Michael Santoli guide listeners through each trading session and bring to you some of the biggest names in business.

Welcome to Closing Bell. I'm Scott Wapner, Post 9 here at the New York Stock Exchange. This make or break hour begins with the surging Dow heading for its ninth day in a row of gains. It raises the question now of whether sectors that were lagging will soon be leading. We'll ask Ed Yardeni in just a moment. He remains bullish on the market and he is here at Post 9 at the New York Stock Exchange. In the meantime, your scorecard with 60 minutes to go in regulation, health care, energy, industrials among the best areas today. Names like J&J, IBM, Boeing and the banks leading the Dow's continued rise. There you go, green across the board there.

Down day for the Nasdaq, Tesla, Netflix. A midday miss from SAP dragging tech a bit. There's SAP, the bottom of your screen, down near 7%. We are near the highest levels across the board still, though, on the major averages since early 2022. And it takes us to our talk of the tape, the rally itself, and why Ed Yardeni says it has staying power. He joins me, as I said, here at the Stock Exchange. Welcome back. It's been a minute since before COVID, you said, since you've been in the building. I think so, yes.

Well, it's good to have you here in person. My pleasure, indeed. So why do you think this has staying power? Well, I think that we're not going to have a recession. We've had sort of a rolling recession hitting different industries at different times. We've talked about it before. I think it's going to roll into the commercial real estate market, but I don't think that's going to take the economy down.

Meanwhile, the consumers, they're starting to see their wages going up in real terms, inflation adjusted. We'll see how the strikes pan out. But all in all, the outlook for real wages is really quite good for the consumer. All right. So let's talk valuation. Sure. Tell me why the valuation now in the S&P, which is above its historical average, makes sense. Well, the historical average is 15, right, for just about every measure of macro valuation.

Where are we at now? Like 19, right? We're at 19 and a half. Okay. And of that, something like the mega cap eight stocks, which account for now 27% of the S&P 500, they've got a multiple of 30. So they got down to 20. Now they're at 30. People are willing to pay for those kind of companies.

And they're not going away. These are not the kind of stocks that kind of imploded in the tech wreck of 1999, 2000. These are real companies that are making a lot of money. And so I think they're going to remain large. And so I think we have to account for that in the valuation calculations. So when someone says the market's just too rich overall relative to where earnings are and relative to where the economy is, yes, the economy hasn't rolled into a recession, as you said, but nonetheless, when someone says that,

what's your pushback? Well, my pushback is that the market doesn't discount where earnings are today. It's discounts where earnings will be over the next 12 months. And the analysts are already giving us estimates for next year. The market is starting to look a year ahead. And so much depends on the economy.

I think the economy is going to be such that earnings this year will be 225. And, you know, there's a lot lower numbers for this year out there. And then I think next year is 250. And the year after that, I think it's 270. So I could just on those numbers with a valuation multiple, if you'll excuse me, giving you 20 instead of 15, taking account of the mega cap eight impact, then I think we could see the market continue to move higher. Some people would suggest it's just too early to sound the all clear. And you have some very lofty earnings projections.

Those are big. Yeah, I'm not sounding all clear. I'm not saying there aren't any risks. I think, I guess I'm in the same camp as the Goldman economists are. We're talking about 75% likelihood that we'll not have a recession and 25% risk of a recession.

So we're not, you know, I don't think any of the recession forecasters, any of the no recession forecasters are predicting that it's not going to happen at all. So I'm on I'm on the watch out for it. But it's like a de facto all clear in some respects. If you think that earnings are really going to be that high, you can't have one without the other. No, I know. Look, basically, I started giving the all clear in late October of last year. I thought that October 12th was the low. We've had a great rally since then. But that was then. And as you said, this is now. And as we look forward here, my opinion is that the economy

is going to do surprisingly well. And so we're learning. So today is a good kind of example of the broadening of the market a bit. Obviously, tech is pulling back a bit today, and you've had these lagging sectors do well of late. Things like transports are at highs. The banks have finally woken up in some of those more cyclical areas. Is that staying power there, do you think? Yeah. Is the catch-up trade going to work?

Well, I think it reflects the underlying fundamentals. I'm a fundamentalist. I do realize that some of the technicals are looking as though the market needs a correction. But from a fundamental perspective, the financials are doing well because we had a financial crisis in March and that dissipated pretty quickly. The Fed dealt with it and the banks are reporting decent earnings. Then with regards to the industrials, this is the first time we've ever really had fiscal stimulus before a recession, which is one of the reasons we're not getting a

recession. Usually fiscal stimulus cuts taxes or increased spending after the recession has already occurred. This time around, there's so much spending coming from the government, and a lot of that is going to benefit the infrastructure companies. So it's different this time? Well, I think fiscal policy is different this time. I think just empirically, it's amazing to see the Fed funds rate up 500 basis points and the economy is still doing well. I mean, even I can see that.

But then again, the economy has been resilient and I think it remains resilient. I guess in other words, when I suggest that, you know, or ask you if it's different this time, meaning you are at such a level of strength and stimulus going in that maybe it was different on the front and it's different in the back. It could be. It definitely could be. I mean, there's still, I mean, Jamie Dimon's still talking about when consumers run out of excess savings that the consumer is going to retrench. And if the consumer retrenches, then we're going to have an economy-wide recession.

So I'm very aware of that. I think we're all aware of that. But I don't think that's going to take the economy down. But you also must not think it's going to happen. You can be aware of it. But, I mean, if two-thirds of the economy rolls, then you've got a problem. Yeah, exactly. I think there's offsets. And I think the offsets is the labor market remains tight. I think that wages are going to continue to rise faster than prices. And baby boomers like myself, 75 billion of us put together net worth of $75 trillion.

And a lot of my friends are retiring. I'm not. But what do they do all day? They spend money. So there's a lot of that going on. So what do you make of what's taken place in tech that make you any any any bit nervous about you think those valuations are justified? Well, the multiple expansion we've seen there. You know, I started out the decade talking about the 2020s as being the roaring 2020s. And it didn't take very long for that to look totally delusional.

We had the pandemic. We had, you know, the economy getting hit and doing better. I'm feeling pretty good about that outlook for the rest of the decade. I think technology is going to make a huge difference to productivity. Technology solves problems. And the biggest problem we have now is a labor shortage. And I think it'll solve that problem. Productivity increases. That's good for profit margins. It's good for real wages. It's a win-win situation. So if we can get, you said you think the S&P can see 5,400 by the end of next year. Next year.

And 5,800 by the end of 25. Right. And you think it's technology that's going to drive it towards those lofty numbers? I think technology will be part of the story. But I think every company has to become a technology company. In other words, even if they don't make the technology, they have to use the technology to improve the efficiency of what they do. And so I think technology becomes a very big factor for the economy overall.

Is there an area of the market you just don't like at all? Well, you know, at this point, I'm not too crazy about consumer staples because I think the economy is doing better and they're not exactly cheap. Utilities are basically bond surrogates and so I can't get too excited about them because I think bonds are just going to stay here for a long time. But health care has been an underperformer. Yeah, it sure has. Yeah, I think it's due for a bit of a run. Financials have been underperformers. They're due for a run.

So I think it's going to broaden out. All right. Let's bring in Stephanie Link, CNBC contributor of Hightower, to join the conversation. You heard, Steph, it's nice to see what Ed had to say here, that this has staying power. You agree? I do. I actually agree with Ed on almost everything he just said. You were just talking about the consumer. And we can cite a lot of the various government data that we get.

But I'm going to tell you the company's data and the company commentary, especially the banks, suggest that the consumer is just fine. You heard Synchrony Financial talk about how strong the consumer is, and they're vulnerable given their mix. You had PNC just yesterday saying the same thing. You have J.P. Morgan grew credit card loans at 18 percent. You had Wells Fargo grow credit card loans at 18 percent. You had Wells Fargo grow credit card loans of 13 percent. Both of them talked about not only the consumer being strong, but small and medium-sized businesses. So I'm going to listen to what the companies have to say. And then I look at the Fed's financial accounts in the first quarter, as of the first quarter, plus the current asset

prices. And the household sector wealth is at $157 trillion. There's a lot of tailwinds to the consumer. And Ed hit it perfectly on the job market. Initial claims today is far from recessionary and really very strong with a lot of momentum. So the consumer we talk a lot about, because you said it before, two-thirds of our economy is a consumer. So we're rooting for them. I also think the manufacturing side of the economy is bottoming. I think the PMIs are kind of basing. And I think even the regional data, it's kind of it's kind of still stinks, but it's getting less bad. And so I do think that the reshoring, unshoring theme and electrification theme and energy transition theme are very much tailwinds from the manufacturing sector over the long term

you mentioned positive commentary and what the companies are saying and that's what you're listening to but what about what sap had to say today as they lower their cloud revenue forecast because of slowing demand and it's taken a lot of the cloud software names down and these stocks along with chip stocks and some of the other areas of tech outside of the Magnificent Seven, have done incredibly well. Some might argue a little too well. They have done too well. You know I'm underweight, the group. But there are pockets within technology that are still very attractive.

I don't think AI is a flash in the pan. McKinsey has a $4.4 trillion total addressable market by 2030 for AI. So maybe the AI stocks are ahead of themselves, but that's going to be a great theme. Cloud is not going away anywhere. I know you may want to talk about IBM, but Red Hat grew 11% in the quarter for IBM. That's very nice growth. It might be slowing from the mid-teens that we saw, but it's still very healthy. And it's a trillion-dollar total addressable market by the end of the decade. And we talk about cybersecurity all the time. And that's probably

my favorite sector, subsector within tech. Those stocks are not cheap by any means, but that doesn't mean you have to buy them here. You wait if you see if you get a pullback because the growth at the end of the day is so substantial. Ed, why aren't we more worried about what's happening or maybe better said not happening over in China? It used to be that, you know, China catches a cold, the world gets sick. Now, China's recovery hasn't been anything close to what people expected it would be. I mean, in part, commodities and some of the weakness there have been reflective of that. Why doesn't the market care? Well, I think what the market is focusing on is that China's economic weakness

is translated into deflationary prices over there. The PPI is down like 5% on a year-over-year basis. The CPI is zero. And there's actually a pretty decent correlation between the PPI in China and the PPI in the United States. And I think we saw a surprisingly low inflation rate for the PPI in the latest numbers. So a slower Chinese economy has kept the lid on inflation on a global basis in terms of copper prices, in terms of oil prices. And the market is focusing right now on inflation and better than expected news in that regard is better than expected news. Yeah, I guess inflation

news better than expected trumps almost everything now. But, Steph, you bought more Las Vegas Sands this morning. This is sort of one of those in the wheelhouse of China fears, worries about Macau and what's happening there or not. Yeah, and Las Vegas Sands is really more the consumer and Macau. And Macau is just about to hit its stride. They grew market share 30% in the quarter, and yet they had 13% of their rooms are out of service, and you only had 50% of airport volume.

So just imagine when those things actually improve. And Macau GGR, gross gaming revenues, is up 97% from 2019, but I think that you're still going to see material upside as you have kind of their economy on the consumer side normalized. Now back on just overall China, I will tell you I own Freeport-McMoran and they actually said on the conference call today that China, their results in China are a lot stronger than what the headlines and what the commentary is out from, you know, coming out other parts, other data, other data points. So I thought that that was kind of an interesting comment from them.

We haven't heard that yet. Let's wait until we get some of the industrial companies to hear what they have to say about China. But, you know, I'm in the camp. I like China. I like the reopening. But it's the consumer side that I like. Yeah. Ed, I'm looking at, you know know areas of the market that have been doing well

All right, let's say in the last month which are more tied To our economy here right things like small caps Russell 2000 is up 5.3 percent in one month Financials the XLF is up near 7% These trades, what do you think about? They make a lot of sense. Small caps, mid caps, things that are more economically sensitive, generally lead you in on the way down, lead you out on the way back. Well, usually the mid caps, the small and mid cap stocks do quite badly when investors are worried about a recession. Now, as people are getting more comfortable that maybe that's just not going to happen, we're seeing them starting to outperform.

And we were talking about valuation before. They're very cheap compared to the S&P 500. And we're talking about 13, 14 forward PEs. And so there are definitely opportunities there, but they're moving. They're moving fast. The industrial small cap, mid caps are at all-time record highs. Steph, do you think the banks have bottomed these bank stocks? Because the stock reaction has been, I think, quite interesting. You know, the last few quarters

that these companies have reported, the stocks have not performed all that well. And now even with results that in some cases would be deemed mixed, the stocks have largely reacted well. Yeah, well, I mean, the expectations were really low. The sector has has lagged all year, pretty much. The valuations, some come some of these big banks. I mean, they got below book value. I mean, Bank of America, point nine times book, even JP Morgan, one point five times book. It's usually over two times book. So the valuations have come down substantially. Capital levels are very strong and they're going to continue to benefit from net interest income being higher because of the yield curve. Net interest margins are going to

hurt, but I think they're more than offsetting that with the higher NII net interest income. Expenses are coming down. And oh, by the way, I think we talked about this on Halftime the other day. Morgan Stanley, CEO, talking about investment banking capital markets having already bottomed four to six weeks ago. If you really believe that and you know I do, then you want to own the capital markets exposed banks. Morgan Stanley, Goldman Sachs. Look at Goldman Sachs. Terrible quarter. The stock's up since then.

Look at even Bank of America. They're gaining market share. So, yeah, I think there are certain pockets within financials that have bottomed or at the very least have more upside to go from here. We've kind of, I'll give you the last word, we've kind of written off the Fed as a risk. The market doesn't really seem to care. It assumes that in a week or so, the Fed's going to raise again. And even if it goes in September, the market doesn't seem all that concerned. Is that the biggest risk, underestimating what still might happen with policy? I see your point, but I don't necessarily, I'm not particularly concerned that the Fed's suddenly going to become a big issue for the market. I think the market has seen, as I said, the 500 basis point increase in the Fed funds

rate and the economy is resilient. Another 50 basis points isn't going to make much of a difference to the overall economy. We'll leave it there. It's good to see you back in person. Thank you. That's Edgar Denny. Steph, you'll be joining us a little later in the Market Zone as well. We look forward to that.

That's Stephanie Link. Let's get to our Twitter question of the day. Which lagging sector of the market is about to have a big catch-up trade? Is it health care, energy, or financials? Head to at CNBC closing bell on Twitter to vote. We've got the results coming a little later on in our, you know, we're just getting started, though. Up next, the drop in Tesla shares, dragging down the Nasdaq 100 as comments from the company's earnings call overshadow record revenue. But EMJ's Eric Jackson is staying bullish. He joins us to make his case for sticking with that stock. Why the bears have

it all wrong. He also owns Netflix. We'll find out if he's doing anything with that position. Shares are down today more than 8 percent to drag on the Nas. We're live from the New York Stock Exchange. You're watching Closing Bell on CNBC. We're back. Tesla and Netflix dragging the Nasdaq down in today's session. Both stocks down more than 8 percent post earnings. There's your look right there. Tesla's down 10 percent right now. My next guest who owns both names says he is still bullish on both stocks and tech overall. Let's bring in EMJ's Eric Jackson, EMJ Capital. It's good to see you again. Welcome. Hey, you too, Scott. So let's take Tesla. Your reaction to

a stock that's down 10 percent? Stocks had an enormous run. You know, I, my AI and ML driven model got long Tesla back in early May and 168. The stock touched 300, I think, a day or two ago. We've given something back here today, but we're basically back to what, beginning of the week or the end of last week. So I think it's a blip. Same thing with Netflix. Both conference calls were really strong. Things are heading in the right direction. Both were better than fear.

And in my opinion, the key metrics for both companies are moving in the right direction. So you don't care about a lack of or at least the fact that Musk seems intent on putting growth over profitability at this particular time. That doesn't bother you at all. He's he's playing from a position of strength. And so, you know, all the bears on Tesla all year have been decrying how these price cuts are a sign that nobody wants these cars anymore and that the bottom is going to fall out and gross margins are going to go through the floor. We got better than feared gross margins at 18.1%. I'd like to see the gross margins of Ford and GM for their electric vehicles after Ford's just done the first of probably many price cuts to their lightning machine. You know, the fixed

cost or the labor cost that Tesla operates at compared to the U.S. competitors, there's no contest. Elon knows that, and he's taking advantage of that. He's going to build market share over these next few years. And what are the Fords and the GMs of the world going to do in comparison? They're going to lose a lot of money. So you, and you, in terms of Netflix, so you own Netflix? Yes. As of when? Netflix as of a couple of weeks ago. And what made you buy it a couple of weeks ago? Well, again, Scott, right now, since June the 1st, I switched over to a two-year in development AI and ML-driven model as the basis for identifying when to get in stocks, when to get out of them.

And Tesla was one I got into right off the bat on June 1st, and it's done tremendously well. Netflix was one that came on kind of version two, version three of tweets in the model. It's also done really well. The model got long hit at $331 in early May, but I bought it into the fund a couple of weeks ago. It's one of the larger cap tech stocks that I think still has a lot of room to run. They've proven, and it'll be interesting to see once we can compare them to the Disney results and the Warner Brothers results in a couple of weeks, just how well they're doing. I think they're their the clocks of the competitors they're actually making a ton of money from streaming remember when that was sort of a you know a far-flung idea they're doing it free cash flow

this quarter was prodigious so when i look at other mega cap names because you haven't exactly been a mega cap kind of guy right i mean you've owned a lot of the other higher multiple growth names. You told our producers that you like Meta, which reports earnings obviously next week. Do you own Meta? Yes. When did you buy that? Same time as Netflix, a couple of weeks ago. And because of the model telling you that, because the stock has had a huge run up before a couple of weeks ago. Yeah, it has. And, you know, I wish I'd been trading the model since December. The model got long Facebook or Meta on December 23rd at 118 and has been long since.

You know, but I'm on version three of the model. You know, I found that what works best in the portfolio is having a combination of the smaller speculative, some would say profitless tech companies along with the big tech stalwarts. And I am trusting in the back-tested data that I've seen. Meta, Netflix, NVIDIA, Tesla, those are the large-cap names that I like the most. But I've got a ton of the smaller speculative stuff. Obviously, the big winner since I was on last time with you has been Carvana. I bought it for $15 June the 1st. It was $50 yesterday. It's down today, but that's part of the course with Carvana.

But see, here's what I don't understand. If you bought Carvana based on your model, the model doesn't know that Carvana is going to restructure the debt and the stock's going to go up 35%. I mean, an algorithm doesn't know anything about that. So can you explain this to me through my obvious skepticism? I'm not omniscient and neither is the model. You're absolutely right, Scott. The question is, can a machine that a human builds actually be smarter and hold a bunch of variables in its head at the same time and make more helpful suggestions about when to get in, when to get long, when to get short, certain names,

than a discretionary, long, short, human hedge fund manager. I think it's the latter. Obviously, there are a lot of people out there in the world with models. A lot of ivory tower academics who create models that work great in theory and don't work great in practice. But the model has to prove itself. But all the backtesting that I've done over the last two years it's been, building the model, validating it, have shown me that this is the way of the future.

And this is the way that I want to have my investors' money invested along with my own. So it's sort of like a chairlift guy who used to take people up on his back walking up the side of the mountain. Then he decides that he wants to design a chairlift guy who used to take people up on his back, walking up the side of the mountain. Then he decides that he wants to design a chairlift to take people. He doesn't just build the chairlift and then sort of walk away. He's got to stay involved. He's got to watch the chairlift every day, make sure that the thing's not cracking and breaking. I'm still involved. It's not a Jesus take the wheel moment here with the model. I'm going to continue to tweak it. So AI is going to continue to get better. A couple of years from now, we'll be on version 10 instead of version one. But the results have been great so far. I know, but when you get on the chairlift, you're guaranteed to go to the top of the mountain. It doesn't all of a sudden reverse

and take you in the opposite direction. Is the model ever wrong? I mean, explain that. Absolutely. Yeah, the hit rate is only 53 percent. So the model is wrong a lot. And some would say, well, isn't that just better than a coin flip, Eric? Well, I'd say, you know, Warren Buffett said the best money managers in the world are right 50 percent of the time only. So 53 percent is great. The trick with the 53 percent is that the winning trades, so the Carvanhas of the world, when you do get into them, and the model got in at $11.85 on May the 7th. I got in when I started live trading it on June 1st at $15.30. It's had a huge run. The winners more than make up for all the losses. So if you're operating at a 53% hit rate,

you can do extremely well compounding over time. So there will be lots of busted trades, no doubt. But I'm betting that over time, this thing will work well in good markets and in bad markets. Well, see, Carvana is a good example. Can we throw that back up, guys, please, just on the one month? Because as I just think I saw it correctly, the stock's up like almost a double in a month, right?

Yeah, there is 93 and a half percent. Now, being the human side of what you do would maybe look at that and say, in terms of risk management that a model can't tell a human brain necessarily to do or override that, why wouldn't you look at that and say, you know what, this is an unbelievable gain in an incredibly short period of time. I'm gone. Right. Well, the last time I was on with you, they had come out and pre-announced that they were going to be more profitable in the quarter than they expected. And the stock that day, this was in early June, was up 61%. I was feeling great about myself. I went the next day.

The stock was down 28% on the day. And I got all these calls from some of my investors who had seen me the day before with you talking about it on CNBC. And they were saying, what does the model say? Are you going to sell it? Are you going to take your profits? That's when the stock had gone to $21 and pulled back to $18 or something like that. We looked at the model, and I'm not going to get into the secret sauce of it, but basically we find the patterns of all 300 top global tech stocks and what are the patterns that matter individually most for that stock.

So what's different for Carvana is different from Tesla or different from Meta. And in the model that we were looking at for Carvana, it said over the last six and a half, seven years, it was better to hold the line and stick with the low long position, even though I gave up 28% gain in one day. And what happened? The next day, you know, the next week, you know, the thing stabilized and it's gone from 18 bucks to, you know, I think it was 60 bucks in the after hours last night. So I'm going to trust, you know, the data. I guess if you don't want to say trust the machine, Scott, trust the data, trust,

you know, what has worked with a stock like Carvana in the past. I can't hold it in my mind as a human for that and 300 other stocks. But with the help of AI and machine learning, I can do a much better job, you know, populating the portfolio. All right. We're going to leave it there. Eric, thank you. We'll talk to you soon. That's Eric Jackson, EMJ Capital, joining us straight ahead. The semis coming under some pressure today. And that's after a warning shot from one big player in the space about a deepening slowdown in the second half. We have the details, and whether that cautious commentary

could put a pause on the chip surge, we'll do that when Closing Bell comes right back. Welcome back to Closing Bell. A profit miss, cautious guidance as well from Taiwan Semi sending the chip stocks lower today. Christina Partinello is following that, joining us now with a look at that space. Christina? Well, Scott, it seems like the AI hype can only go so far.

That's the message from TSMC management on their earnings call. Why is that? Because AI only contributes 6% of total TSMC revenue. Yes, it's expected to grow double digits in five years, but it's still not growing fast enough to offset the weakness in smartphones and PCs, which is a much bigger percentage of industry revenue. The stock you can see on your screen right now selling off down almost 5% is bringing the SMH lower. Equipment names like we're seeing applied material, all of

those getting hit hard because TSMC reiterated its CapEx spend at the low end of the range. Spending less means less revenue for equipment makers, which is why you're seeing a lot of them lower. Deutsche Bank points out that TSMC's delays with its Arizona fab will be a short-term negative also for these names. So there could be some pressure in the coming months. There's debate right now on whether now is the time to buy the dip for TSMC, especially if demand for electronics continues to be weak in the second half. Morgan Stanley and Mizuho say bye since TSMC is getting the bad news out of the way and long-term growth remains unchanged. JP Morgan thinks the stock will possibly reset lower just in the next few months, but gains over the next few years. TSMC alluded to a cash dividend.

That adds to the long-term play for this name. Bottom line, though, Scott, AI compute demand exceeds supply, but we've got to deal with the PC smartphone business that continues to remain depressed. And still, no one, Jefferies, Bank of America, the list goes on, no one is budging on their buy rating for TSMC. So it could be a good opportunity to get in. All right. Good stuff. Christina, thank you. Let's get more now on how to play the semi space and the sell off with Virtus Investments.

Joe Terranova, it's good to see you. Is this like a record scratch on the happy days are here again song or what? Well, I think this is more technical than anything else. I mean, clearly, we knew that smartphones, PCs, handsets were going to be remaining weak. We knew that the boost was going to come from artificial intelligence. So I think this is more about technicals just getting way extended. Just look at the SMH. The SMH is trading at 153. The other day on half. It's been at a new high. It's been, well, July 18th, it recorded a new all-time high, 153 today.

Yesterday on halftime, I talked with you about the air underneath current price and the 50, 100 and 200-day moving average. You could apply that thesis to the SMH. The 200-day moving average is all the way down at 121. The 50-day moving average is all the way down at 121 the 50-day moving averages all the way down at 143 so i think this is about technicals more than anything else christina did an excellent job in identifying that semi conductor equipment makers are going to be most challenged as a result of not just taiwan semi but as as well. But you gave me the reasons why you wouldn't think that these stocks would be at a high, ESMH, PC, slowdown, handsets, unless you believe that those have troughed.

And maybe that's what the market was betting on. But I just wonder whether Taiwan Semi just said maybe, you know, not so fast. Well, I think Taiwan Semi is more specifically about China demand. I also think ASML is talking about European demand. And you have to factor the macro into the semis because the semis are the nucleus. They are the mobility. They are what the economy is today in 2023, similar to what oil used to be. So if you were to tell me, and I heard the conversation with Ed Yardeni and Stephanie Link,

if you believe in the economic sensitivity, if you believe that the economy avoids a recession, if you believe the economy is in a good place, then why wouldn't you believe that the very industry that represents what the economy is would do well as we move forward? And that's a semiconductor industry. I know, but maybe people believe that these stocks are ahead of themselves because they don't believe that the economy is as strong as some would like to believe it actually is. I don't agree with the fundamental aspect. I think the technical aspect is confirming what you're suggesting, that yes, these stocks are

ahead of themselves and they can pull back to the support of moving averages. Now, what do you do with all of that? First and foremost, I think you have to stay high up in quality. I've advocated for Broadcom, which I believe is at a reasonable valuation and is an AI winner on Semi. That's my favorite semiconductor name. And NVIDIA seems to have this moat around their ability to participate in artificial intelligence. But lastly, I think the single most important thing that you could do for the semiconductors and overall for the market is what we talked about yesterday with Brian Belsky. If you're concerned that the technicals are stretched right now and need to fall back further, go to an equal weighted strategy.

Well, why do you only assume it's a technical thing? Maybe people have been too fixated on thinking that the AI-related bubble is in the Magnificent Seven type names. Okay. But maybe the place where it's more represented is in the chip stocks, where even if you're not, like the SMH isn't all filled with AI chip related things, yet the SMH is at a new 52 week high almost every day because it was first in first out. It was first in to the economic contraction that started in 2022.

That's my belief. I think the economic contraction started in 2022. I believe the semiconductor industry was the first industry that went into recession. And I believe it is first out. I think the semiconductor industry, as we look forward, sees a better 2024. It sees China demand reaccelerating. It sees inventories beginning to build once again. Joe, thanks. Thanks, Scott. All right, coming up, we're tracking the biggest movers as we head into the close, including a pair of stocks in the financial space having their worst day in more than three years. Closing bell right back. 15, deal the closing bell.

Let's get back to Christina Parts and Novelos for a look at the stock she's watching. Christina. Scott, let's start with Discover Financial because it is down double digits at the moment after disclosing a credit card misclassification, I should say, and it's having a discussion with regulators right now about it. The company also said it's received a separate notice from the FDIC related to a consumer compliance matter

and it's pausing its buyback program during an internal review. So a lot of missteps there, down 16%. Let's talk about Equifax. It is having its worst day since 2018. The credit bureau reporting mixed results, but slashing its outlook, citing the slowdown in U.S. hiring and weaker mortgage markets. Executives also say that they expect those trends to continue in the months ahead.

Not good news, down almost 9%. All right, Christina, thank you. Christina Partsenevelis. Last chance to weigh in on our Twitter question. We asked which lagging sector of the market is about to have a big time catch up trade. You can head to at CNBC closing bell on Twitter. The results are right after the break. The results of the Twitter question we asked which lagging sector of the market about to have a big catch up trade. It is close. Health care, though, is the winner. Thirty six percent of the vote.

A very, very close vote. Thank you for voting. Coming up, the year's Red Hot Home Builder Rally taking a bit of a breather today. A number of those names have reversed lower. After hitting record intraday highs, there they are, KB Home and Pulte Group, the biggest losers, down 5%.

We've got that story and much more when we take you inside the Market Zone. All right, we're now in the closing bell Market Zone. CBC Senior Markets Commentator Mike Santoli here to break down the crucial moments of the trading day. Diana Olick on the surprise reversal in housing stocks after 52-week highs earlier in the session. Stephanie Link back for how she's playing J&J amid today's rally, one of the best Dow performers today. Micah, go to you. Dow kind of day. Not much else working. It is still more rotation than it is kind of an escape from the market in terms of net money flow, although the top has started to spin slowly and wobble a little bit here after this rally. So as we would have said coming into the week, markets built up a lot of gains in a short period

of time. Getting a little bit stretch. There's been a short squeeze element of it there's been a momentum chase element of it there's been a. Let's position for earnings in the old favorites and. So nothing in the way of net damage to

speak of yet. Really just unwound in the S. and P. a couple of days. Worth of upside but you know you want to be on alert for the fact that. Maybe you got a lot of house money built up and see where it goes from here. The Netflix and Tesla damage on the reaction to their results, so to speak, is relatively

contained. But if it piles up and that becomes the theme, that's what you have to look out for next year. I was writing those names down before you mentioned them, thinking that tomorrow will be the tell, right? If you get the buyers come in, that's sort of emblematic where the psyche is going to be in terms of big cap tech that's done really well. And if the buyers come in on the dip. In terms of those names, for sure.

But I would look for things like Microsoft, which I consider probably the most important stock in the world in the sense of it's all about belief in long term-term trends and the management and sort of like the valuation is rich and people don't care. And, you know, if it goes down a few more bucks from here, someone's going to look at that to your chart and say it's a failed breakout. Now, who knows? I mean, it's obviously got a ton going for it. But there are a series of names if we get into next week to start to ask those questions. Diana Olick, real interesting day for D.R. Horton. I'll focus on that, but we're looking at others as well. I know you are. The stock was up nicely and then had a big reversal. What's going on? Well, look, D.R. Horton had a big beat this morning, guided higher, new orders up 37 percent quarter to quarter. And Chairman Donald Horton said despite higher mortgage rates,

builders are reaping the benefits of the shortage in the existing home market. Nothing wrong with the fundamentals. But as you said, look at the stock. It shot higher to start the day, up nearly 10% in the first 40 minutes in reaction to that report. But then it falls to the low end of the range. So what's up with that and the other stocks that it took along with it? Well, take a look at how far it's come, up about 45% year to date. So the sell isn't really about the fundamentals. Bob Pisani talks about this all the time. It's about distribution.

And traders may be feeling that at this level, this high valuation, there just isn't much farther to go. So they're taking the top and taking off. Maybe it's nothing more than that. Diana Olick, thank you very much for that. Stephanie Link, J&J, one of the best performers out of the Dow today. Still down 5% in the year, Scott, trading at 16 times forward earnings, and you get 2.8% dividend yield. They've been raising the dividend for 62 consecutive years. The beat was from pharma and med devices. Pharma came in at 6.2% constant currency. Med devices almost up 10%. And that's not a surprise because we know a month ago UnitedHealthcare and Humana both talked about higher utilization rates.

That's very good for hospitals, very good for the device companies. And Johnson & Johnson pulled through. Michael, it's going to be easy or interesting to see, I should say, UnitedHealth, these kinds of stocks. Whether healthcare has got some room to run here. Yeah, it could be the next phase of where we're headed in this market in the sense of the flip side to in the spring or going into the spring. It seemed like all the oxygen was being consumed by the same Nasdaq stocks. What it means is there's a whole lot of market cap that was not doing much of anything. And pharma definitely falls into that category.

Healthcare services, a little bit less so medical devices, though. Some of the big names there, like Thermo Fisher, Edward Life Sciences, have not actually really done a heck of a lot. So, yeah, I could see it happening. It's not clear to me that's necessarily the next source of a thrust for the overall market. But as we kind of rotate and turn around, it would make some sense. Stephanie Link, thank you very much. We'll see you soon. So back to you, Mike, as we approach the two minute warning. What do you think is the next source for this market if it's not going to be health care? I think I'm a little more focused on whether we need to to kind of settle back a little bit and just sort of reload. You know, the last dip that

we had really was hardly one to speak of from the mid-June highs in the S&P was like a 2% to 3% drop. If you got something like that now, that's kind of classic textbook up-and-away bull market type pullback. And that's still not much of anything that would take you down to literally the 20-day average on the S&P. So I want to see if that's what we're in for as as again seasonals get a little tougher. Going into. The huge chunk of market cap that's coming next week as well as the Fed meeting. I just want to see if. If the

market's going to tense up a little bit. Getting into- into that phase I don't think it would change the overall story. In terms of. Overall trend in terms of all earnings troughing- the Fed being on a manageable path. At this point

and- you know, the softer landing is hard to refute in the short term. But by the way, leading indicators, again, weak this morning and are deep into the zone where in the past the economy has already been in recession. So it keeps people uneasy because of that cycle pattern. Next week is going to be really, you know, you've been talking a lot about these hurdles to get over. Yeah. And now if you talk about, you know, mega cap tech plus the Fed,

you have automatic higher bars now to get through. Next week's gonna be probably the tell on what this thing really is. Right, and you know, we've been in those phases before when it seemed like we were at a logical ceiling and you got those tests and you kind of slingshot above it. so it's not so much like oh that's going to stop the market and its tracks but it literally is a test if the buying's strong enough to sort of disregard some of those challenges once we get through them then that's significant as well nine in a row

nine in a row for the dow jones industrial average as the bell rings that's what we've got we got red in the S&P and the NAS. But that's not the story today. We'll pick it up tomorrow.