The Compound and Friends - Why Defensive Stocks Have Disappeared

Episode Date: June 20, 2025

On this special episode of The Compound and Friends, ⁠⁠⁠⁠⁠Michael Batnick⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠Downtown Josh Brown⁠⁠⁠⁠⁠ are joined by Matt Cerminaro and Todd Sohn for the ultimate CHART ON session! They discuss: the Fed, market sentiment, the future of Apple, and much more! This episode is sponsored by Apex Fintech Solutions. Learn more at: http://apexfintechsolutions.com/augmentedadvice Sign up for The Compound Newsletter and never miss out: ⁠⁠⁠⁠⁠thecompoundnews.com/subscribe⁠⁠⁠⁠⁠ Instagram: ⁠⁠⁠⁠⁠instagram.com/thecompoundnews⁠⁠⁠⁠⁠ Twitter: ⁠⁠⁠⁠⁠twitter.com/thecompoundnews⁠⁠⁠⁠⁠ LinkedIn: ⁠⁠⁠⁠⁠linkedin.com/company/the-compound-media/⁠⁠⁠⁠⁠ TikTok: ⁠⁠⁠⁠⁠tiktok.com/@thecompoundnews⁠⁠⁠⁠⁠ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick, Matt Cerminaro and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of ⁠⁠⁠⁠⁠Ritholtz Wealth Management⁠⁠⁠⁠⁠, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here ⁠⁠⁠⁠⁠https://ritholtzwealth.com/advertising-disclaimers⁠⁠⁠⁠⁠. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: ⁠⁠⁠⁠⁠https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

This episode is sponsored by Apex Fintech Solutions. The time to compete for next-gen clients is now. Like now now. Transforming your business for the future might seem like something that you can push off, but by the time it is a problem, it may be too late. Sure, you could sit this one out and your business will probably be fine tomorrow. But meanwhile, you are letting some new Fintech win a generation of loyal customers around you.

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own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Special edition. It's the compound and friends. We have two friends with us today and we are remote.

I would like to just say this is going to be a new format of the show. Not permanent, just because we felt like having some fun. We're going to do, what is it like a chartapalooza? Is that the best way? You like that? All right. All right, ladies and gentlemen, first time viewers, first time listeners, my name is Downtown Josh Brown.

I am a co-host of The Compound and Friends. My co-host Michael Batnik is here. Michael, say hello. What's up, everybody? All right, and we have two very special guests. Returning champion Todd Sohn. Todd is an ETF and technical strategist at Stratigus Securities and Stratigus Asset Management and Institutional Research and Asset Management Platform.

Prior to Stratigus, Todd has held several roles at JP Morgan and SAC Capital Advisors. And joining us for the first time ever, you've heard his name a million times, literally, on this show and other shows here at The Compound. His name is Matt Sermonaro, otherwise known as Chart Kid Matt. I wish I had the round of applause button. I would be smashing it right now.

Look at that guy, look at that put up. So excited to be here, let's do it at that guy. Look at that plinth. So excited to be here. Let's do it. Yeah, we'll add that in post. Matt is the co-founder and chief product officer of Exhibit A, a tech platform providing custom branded visuals to financial advisors

and financial institutions. Matt is also a research associate providing content and visuals to the compound and Ritholtz Wealth. Matt welcome to the show so happy to have you. Thank you so happy to be here. Are you nervous? A little bit of nerves in here. I'll let the charts talk. That's it. Because I was gonna say I was gonna wait for you to say no I'm not nervous and I was gonna tell you maybe just like a little bit. Just like a little bit big. It's just like a little bit Just enough to prepare. Yeah. All right. Awesome. We're so happy to have you on the show So, um, I guess we have to start with the fed right guys

If you want to put something big we can start there You can do that or hopefully people don't fall asleep. I know. All right So I said, yeah, I said, uh a couple days ago on what are your thoughts like the Fed's posture? The Fed's posture is lying on a chaise lounge effectively. And all right, so this is from Peter Bookvar reacting to the Fed statement. And I think he put this out before the press conference, but it doesn't appear that anything really came out of the press conference of substance. The Fed maintained its stance that economic activity has continued at a solid pace and

that the unemployment rate remains low and labor market conditions remain solid as well as inflation remains somewhat elevated. So those are just copy paste from probably the last six statements if I had to guess. Then he said the committee is attentive to the risks to both sides of its dual mandate. That's something they didn't say in the May meeting, according to Peter. He also said the risks of higher unemployment and higher inflation have risen. Of course, this is the thing that we don't want to see, stagflation. Lastly, they updated their economic projections. 2025 estimate for GDP fell to 1.4%

down from 1.7% somewhat notable. Their unemployment rate expectations rose by 1 tenth from the March statement to 4.5% That's versus 4.2% as of May. Headline PCE, which is the Fed's preferred gauge of inflation, went to 3% from 2.7. Core went to 3.1 from 2.8.

It seems as though they're not changing much, but the two changes they're making, I think, are both in the wrong direction, slowing GDP, rising employment, and then a slight uptick in their inflation expectation. Thoughts? Yeah, I don't think it's great. I think it's hard for the Fed to make a definitive move right now, sort of wait and see mode for them. Obviously, inflation has come down a lot. And I think it's hard for them to make a move based on the labor market.

We had the continuing claims really kind of spike this month. I think their eyes probably on that. But it's hard for them to, like I said, cut or make a move or telegraph that to the market right now. Just the data hasn't deteriorated enough. They're not getting fireworks

in anything to do with unemployment. Wall Street Seth Rogen, what do you think? Glad, glad you saw that. Are you really leaning into it? So you're doing that? I had, that's, that's a deep cut for all the listeners out there. Uh, what do I think? Um, I don't think it's one reason I was, I'm not, I'm a big Fed watcher, like other folks out there.

Do me a favor, say old school Hollywood buffet. Old school Hollywood buffet. Oh my God, it's only, close your eyes. All right, so Tata's no take. I just think it's not unreasonable to look for stocks to just consolidate here. You just had one of the best 40 day runs in history for the S&P.

So whether the Fed is the catalyst or not. It's not gonna be the catalyst. We just found out. You just sit tight here and rates, there's no call, especially up the curve. You know who has an opinion on this? You, Michael Banach. I really don't.

John, play my clip. Doing well as a country, if the Fed would ever lower rates, would buy debt for a lot less. It's a shame. This guy, I have a guy. Do you ever have a guy that's not a smart person and you're dealing with him and you have to deal? He's not a smart guy.

He's worried about inflation. I said, that's right. If there's inflation in six months or nine months, you lower the rates or you raise the rates. You can do whatever you want, Brian, right? So let's say there's rampant inflation, which there's none. You know what? There is a success.

I got a call from Congress last night, sir, there's a problem. I said, what is it? Money is pouring in. We don't know how to account for it. I said, check the tariffs. Eighty-eight billion dollars came in from tariffs. No inflation. And it's going to get even more so. I know what I'm

doing. So we have a stupid person, frankly, at the Fed. He probably won't cut today. Europe had 10 cuts and we had none. And I guess he's a political guy. I don't know. He's a political guy who's not a smart person, but he's costing the country a fortune. So what I'm going to do is, you know, he gets out in about nine months. He has to, he gets fortunately terminated. Biden, I would have never reappointed him. Biden reappointed him. I don't know why that is,

but I guess maybe he was a Democrat. You know, I got great advice from Mnuchin on this one. Great advice, but he's done a poor job. So we have no inflation. We have only success. And I'd like to see interest rates get down now. All right. All right.

It's enough of that. I could listen to that all day because it's amazing that like free association. Free association. It's the, what does he call it? The weave. I actually don't disagree with President Trump on this. I think you need to cut the rates. The housing market is literally a disaster.

It's going to have a negative effect, I think, in the second half, not just on GDP. But there are certain measures you look at, like construction permits versus how many workers there are. And you get the sense that at a certain point, if we don't get starts, housing starts to move up, you're going to start seeing construction sector layoffs, which are hugely important to people that follow the cycle. And I don't really understand what he can't create inflation with low rates. We already figured that out.

So I don't really understand what the problem is. Housing stocks are, and I'm not talking to just home builders, the derivatives of it to Home Depot, Lowe's, building product names, those are in the dumps still. I also agree with Josh agreeing with the president. I think the downside risks to the economy significantly outweigh the potential for higher inflation over the summer. I don't know what Powell is waiting for. I don't understand. It's not just Powell.

According to the dot plot, more of the voting members are now like on one or two cuts. Like the whole apparently either all see something that we don't see or they're just super comfortable at four and a quarter to four and a half and they just don't want to make any change. Maybe nobody wants to make the first move. But so like the Fed is still on its chaise lounge and you know, we'll go into Jackson. We'll go into Jackson Hole and I wonder what the topic of the speech will be. Maybe they don't even bother showing up. As far as this particular presser goes, it is a bit of a nothing burger.

Market's not really moving very much. S&P is flat as we tape this. Rates are going nowhere fast. Todd, I'd be curious to get your take on the market overall. Do you see either like glass half full, we just had a V-shaped recovery and we are now going sideways? Or do you see us stalling out lower than the previous highs

and we've got some give back in the next couple of weeks? Yeah, I don't think, I'm like glass half full, number one. I don't think a give back would be too shocking anytime you get these price momentum surges and then also the new high data surging, which I think we're all aware of, the next one to three months are sloppy. And maybe it's rates that cause the sloppiness. Maybe it's whatever's going on overseas and the Middle East is the sloppiness,

but that was a big bottom to us. So I'm very much a glass half full. The one thing I'm slightly concerned by is, okay, housing stocks are still struggling. And you're seeing some of it leak maybe into the industrial sector, outside of building products, like the machinery names are still a little bit lethargic. So that concerns me to some extent, but I yield basis, I yield spreads are back below 300 basis points. Hard to, you know, that's, maybe it's just not a credit thing.

Yeah, I think there was so much fear in the market in April and May. And just, you know, justifiably so, given what was being talked about, that it's hard to see that fear come out and then all of a sudden come surging right back because people have, people remember things that took place two months ago. So if you didn't get crazy bearish two months ago, you're probably not about to. And if you did, you probably don't want to do it again. And that's how I mean. I get the sense there's just a lot of skepticism of the staying power of what we've seen. Yeah.

All right. We're going to do some charts and I don't really know. We didn't really, we didn't really finalize the order of how we want to do this. I got this. Why don't we do it like this? Why don't we do it like this? So which one of you, handsome dev devils has the best chart to maybe segue the conversation

from broader markets and where we are today? Do either of you have one of those? If not. I do. Yeah, I do. Let's go, man. Let Matt go. The man-child.

He's the man-child. He's chart goat to me. What do you got? All right. John, can you throw up chart two? Alright, so we've been churning within 5% of all-time highs for like a month now. And like Todd was saying, the market has had this ferocious rally off the April low. I would have expected us to just rip through the highs.

So the real question I wanted to answer with this chart is how long might it take to actually make a new all-time high from here? And so I looked back in history and said every single time there's been a 20% drawdown, which we actually had this year, if you measure the intraday peak to the intraday low. You know, I do. And then you round it. Is there another way to measure? Well, people conventionally use the closing prices. You know I do. And then you rally. Is there another way to measure?

Well, people conventionally use the closing prices. I'm going to say close enough and I'm going to call it. So Matt, what are we looking at? So what we're looking at is, let's say you fall 20%, you rally to within 5% of all-time highs. How long in months is it going to take to actually achieve the new all time high historically? And so all of these x-axis, all of the instances on the x-axis here are showing the day that we rallied to within 5% of all time highs after 20% drawdown. We got that on May 12th, 2025.

And on average, it takes 3.6 months to actually go ahead and make the new all time high from being within 5%. So, yeah, so I actually was pretty surprised by this. I thought that a lot of these would be within three months. But some of these, I mean, coming out of the 2022 bear market, we actually got to within 5%. It took six months to actually make the high in early 2024. What are the dates listed at the bottom?

That's when you get back to within 5% of a high? Yes, correct. Yeah, that's when you get back to within 5% of a high after you just drew down 20%. So beautiful chart off for a second. Matt, this is great work. I think this makes sense to me because once you have a 20% drop, like V-shaped recoveries that we've seen recently are the outlier in history. Normally that doesn't happen. And if you do have a 20% correction and then you bounce all the way back to within 5% of the all-time highs, it makes sense to me that you would see some supply hit the market and not just rip to new all-time highs. Yeah. Yeah. My thought here is, is there something technical at play? Because you're effectively approaching a previous resistance point. And so

like you said, there's overhead supply and I think just natural selling. Todd, it's a really good point. Sorry, when you hear technicians say prices memory, that's what they mean. It's beyond technical, it's behavioral. It's like, all right, I didn't sell the market fell 20%. Now it came all the way back to within 5% of the old price. Well, maybe now would be a better time to take something off just in case that happens again. And I'm not talking about one person saying that I'm talking about 50 million people saying that

all at once. And that's why they're kind of there being a little bit of a lid on us before we can pop to a new high. Like just knowing people has always made sense to me. Todd, I want to get your take on this before you chime in. I just want to give a shout to the media team because this type of show is exactly why we need it to be on Spotify concurrent with the episode drop. Because if you're listening to a chart heavy show, it's really tough. So credit to Duncan and Daniel and John and Travis and the rest of the team for doing the outstanding work there.

Todd, what do you think about this idea of overhead supply coming in after a bear market and then a monster rally? Yeah, it's all behavioral to me. Like to Josh's point, you get this rally and you have investors out there, whoever they might be, start to say, okay, well, what's the next catalyst to get you higher? Is it earnings?

Is it some development out of nowhere? And I think you get some people that are skittish. They don't like the risk reward. Yeah, it could have been a rate cut. But we have a dumb, stupid fed show. But we're dealing with a dumb guy. Maybe he's a Democrat. I don't know. Yeah. Could be anything. Can we put that chart up one more time? This was this February 14th, 2007. Oh boy, was that a doozy. I sort of remember what happened next. Within a month of that, Bear Stearns went to zero and then got acquired for $2 and $2

was so insulting that they changed it to $10. But I sort of remember like that was right. $100 was so insulting that they changed it to $10. So obviously that's a different market with much different things happening in the economy than what we're dealing with today, thank God. But I think the point is some of these recoveries back to within 5% of a high, you eventually do get another high, but like it's not all good.

Or actually I think the bear Stearns thing was, oh wait, so it was a year ahead of then. Um, but Oh seven, that was tricky because they actually fooled you into the fall. You got the new high, they fooled you. And then, uh, you know, the, the rest is, the rest is history. It's painful. Yeah. Can I, can I bring in a, uh, a chart here that actually kind of ties somewhat into this? Yeah, sure.

The chart draft, John, you have chart one from my doc here, okay? So we were talking about US all-time highs. There's not necessarily a statistic here, but this is an easy chart to ease us in here. MSCI EIF, right? All developed international markets, all-time high. First time it's made one, speaking of 07 Josh,

there you go, back to 07 highs. I think it's totally reasonable to see this retest, the breakout from 2007 and from 2023. But this is important. International portfolios actually have something working again, whether it's Japan seems to be percolating right now and Europe has worked. And I think it's important when you look at the sector construction,

the industrials from 10 years ago are up about 5.3%. Finances are flat. That's a good thing. So the more industrial exposure, I like that tech saving up too. So internationals get more cyclical. One of the things happening in the best stocks in the market list that I keep with Sean is that industrials are dominating by the number of companies that are on the list. It flipped. It was utilities in the first quarter when people were worried about trade and the economy is going to slow down and blah, blah, blah.

And now it's industrials. And when you dig in, like, well, which industrials? It's kind of a mixture of some of them play very heavily into the AI theme. And then some like literally the construction of data centers, but then a lot of them are defense, defense and defense tech, which are under the industrial umbrella.

Almost every one of those stocks is in a bull market. The defense ones, I think in a very short term, are a little overcooked. Yeah. That's a, that's a big time bull market. And then the other, as you said, the AI construction type stuff is awesome. A hundred percent. All right. What do we have next?

Could we talk about valuations now? Cause I think I have a chart here, uh, that would be interesting. So could we throw up chart one? Michael, this is the one that I mentioned to you earlier that this might be the best in the doc. Okay, so for the listeners, I'm gonna do my best to paint this picture for you. And for the people watching,

the chart on the left here is where I want you to focus first. So I've broken out the average forward PE ratio by decile in the S&P 500 at the 2021 valuation peak. And so those are the light blue bars. And then the dark blue bars are the average forward PE ratio by decile as of today.

And so you'll notice that across the board, indiscriminate of what forward PE decile we're in right now, or indiscriminate of any forward P decil, we are cheaper across the board right now. And that's what the chart on the right is showing is the discount today versus the 2021 peak. So, Matt, we talk about some of the names, Pound here, now Circle most recently, Core, we have some of these really high flying nosebleed valuations, but you're saying compared to

2020, 2021, did I just say 2021? 2021, these stocks look like cigar butts. Yes. And well, cigar butts. Not quite. But yeah. But if you look at the 10th decile here on the left, so this is the top 10 percent, the 10 percent most expensive stocks in the S&P 500. In 2021, those stocks traded at an average 4P of 104 times. We really had it all, didn't we? But the air pockets gone, right? Now the average 4P of that cohort is 63. It's a 40% discount. I'm not saying 63 is expensive. I want to throw one

monkey wrench into the story though. All right. So I like the story where you break down the S&P on a cheap to expensive spectrum and in deciles and like the most expensive stocks in the market right now are 63 times earnings, which is not cheap, but versus how expensive stocks were in 2021 at 104 times earnings, it's a relative bargain or maybe it's like we're not that overvalued guys. And I totally agree with that. Except and that, by the way, that holds true across the board every decile, except understand what was happening in 2020 and 2021, where companies taking massive accounting charges because of the pandemic.

And that's what they should have been doing. And I don't know to what degree that impacted per share earnings. I don't know if we're looking at operating earnings or just net earnings, but that's got to play a role in why we were paying up for stocks. It's because we understood that there were artificial charges in these earnings that were not going to repeat and had nothing to do with the long-term earnings quality of these businesses.

So it's almost like a little bit of an asterisk on this, right? For sure. Okay. I want to bring in a chart to go with this thread. One of the most expensive stocks back in 2021, I believe, was Nvidia. I've got a chart. And the chart that I want, John, is, well,

it's the Nvidia chart. So we have a five-year price chart. And I like the images do it for me. One of the dots was the absolute magazine indicator sentiment fever pitch of all fever pitches, which was Jensen Wang signing the bra of a woman in the audience. Good. Say, dude, you could say boob on the show.

Okay. I think it's a bra. That looks like a bra. And then the second one, the second one equally as antenna raising, this is the top, was the watch party for one of the earnings. And actually it's really easy

with the benefit of hindsight, sometimes this stuff works out, the sentiment analysis, this anecdote, adding data type stuff. Sometimes it works out, but for every magazine indicator that we look backwards at that nailed it, you've got 5,000 that just don't matter. So listen, I, I, I giggled to, I definitely said it too, but it doesn't always work the way that you think it would.

This is interesting because so Nvidia is now higher than where it was. Put the chart back up. Nvidia is up 25% and 16% total return from both of those events. The bra signing was June 4th, 24 and the watch party was last August, the earnings report. So if you took the ZQ, it's like, all right, I'm out of tech. I'm maybe even shorting. I'm getting out of the way. It didn't really work out so well. Yeah. Would you guys tell young investors to just throw this stuff out?

The like the extreme sentiment stuff that's like an indicate magazine cover we used to call it. There's hemlines, there's Hamptons traffic, like all that shit. Would you just throw tell a young investor to throw it out? I kind of think I would. Not all of it. Oh, yeah. Well, how do you not when it works? When you get enough crumbs to build a little bit of a cake, then it matters. You need three? No, here's what I like. I say this all the time.

I always rely on Ryan for this sort of stuff. I love the washouts. I love the breath thrust when you've got that behavioral thing that is market driven, psychology driven, that will never change. That sort of stuff I love. And when it lines up with every sentiment survey indicating the same thing, extreme fear. That's when you pounce. But for, for shit like this, just the one-offs, the, Oh, the economist LOL, like did you see blank garbage? Yeah, I saw it. So did everybody else. We, we, we, uh, we almost threw Dan

Ives into that. Um, he, they covered the fashion of Dan Ives in the New York Post. Do you remember that? Yeah. Yeah. Yeah. I don't remember exactly when that was. Dan's a friend of the show, but like they did this fashion spread because he dresses like volume level. It felt like a Madden cover when Dan was on cover or whatever it was. Dan was time. Yeah, and it didn't work. So alright, we've got a lot of charts Let me this is gonna fit nicely with with the valuations and video thing John if you have a chart to From my from my deck here. Okay, so this is

the sum of the defensive sector weights in the S&P 500 staples energy health care utilities might and some people ask me why energy. The MSCI defensive sector index has energy in it. So I'm going off of them and I get energy, has some yield and it can work. No, that's right. Exxon and Chevron are not considered growth stocks. That's right.

They're not risk on stocks to me. Maybe some of the nuclear stuff is, that's a different story. Okay, so. They're tiny. Nvidia, back almost at a new high, right? That's a six and a half percent weight in the index. Where are the cheap stocks are all going to be here. And the sum of those four sectors is now below 21%. That's the lowest I have in 35 years of data. So there's

just no demand. Below 21% of market cap in the S&P? Yeah, in the S&P. Yeah. Yeah. I love was just no demand. Below it's 21% of market cap in the S&P. Yeah, as the S&P, yeah. I love this. Wow. I mean, this is just... So what's crazy is that healthcare has... I could understand...

I guess my question for you would be, is it because they're shrinking or is it because technology and financials have grown so much. Their healthcare has, healthcare took a GLP one, basically by itself. It went from, it's down below 10%, that's rare. I mean, Utes have been small forever,

right, there's no doubt about that. Energy was big, now you're back down to 3%. And then staples can fluctuate between five and 10, I guess, over time, but a lot of it's healthcare driven. What's your takeaway from just the shrinking of these four, quote unquote, defensive sectors? I think there's two takeaways. One, know what you own when you're buying an S&P 500 or large cap index, because you're really getting a lot of tech growth stuff. That's fine. It's great. But just understand that.

And to the the idea that traditional defensives do not work anymore, you have to think differently about playing defense. And so I wrote on that chart, we could argue thematic rotation is a better route, because we have a thematic rotation ETF here at strategicist. I don't want to stuff the home cooking down everyone's throats, but SAMT, they buy thematic energy, they buy cast full aristocrats like Costco and Walmart, et cetera. So think differently about traditional defense.

You know what's interesting? The whole concept of breaking the market into two pieces, it was never defense versus growth, just so people understand how this all came about. It was defensive versus cyclical. Okay, so that's number one. And tech used to be considered cyclical, which I think we have all now come to the conclusion that actually no, tech is some form of consumer staple slash industrial, but it doesn't even matter. form of a consumer staple slash industrial, but it doesn't even matter. The original concept was, and this goes back to like Charlie Dow in the late 1800s, was that there was a cyclical side to American capitalism, industries that did better when the economy was growing faster.

And to invest in those sectors or those industries was to make the bet that the economy will be better than expected. And the defensives were for portfolio managers who didn't have the option to swing to cash. So they had to be fully invested. So they would say to themselves, well, if I'm bearish on the overall outlook, or I'm not seeing enough earnings growth to justify buying growth companies, then I'm going to shift the dollars that must own stocks into stocks that do well regardless of what's happening in the economy, defensive stocks like Hershey and Coca-Cola.

And that was a very sound way of thinking about the market until we reach the point where every year dollars are being yanked away from fully invested stock picking managers in the mutual fund space and more frequently appear those dollars more frequently show up in ETF portfolios and people just have other options besides I'm gonna rotate to defensive stocks. They can literally buy anything and they are. Those I feel strongly the staple stocks just aren't built for this era. Hershey, General Mills, Kraft Heinz.

Like they're just the influencers know they're full of junky ingredients. So they go on Instagram and say don't buy this buy another brand. Well Coca-Cola new highs this summer. Yeah, I'll give you that. So, you know, you can make money in these stocks. I'm trying to picture in my mind, I'd love to hear what you guys think. A scenario where that reverses. How did defensive stocks in their current incarnation go back to being 35% of the S&P from 20%?

That's not going to happen. But you would have to have a massive market crash in AI stocks. go back to being 35% of the S&P from 20%. You would have to have a massive market crash in AI stocks. Recession and AI just completely sputtering for some reason, regulatory regulations or something like that. You'd have to ruin the entire AI story. Yeah, I agree with Todd. I also think the question here is how are investors categorizing in their own minds what a defensive stock is? Right like is is Netflix a defensive stock to somebody who says look no one's gonna cut their Netflix subscriptions

It's like we're almost redefining what a defensive stock is over the past few years Just these companies have compounded their capital at such high levels despite Fed that was on the fastest hiking cycle ever, despite 9% inflation, despite everything. And so in the in the defensives have actually gotten hit the entire time. So it's just a question of redefining what are defenses. Great point. I've I've spoken with people who say Visa, MasterCard and Amex are defensive because you still have to pay your bills and more and more of your bills are being paid on credit cards.

Therefore they're raking in their fees no matter what the economy does. I've spoken to people that point to like the uncancellability of Netflix. Like you know how bad things would have to get if you do not want to have TV. Utilities, are they defensive or are they an AI play? Because you can't really be both. You've got utilities making all time record highs selling at 15, 17 times earnings. Are those still defensive? Would those be defensive if there's a crash in the AI theme?

I doubt it. So I totally agree. We don't really know what's a defensive stock anymore, which is why I think that old paradigm kind of needs to go. And we need to just focus on industries more than sectors and companies more than industries if we're really trying to understand what's going on. Matt, you got a chart? I do have a chart.

Yeah, John, can you throw up chart three? Awesome. All right. I do have a chart. Yeah, John, can you throw up chart three? Awesome. All right, so I wanted to highlight this sort of market dynamic shift that's happening right now. And there's kind of this divergence where the S&P has recovered almost all of its loss from the peak in February,

but the MAG-7 weight in the S&P has only recovered like half of its decline and so I think this is kind of like a broadening story and Also highlights that the mag seven has kind of been a drag this year, Matt. This is so good Yeah, so for people that are listening Matt's got the mag seven weight of the s&p 500 which peaked in early January and has now recovered, let's say, I don't know, 60% of the decline versus the S and P 500, which is just 2% away from its all time high. And I've got a reason my friends, John, throw my Apple chart on. I've used this chart in the past with Josh, but we are at an absolutely critical juncture

for Apple. I'm looking at Apple divided by SPY and for whatever reason it has bottomed exactly where it is today in a meaningful way, in a meaningful way, three times previously, and I, uh, I don't know if I suspect this holds or not. I really will, will not give an opinion because I just, you know, who the hell knows, but this is a big reason why Apple was the king, was the biggest stock in the market for the better part of the last 15 years. And it is relatively on the ropes. Is this bullish? I, that's a great question. Not for Apple. Is this bullish?

I know, I chart off. What do you think? Is this bullish for the S&P 500? Is this bullish for the S&P 500? I think this idea that the S&P is so over-concentrated will actually scare some investors away. So the question is, if the S&P's composition is starting to become less and less concentrated because of an Apple following, then I think it might actually encourage new investors. Historically, Michael, Michael mobson did a post that shows empirically concentration is bullish. Like you be careful what you wish for when you get a burning out of the market, it usually happens in a bear market. Now it's not to say it's not to say that that holds always in forever because we are experiencing apple lagging

for a long time, Amazon lagging for a long time, and you see the 493 coming up the rear. So who knows? But that's a really good question. Is it bearish or bullish or neither that Apple is relatively weak? It may just be leaving its peak dominance. I mean, that's what that chart tells me. It's like 40-year-old LeBron.

It's still there, but... Chart back on. So let me frame it this way. Will Apple ever make a new high relative to the S&P 500? I say no. I mean, they would have to just have like this killer, they're talking about foldable phones now. Like they're following the Chinese at this point.

I don't know. They would have to have just some killer product cycle and then it could happen. But Josh, what do you think? Will Apple ever make a new relative high to the S&P? Like will Apple get back to where it was at the start of this year in terms of its size? It's oh, this is price chart. Will this chart ever make a new high? I don't think so.

You know what? I'm going to say no. Of course know what I'm gonna say no. I'm gonna say no. The other part of this with the weight is also alphabet because that's having an issue too. And if I can play devil's advocate, if you inserted Broadcom into the mag-7, you know, or if you just made a substitution here, that makes that chart a little trickier, but I'm in agreement with that. It's a good chart.

It's just, we have a rotation going on with what the big influences are now. So one of the good things that's going on that I just want to point out is that there's this tier beneath the Mag seven, call it 30 stocks, that has just increased in market cap so dramatically over the last year.

So I want to throw out like Oracle being a really great example of this. I want to throw out Uber, which everyone knows I'm long, but like this is a stock that had a $75 billion market cap like a year ago maybe it's a hundred eighty uh is it a hundred eighty billion dollar market cap now on its way to 200 i think there are a lot of crowd strike is a 500 stock now there are a lot of stories of companies that have gone from 30 to 50 billion to 100 billion in market cap and like we have we have to say that's a net positive. Absolutely.

That the second tier of stocks exists. I'm so excited. Yes, I'm so excited. Cause I have a chart that is kind of showing what you're saying here. All right, good. Cause the look on your face is like you just f**ked your girlfriend.

And I'm sitting around the campfire telling you guys how much I love her. Show us the chart. So excited. Chart four. Chart four. Okay. All right.

So what I did here was I took the, I took the, all the S&P 500 constituents and grouped them into 10 deciles by market cap. So deciles six to 10 are the top half, the largest S&P 500 stocks. And deciles 1 through 5 are the smallest. And so, Josh, I then showed the contribution to the year-to-date return by each of these decile cohorts. So the bottom five, deciles the smallest half of the S&P 500 is detracting 21 basis points to the year-to-date return. And the larger half is contributing 192 basis points. So the companies and the

reason why I was getting excited is the companies that you're talking about they're in like that eighth, ninth, decile. They might not be the tenth but they're like right in there and that's been the sweet spot. So good. Yeah. I don't know Is that like the snowflakes of the world, or even bigger than that maybe? Even? Trying to think what would be in there? Oracle, for example.

When you said Oracle, I think it would be in there. Cisco, definitely. Cisco's having an amazing year. Netflix, of course. OK. Look, that's one of the definitive trends of the last, let's call it 10 years, is that size matters and large market cap stocks on average have had better returns year in, year out than companies on the smaller end of the spectrum. And I don't know if that's an industry thing.

You have a lot of small cap, like banks that can't get arrested or. Dude, it's a lot of Disney, American Express, McDonald's, a lot of banks are in here. IBM is on fire. You know, this just blew off a light bulb in my head. There's an ETF that's coming out that will take out the top 100 names.

By size? Yeah, so it's gonna be like will take out the top 100 names. By size? Yeah. So it's going to be like the S and P 200 to 500. I forget, I forget it might've been ice shares who did it. It's coming out later this summer. So if you want to make a contrarian bet or if you want to own the next tier, that would be the way to phrase it. You know, that's a better, that's a better expression of what you're trying to actually target than the

equal weight. True. Yeah. It's like a spin on equally weighted. Yeah. Equal weight is like a mean reversion bet that the market will still do well, but that there'll be more participation from the rest of the market. Therefore you want to downplay the mega market caps. But I don't like that idea as an investor.

I understand it as a trade. I just, that's not for me. I do like the concept of like, these are are this is the next tier below the mag seven. And if you want to make a representative bet on the stock market, but negate the size of Microsoft like the S&P 150. This is how you would. Yeah, I sort of like that idea. Anyway, if somebody said, is that bullish or bearish? I would say bullish. I would also say this directly contradicts the people that were saying the only reason

the market had a great year in 23 or in 24 was seven stocks. Well, it was true in 23. Right, but it's becoming less true and the market is still at record highs. True. So what are you going to say now? The influence is declining, which is not a bad thing. Well, the market cap is being redistributed. Yeah.

It's going elsewhere. It's not going everywhere, but it never will. It's also just the disparity among those big names, too, like Apple, we were talking about, and Alphabet. Right. OK, love it. Great chart, Matt. Thank you.

When you show that to advisors, that strikes me as the kind of thing that advisors would say, oh, this actually helps me make the point I wanna make to my clients when they ask me, why don't I just buy, you know, Nvidia, Tesla? Like, well, here's a really good reason why there's a lot of money being made elsewhere not just in the top decile.

100% and also just the benefits of diversification. The S&P is up 1.7% year-to-date price return as of yesterday's close but it's not evenly distributed among all of the members. You got to buy the basket effectively. It actually achieved the return. Yeah. Okay. Love it. Who's got the next chart? You want me to roll in here?

I don't know if one of you guys got it. Okay. John, chart five, chart five, John. Okay. I want to stay with this market cap idea that we're talking about, but we're going to go a little wild Westie. So this is a lovely scatter plot of levered long single stock ETF. Okay. So this is a three scatter plot of levered long single stock ETF. OK, so this is a three-year-old category in the world of ETF.

And if you're unfamiliar with them, what they do is just take a single stock like Apple or Nvidia and put leverage on it, usually two times. On the x-axis is the inception date of all these funds and the y-axis the size of the underlying today. And I'm, I point this out because levered single stock 1.0, the initial batch, we're all, we're all mag seven in the last three to five months. They've gone crazy in terms of the size, the stocks that they're involved in. Now we're talking three to $5 billion names, dude. this is nuts. QBTS, what in the world? Archer Aviation, Upstart, Do You Have Quantum,

Rigetti, Lucid, GameStop, Tempest AI. Wait, hold on, hold on, hold on. There's a 2X ETF for every one of these companies on here? Yeah, and sometimes multiple, right? Multiple issuers are involved. Somebody launched a 2X Intel for like, yeah, that I don't know. That was, that was silly. You got the JT on here. Hymns, right? Mara, uh,

reggae and ion Q the quantum stocks need a two X. They're not volatile enough. Yeah, exactly. Todd, are any of these tiny ETFs getting a traction asset wise? I can't imagine. There'll be some hits, but most of that's going to come price appreciation. The flow is... Dude, I want to see the first one of these that ends up with more market cap than the stock it's based on.

Oh, that's very... That's going to happen, right? That's... Yeah, I don't see why that wouldn't be possible, which might be a problem. It's probably not going to happen with like micro strategy, because that's already really big. Or strategy, whatever we call it. But something like a Rocket Labs or a Rivian, if one of those hits a trend and starts to really go,

it's still going to be small enough where you might see the betters, um, put more money into the two X. Yeah. Like that's a very bad. That could create operational problems. I don't know how, like I'm not sure. So the people having to deal with that. I'm going to tell you that's a hundred percent of buy signal short term and a sell signal intermediate term. Yeah. If it wasn't like, if you read the headline, if you read the headline, Ion Q's, uh, Ion Q's 2X ETF now has more money in it than the company's market cap. You just buy it.

Ask questions later and then, and then sell it really fast. There's more of these coming too. Uh, like real niche-y small cap stock, cause that's where the volatility is. Todd, you have any ideas that your surprise don't exist? Yeah, that's a pineapple express questions. If you were to launch a, an ETF, what would it look like? He would launch an old school Hollywood buffet. Hollywood. Yeah. I mean, Hollywood. All you can eat for $30.

How do you think the companies feel about these? Do you think they care? Do they know about them? Yeah. I'm sure. I think there's probably, there's probably somebody working at every, at every one of these companies that like they have to distance. It's their job as an investor relations professional to make sure that they distance themselves from they want the deagons. All deagons investors were open. I mean, like, this is crazy. Yeah, I think I think one of the things that's happened with ETFs is that they used to be more expensive to just let them exist.

And because the costs have been driven so low, it's almost like they're just, you could have zombie 2X company ETFs that just live forever because there's nobody has a reason to need to shut them down. So speaking of Hollywood, I think that a lot of these issuers were smaller niche issuers take this

Hollywood approach where you release 10 films in a year. Yeah, or three of them are your winners and then six or seven flop or, you know, they do better on eventually on demand and stuff like that. You know what I'm saying? The ETF industry has always been a

spaghetti cannon and I'm old enough to remember people in 2011 and 2012 being angry at all like ETF launches. I think at this point nobody really cares. And now the costs are a fraction of what they used to be so launch it, who cares? See what sticks. Launch it and leave it. What's the difference? If you launch it they might come. They may. Matt what do you got? I've got a chart. I think this is my last chart. Yeah, I know you do.

Yeah. All right. Chart five, John. Could you throw? All right. Awesome. All right. This chart, which comes from Exhibit A, is showing the performance of the S&P one year

after at least 58% of stocks hit a new four-week high. So this is kind of like a breath rust. And so we got this signal in the middle of the just face ripping rally we had off the April low. And you'll notice across the board, one year later, the S&P has never been lower. And the win rate, in other words, the number of instances that saw a higher market one year later is 100%. The average return is 19%.

So it's great for returns. 12 months later, anytime the stock market has hit 58% of companies making a four week high a year later, the average return is 19% and it's never negative. And think about when these events happen. Look at all the dates in here. They're all, they're all bottoms. And they clustered. And they cluster.

Did you notice that Matt? Like there, a lot of them are around these bear market lows. Yeah, they happen typically after a large drawdown and coming out of that drawdown. And it's exactly kind of what we had. Actually, but there's two that stand out to me because I lived through them. One of them is March of 2003. That was the end.

That was the end of the dot com meltdown slash Enron slash nine 11 bear market. And I actually remember that bread thrust because I was working at a retail broker dealer and we were selling biotech stocks like these little shit small cap biotech companies that don't even exist anymore. But they were doubling and tripling. Like we were selling them because people were buying them. Right. And all of them worked out.

Like I remember that summer was just a field day. No matter what you bought it went up. I didn't know that the bread data that you showing me here, but that one stands out. The other one is, one more time, same thing, July of 2009. I don't know specifically what happened on July 23rd of 2009. I'll take your word for it that there was a big bread thrust, but effectively, that's when the market is making its recovery from the March low. It's like still in the midst of this massive rally where every stock is going up. I think that one was just like, there's no sellers.

You know why this is such a great chart? I'm just eyeballing some of these. Like these are the type of dates that most investors, especially had they gotten to cash, would never buy. Like July 2009, you're they gotten to cash, would never buy. July 2009, you're like, oh, I can't buy now. We're a double off the bottom. Yeah, we're 40% off the lows. So I'm looking at December 2023, for example. That was a question. I feel like you could have bought that. It doesn't look like breakout was coming. But other than that, who the hell was excited to buy June of 2020? It was like, what? Why are we up so much from the lows? You're telling me to buy now? No way. I'm going to wait and see. We're going to retest. This bounce doesn't make sense. Same thing

with July of 2022 with inflation screaming. But guess what? The market isn't dumb. And when you see this number of stocks making a 52-week high, you just shut up and you don't worry about what's going on and you buy them. Yeah. I think they don't mark the lows too. They're like three months later. By definition. By definition because that's enough time to reach 58% of stocks hitting a four-week high.

That's not going to happen within a week of a 20% bear market low. All of these are like a few months after the recovery has already started and they were not sell signals. So my point is you could convince somebody to catch a falling knife, right? Like if you're like, oh, whatever, I can't keep going down forever.

It's harder to convince somebody to buy that 58% because by that time, Josh, to your point, you're three months late and you're already 30% off the lows. I missed it. I missed it. I missed it. I missed it. No, you didn't. The chart to me, if I had to pick one measurement

to like use all the time and get rid of everything else, it would be that data, 20 to high data. Cause it's about probabilities. The probabilities are way in your favor and it signals durability too. Yeah. That's some of my favorite data. When you see a giant washout followed by the breath thrust,

that's it, the bottom's in. It's usually really good. The other thing is you could be wrong. So like in other words, all right, so right now, so as of the middle of May, 58% of S&P 500 companies were hitting a four week high. So you really have a short term rally at minimum. That's all you knew you had.

But looking at that data, no guys, this has always worked in the past. With the caveat, one time it might be different, but is that the way you want to invest? You want to bet on extreme outliers or? It won't work forever. You're 100% right, but the odds are the odds. Take them. I'm also appreciative that, Matt, you put a little asterisk on there that it's only the first instance over a 30 day period.

So you're not cheating the data. Yeah, yeah. Sometimes like, so sometimes you'll have, so may 12th, may 12th, uh, could have been 58% hit, uh, for Rekai and then may 13th, it could still be 58%. Just, I'm just double counting the instance because then what happens, if you double count the instance, it will skew the average and it's not that's, that's not the right way to show the data. That's the work of a man-child chart kit.

Very good point Todd. Very good point. All right. We did match charts. Do we have any more? I can give you one more to whatever you want. Yeah throw it up. Let's go.

John, chart three. This is a source subject for me. So we talked about the new high data expanding for the S&P. We talked about market cap. Here are flows to small cap ETF because it's just been awful. Freaking awful going on. We've had some runs in there,

but it's been a four year bear market for small caps. Maybe the April low is the purge, but I just think it's interesting that over the last few months. Wait, wait, wait. Let me, for the listeners This is the rolling month the rolling three months three months some of all of the money that is either come into or left Small cap ETFs so what what are these ETFs?

The tickers or just yeah IWM IWM IJR calf Okay, IWO. I think it's to be small cap growth if I'm remembering correctly. Okay. There's a few hundred of them in this. So this is now at an extreme that we haven't seen since the end of 2006. Yeah. Which is not a great harbinger.

Which was the start of the mortgage crisis. So I have to tell you this, this is the chart. I, so on its surface, this is the chart. So on its surface, I think all of us would agree chart off on its surface, all of us would agree. This is the mother of all contrarian buy signals. Okay, hopefully. But the biggest asterisk also market structure has changed. It's not that there's no money. It's not that there's no money going into small cap companies on the equity side.

It's that most of the money now, new money going into small cap companies is going into venture funds and private equity funds. And those, those companies that are in receipt of these equity investments do not trade, don't have tickers, don't appear in these ETFs. I don't know how to do this. I don't know how to get that data and harmonize it with the publicly traded small cap, but there is no reason to be a publicly traded small cap. Many companies that in prior generations would have been in the small cap index are very easily very happy, very seamlessly raising money in the private market and they will

come public as mid caps or large caps. Yeah. And we can't pretend that that's not happening. I've had a few people tell me they took away their small caps and just put in high yield bond instead. Similar return profile, right? Volatility. Just put it in the toilet.

Instead of, Oh, you're going to, are you going to buy small? Right. I mean, that's, that's as bearish as it is right now in small cap land. And it just like on its surface, you just want to say, I don't care if it takes three years, I'm going to make a ton of money on this. Small cap stocks. Look at Cheesecake Factory. I hear that's the new jam. I'm going to make a ton of money on this small cap stocks. Look at Cheesecake Factory. I hear that's the new jam. I was, it was the last time you went to one.

The only thing, Seth, the only thing that forces a company to be a small cap stock is not having an AI strategy. Well, Cheesecake Factory, guess what? Yeah. Like if you want to graduate from small cap to mid cap, if you're Cheesecake Factory, tell Wall Street how you're using AI to blah, blah, blah, blah, blah. And that's your best shot right now.

And chip cheesecakes. I own a few small caps. And when I talk about them, like publicly on TV, I'm the top news article for three months because nobody else has anything to say. Yahoo Finance is not publishing the analyst commentary on these stocks. The only outlet that I ever see with an article is either Seeking Alpha or Benzinga on some of these. They almost don't exist. It's incredible. Seeking Alpha could have been me like junior year of college.

It could have been a very young chart year of college. So, like literally. It could have been a very young chart kid, Matt, doing a post. All right, guys, the charts were unbelievable. Let's do final thoughts and then we'll say goodbye. Anything? Am I doing what am I liking right now? Give me a final thought on the market.

Because I did watch the Titan. Buyer sale. Boil it down for us, dude. The Titan documentary on Netflix. I'm a buyer of that. What is that? On the submersible that just vanished. Oh, that keeps coming in my algorithm.

They think I'm going to like it. I didn't know it was made out of carbon fiber. Okay. Me either. They have footage of some other dives and you can hear the ship basically popping, foreshadowing what happens. It's pretty spooky. Yeah. I'm going to stay with a jet skiing.

Charged kid Matt, any parting thoughts? Yeah. I think that markets are healthier than they were at the February high. There's obviously some rotation away from some of the Mag- 7 names and into other areas. I think that's overall good. Getting some breath rust in the data. I just wouldn't be bearish personally.

I like it. Michael? I'll give a plug for the Unlocked. Phil Huber and I did 50 minutes today on the mega trend of alternative asset managers infiltrating wealth managers. It was a good one. That's over at the unlock. That's the unlock channel on YouTube.

When is that going out? Is that out now? It was out live this morning at 11. See the replay. All right. I'm all in. All right, guys. Thank you so much.

Thank you so much to Todd Sohn of Strategus and to Chart Kid Matt Cermonaro of Where It Holds Wealth slash Exhibit A. Wonderful to have you guys. Thanks for doing this. And to all of you out there, thanks for listening and we'll talk to you soon.