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00:00Good morning. Good morning. Cameron Dawson, Chief Investment Officer, New Edge Wealth.
00:06Cameron, how are you doing today? We've got a lot to talk about. We'll just go overall,
00:14broad market perspective here, just a rally that has just exceeded everyone's expectations.
00:20And we're just back at the lows from last week. I mean, no big deal. Why is everyone so upset?
00:26What's going on? They're upset because they're conditioned to such low volatility. We've been
00:32in this unflinching, up-and-to-the-right kind of market. And so when you get a little tiny
00:38ounce of volatility, it just feels so foreign to the world that we've been in. On the one hand,
00:44this market absolutely demands that you respect the trend, meaning that the trend is up. And
00:50every time we pull back to trend, you see buyers step in. It doesn't mean that you can ignore
00:57certain risks. It doesn't mean that you can ignore some of the deterioration you see under
01:02the surface and pockets. But overall, until we see signs that the trend is truly deteriorating,
01:08that you're seeing more distributive types of patterns, that you're starting to see some
01:13decaying in the fundamentals, which we can talk about, we're still in the respect the trend camp.
01:19And that means though, is that you can have an uptrend and still have pullbacks and it's
01:23perfectly normal, perfectly healthy. Okay. There's a lot to cover here. I mean,
01:30the narrative is constantly changing in these markets, but I looked at your Monday charts and
01:36I'm going to show them here. And you started out with, I mean, look at the news that we've had,
01:42the political news in the last couple of weeks. And we were trying to identify Trump stocks,
01:48Biden stocks. Well, no, it's no longer Biden stocks. Now it's Harris stocks here. I like to
01:53look at this, predict it. I see you have it up here. You got it nice graphically here. Let's
01:59just talk about like politics. I mean, we're away from a major election. We've had a historical
02:04change happen. You know, there's Trump stocks, there's Biden Harris stocks, or just tech stocks.
02:11Talk to us about the political environment. Well, one thing to encourage is that you can
02:16put these buckets of stocks that benefit from different policies together. The market does have
02:23a propensity though, to front run and pull forward a lot of those benefits. I lived that when I was
02:29covering the industrials, it was a great example back in 2016. Everybody thought we'd get all this
02:34stimulus on infrastructure. Industrials ran up mostly in the two weeks post the election,
02:41made a new relative high versus the market and quite interestingly, have not made a new relative
02:47high since. So that peak was in 2016. So just a good reminder that yes, you can see these things
02:53move around. There's some stocks that will definitely be correlated to the polls, polling
02:58numbers or the betting odds. But for the most part, it's you kind of take it with a little
03:04grain of salt because you can see a lot of pull forward and it could be a buy the rumor,
03:08sell the news kind of situation. Yeah, boy, I'm thinking about the weed stocks and I'm thinking
03:15about the solar stocks back in November and those moves were just unprecedented. Let's
03:22move on. Everyone's talking about bad breath, right? The rotation, relative strength here,
03:28the people that were waiting for that IWM. This is their perhaps getting their moment. I haven't
03:34checked the quotes yet. Peas are still leaking here. Talk about the breadth of the market and how
03:40this is maybe actually a good thing, the kind of correction in the rotation that we're seeing.
03:45Yeah, it's no surprise. The market got really overbought at the beginning of last week. And so
03:51to see it pull back to trend, at least the 50 day moving average, maybe the 100 day like we got a
03:57little bit in the beginning of the year. Again, it's all very well and normal. And I think the
04:03test then comes is how much gusto do you respond out of the out of the correction period? Of course,
04:10we saw really strong reactions coming out of the correction earlier this year, of course, back in
04:15October of last year as well, which set up for the next leg of the advance. Now, to your point,
04:21you are seeing these pretty powerful rotations under the surface, and some of them are more
04:27powerful than others. Right now, we think that they are driven purely by positioning and not
04:32necessarily by fundamentals. So if we're thinking about that IWM rotation, you can measure it
04:38through things like ETF outflows from the largest small cap ETFs being getting to an extreme back a
04:45couple weeks ago. You can look at CFTC positioning in the Russell 2000 being at its lowest level
04:52since 2022, not quite as low as it was back then, but still feel pretty pronounced in short positions.
04:57So that snapback is what is really fueling that uplift. And the question and the biggest question
05:04is, can it be sustained? And that's where we think we have to turn to the earnings line
05:08in the Russell 2000 in these unloved areas to get a sense of is this more than just a one to two
05:15month kind of move like we got at the end of last year, or something that looks a lot more akin to
05:20let's say 2020, where we had small cap leadership for multiple quarters. We lean towards there's
05:26still some big question marks on the fundamentals, which we can we can dive into.
05:31Okay, I just pulled up or I am pulling up the momentum surge here in the Russell 3000 names
05:38at the 20 day highs. Very good. We can't see it now. Oh, got to add. Boom. Thank you. There
05:46we go. The momentum surge here. Boy, just I mean, unbelievable chart. Talk about what you're looking
05:54at here. And then talk about the, you know, the recent volatility here. And I mean, the fix has
06:00had its spurts and stuff here. Just talk about how, you know, the two things go together.
06:06Yeah, so this momentum surge, if you talk to the technical guys and quoting Jeff Degraff here,
06:12he calls it momentous momentum. When you see a huge amount of flows into stocks that everybody's
06:18clamoring to get in, you see a surge in 20 day highs. And that typically is followed by a period
06:25of stronger forward returns, because it signifies that people are racing and rushing to get into the
06:31market. The thing that's really unique about this surge in 20 day highs, is that it's not coming
06:38after a corrective period, it's coming actually after a pretty powerful advance. So when the
06:45market was already overbought, you were seeing this surge in 20 day highs. I don't know if this
06:51is the exception to the rule. I think it really remains to be seen. You know, one observation is
06:56that we see some more of these breadth thrusts recently than we have in prior periods. Maybe it's
07:02just the velocity of the market moving around. But it's something to keep in the back of the mind
07:07that typically it is a bullish signal. But of course, it is the confluence of evidence that we
07:13have to continue or could consider. To your point, Joel, on volatility, it's another one of those
07:20examples of you're in a very low volatility environment that creates the setup for a higher
07:26volatility environment. So maybe not quite the Minsky moment of low volatility breeds high
07:31volatility yet. But there is an aspect of seasonality to volatility. This is typically a
07:37time where we see vol pick up. So again, not all surprising. It just feels very foreign simply
07:45because we've been in this ultra low vol kind of world. And I mean, I think I saw a stat maybe,
07:51you know, the stat, but it's been like 300 days since we've had a 2% drawdown in the S&P. And I
07:57mean, obviously, we're starting the day we're down 1%. So maybe today is going to be the day if we
08:02get follow through here. But it never seems like that just seems like the mentality of this investor
08:06or trader is like I buy dips and I win money. And I mean, I don't know how you break that.
08:11I think you break it with the fundamentals and the earnings or liquidity. So to address the
08:17liquidity one, you know, Dan Clifton over at Strategus has done some pretty incredible work
08:22on trying to, I call it the 10 hat analysis, you kind of have to believe in these liquidity
08:27conspiracy theories about TGA drawdown, reverse repo drawdown, how that impacts overall liquidity.
08:35But there are ways to measure to say that there has been a liquidity
08:39support for this market, which has helped it sustain and tolerate any kind of uncertainty
08:46in the headlines. The other aspect that I think is really important is that if you just look at
08:50the chart of the 12 month forward EPS line, it's still going up. Now, we could argue that the only
08:56reason 12 month forward EPS is going up is because you're including more of 2025. Each month you go
09:02forward, you get more of 2025 in that number. So it lifts just because the calendar effect.
09:08But I think the key thing to watch is that we think that 2025 estimates are too high.
09:14And so they're at $277 a share. I think that if you were to identify a risk into the back half of
09:21the year into 25, the risk to us would look like you go into an EPS cutting cycle, you have to
09:27trim estimates. And that line of 12 month forward EPS starts to flatline and possibly starts to turn
09:34over. And then it hits these really high valuations, which you just pulled up, which is that
09:39you look at valuations for the S&P 500 or for tech specifically, very elevated. So the key
09:45risk would be is that you have a slowing trajectory in EPS because estimates are too high,
09:52running headfirst into high valuations. And that could be your setup where, Dennis, where people
09:59are less likely to want to buy the dip, because you're not in this rising growth forecast and
10:06still room for upside to valuation environment. I just find it interesting when I'm reading, I'm
10:12just reading your slide here as well. So the only time tech has been more expensive was during the
10:151990s tech bubble. I mean, there's a scary thought there too. I mean, I think during the tech bubble,
10:21I think the NASDAQ was 45 or 50 times earnings. Maybe you know the stats. I'm going from my memory.
10:26But so obviously we were a lot more elevated than this. But, you know, if you're putting new money
10:32into NVIDIA at this point in time or putting new money into, you know, obviously a lot of
10:37these other tech stocks at this point in time, we might be a little bit late to the party, aren't we?
10:42Well, given where valuations are, I would argue that valuations have hit a ceiling, but I would
10:49have argued as well, obviously incorrectly by this chart, that valuations wouldn't retake the
10:552021 highs, meaning that 2021 was a time when you had, you know, incredible euphoria in markets. You
11:04had huge policy support, you know, rates were zero. Of course, there's a degree of euphoria
11:10captured in things like AI. And a lot of the last, let's call it three months of moves in stocks
11:16weren't being driven by earnings revisions, moving higher for tech names. It was being driven
11:20just by multiple expansion and positioning chases. So if you, the thing to contemplate
11:28going into 25 is that you get a pretty big second derivative slowdown in the pace of earnings growth.
11:33You look at the mag seven, they go from about 46% earnings growth on a cap weighted basis
11:39today in 2024, that decelerates to 20%. Usually markets don't like second derivative decelerations,
11:48meaning that, yeah, you're still getting earnings growth, but if it's at a lower pace,
11:51maybe I pay a lower multiple. So that would suggest that maybe you are a little late to the
11:57game, but we also can't rule out, you know, 1998 is a great example of Fed cuts rates and market
12:04goes absolutely berserk moving higher through the peak in March to March of 2000. And here's
12:09the most fascinating part about that time. Growth earnings actually underperformed value earnings in
12:1698 and 99, which meant that it was all valuation expansion. It was all bubbly kind of behavior.
12:23So that is a tail risk to the upside for this market. We know the Fed wants to cut, look at
12:29Dudley coming out this morning saying it's time Fed has to cut. You can't rule out a irrational
12:36exuberance kind of rally melt up, which is why you have to be balanced. Yeah, there's a lot of
12:41downside risks, but there's also upside risks. So Cameron, I mean, speaking on this subject,
12:48we've seen the RSP, the equal weight S&P 500 kind of underperformed the actual S&P 500 for the last
12:55year or so, because if you weren't in the big boys, you weren't seeing those big gains. Are you
13:00starting to see that trend shift right now, or is that too early to tell if it's going to start
13:05coming back a little bit, the RSP? Yeah, we say, you know, too soon to call it a trend change.
13:11You've seen a little bit of a lift in the relative performance, but not a lot. This can be explained
13:17by earnings as well. Half-weighted earnings because of the mag seven have significantly
13:22outperformed the equal weight earnings. And I saw a stat this morning, and I wish I could
13:28remember who I saw it on Twitter from or X from saying that the correlation between the equal
13:34weight and the cap weighted index is one of the lowest on records. Usually it has a very tight
13:39correlation because it's the same stocks just with different weightings. And that's fallen to about a
13:450.36 correlation in the last few months, which is just, it just speaks to the degree of absolute
13:53and complete narrowness. But we think the market can stay narrow as long as earnings stay narrow
13:58and that you have to see the broadening out in earnings. The point though, I think that's
14:03important in that is that broadening out in earnings is already being contemplated in
14:08current earnings estimates. So the market now has, if you look into the fourth quarter and first
14:13quarter 25, the market has the average stock outperforming the 493 stock, outperforming the
14:20mag seven by the time we get to the first quarter. So if we don't see that, that materialize, you
14:28actually have an earnings revision down cycle for the 493 that could keep the market narrow.
14:33So that's why we have to watch that earnings line and earnings revision super, super closely.
14:38Okay. One more here before we let you go. And this has to be, I think, the favorite one of all
14:44these fantastic charts that you sent us here. And we've had a very unusual time period here
14:50since 2020. You do a great job here. I'd like you to put 2024, the rest of the year, and 2025 on top.
15:00Yeah, we want to see what's coming.
15:01Let's see what's coming.
15:05Wow. What a divergence here.
15:08Yeah. Look, it's absolutely incredible. And again, it just speaks to that. If you look at all the
15:14areas that have the best returns, it's because it's the areas that have had the most earnings
15:20growth. The best reminder to have is that you typically get double whammies to the upside and
15:27the downside. The double whammy is that when earnings growth is superior or accelerating,
15:33you get multiple expansion. When earnings growth is inferior or decelerating, you get multiple
15:39compression. And I think that is the key wildcard for 25, is that can you see the same kind of
15:46leadership if you're seeing a decelerating kind of earnings environment? Do you get multiple
15:52compression off of these super high levels, which could cause a leadership rotation?
15:58I think it still very much remains to be seen. And it's one of the reasons why our view on things
16:05like tech is that you have to let your winners ride. Until you see signs that the trend is
16:10deteriorating, that you're seeing a breakdown in the trend, and that buy the dip mentality
16:16has evaporated, I think that this market, as we started talking, has been demanding that you
16:22respect that trend. So one of the things we're watching closely for is the breakdown in some of
16:28the semiconductors that have deteriorated versus trend. So there's some red flags that are brewing
16:35that could set up for a very fascinating end of 24, end of 25. That is an understatement.
16:44Cameron Dawson from New Edge Wealth here, joining us here on pre-market prep,
16:49breaking down the fundamentals, breaking down earnings, earnings growth, earnings expectations.
16:54That's what we need to talk about more. Thanks a lot, Cameron. We'll be talking to you again real soon.