Up Next: A Mag 7 Massacre?

What goes up… must come down… [Morning Reckoning] February 20, 2024 [WEBSITE]( | [UNSUBSCRIBE]( Up Next: A Mag 7 Massacre? Baltimore, Maryland February 20, 2024 [Greg Guenthner] GREG GUENTHNER Good Morning Reader, The market’s finally flattening out. The S&P 500 stumbled into the red on Friday, posting its first losing week since Jan. 2. No, large-caps aren’t falling off a cliff (the weekly loss for the S&P clocks in at a little less than half a percent). But we’re starting to see some cracks in the foundation following the melt-up move that began in early November. Last week, we reviewed how to react when the market enters a pullback phase. Certain stocks and sectors (I’m looking at you, semiconductors) have become frothier than an $8 latte. As we’ve said for what feels like ages now, we could see a 5-10% market drop trigger if these overextended stocks settle down and reverse. It’s a fact – pullbacks like these can happen several times a year. Just don’t tell the throngs of speculators who will no doubt panic at the first sign of an actual market drawdown. It’s only been three months since everyone was convinced stocks were headed for a crash. But the melt-up rally has wiped the herd’s hard drive clean. As far as many speculators are concerned, everything is back to normal. Stocks only go up… If you’ve been around the block a few times, you’re probably more than a little worried over the market action we’ve seen so far this year. After all, the signs of bubbly action are all around us: parabolic rallies, historic squeezes, and insane earnings reactions are starting to pile up. It feels like 2020 all over again. [WARNING: Do NOT “Buy the Dip”]( [Click here to learn more]( Jim Rickards warned the public that equities were dangerously overpriced in 2023... Well, it’s been just about a week into the new year… And it’s already looking like 2024 could be a bloodbath. Stocks are down… indexes are down… and even large caps have declined by as much as 15%. Some folks probably think it may be a good time to “buy the dip”… But according to Jim, that may be a HUGE mistake. [Click Here To Learn Why]( [LEARN MORE]( In order to get a feel for just how deluded the speculator class has become, I grabbed my hazmat suit to skim the Wall Street Bets Reddit community and a few other stock trading message boards. As you can probably guess, the YOLO speculators are back to their old tricks. But instead of GameStop and AMC shares, they’re slinging options on semiconductor stocks and other tech names. The action this week centers around NVIDIA Inc. (NVDA) earnings, which are set to hit the wire Wednesday after the closing bell. Most of the comments I saw were written by posters who’ve already loaded up on NVDA calls – sometimes light years out-of-the-money. But to my surprise, there were also a few bears mixing it up with the long and strong crowd. No one has any way of knowing how the Street will react to NVDA’s earnings. But I’m willing to bet that we’ll see some volatility after the numbers come out Wednesday night. After all, we’re dealing with a major market leader that’s up almost 50% year-to-date. And while shares did slow their ascent last week, the stock still has yet to post a fat red candle since its breakout above $500. A couple of important points to consider when analyzing this chart: First, we need to acknowledge that the bulls have been dead right about NVDA (and other big tech/semiconductor plays). The early 2023 rally off the lows and subsequent breakout at $500 in January have added up to an astounding 380% rise. That said, I don’t think betting against this stock outright is a solid trading plan. We have to respect the trend – it’s one of the strongest on the market! At the same time, NVDA shares are technically overbought. At the very least, we should expect some retracement or longer consolidation period following the extension off the $500 breakout level. Again, this isn’t a call for an all-out crash. But a sharp move lower – even a temporary one – would help relieve some of the pressure. That said, the Wednesday NVDA earnings release could be the market-moving event of the week, if not the entire month. Other high-flying semiconductor stocks have already started to lose steam, with the VanEck Semiconductor ETF (SMH) finishing lower the previous two sessions. If the flagship stock is unable to impress, we have to assume the other names in the group will also come under pressure. What About the Magnificent Seven? Everyone’s been talking about the popular “Mag 7” mega-caps dominating the tape so far this year. Yet as we enter a period of seasonal weakness, the bears are beginning to pick off these unstoppable stocks one by one. Tesla Inc. (TSLA) was the first to fall from grace, breaking from the group after reporting disappointing earnings in January – which led to an ugly drop of 25% to kick off the first quarter. TSLA isn’ the only one of the big boys having trouble keeping up these days. Apple Inc. (AAPL) has been a choppy mess for the past six months. It’s down nearly 3% year-to-date and remains well off its highs – even as semis and other tech names dominate the tape. Its Feb. 1 earnings announcement failed to generate any excitement – and the October lows could easily come back into play should the stock continue to slip this week. Alphabet Inc. (GOOG) also failed to rally the bulls with its earnings report in late January. The stock remains nearly 8% below its highs and is threatening to go red for the year following a failed post-earnings rally attempt. Pay close attention to these and other Mag 7 names as NVDA earning approaches. They could offer an excellent opportunity to bet on some short-term downside action that might catch the herd off guard. Best, [Greg Guenthner] Greg Guenthner Contributing Editor, Morning Reckoning feedback@dailyreckoning.com [Download This New Survival Guide Today!]( There is a “Crisis Survival Guide” that is available to all The Daily Reckoning readers today. This short 54-page document has everything you need to know to protect yourself and your family in times of crisis. Things like what foods to stock up on now, staying safe during periods of rioting and looting and more. Inside it breaks down all of the coming threats you face and how to prepare. [>> To see how to download your copy, click here now]( . [LEARN MORE]( In Case You Missed It… The Cost That’s Never Counted Sean Ring, Editor [Sean Ring] SEAN RING Good morning Reader, It’s hard enough counting the stuff you can see. And you’d think it’d be damn near impossible to count the stuff you can’t see. But that’s not so. Nineteenth-century French economist Frédéric Bastiat, as imagined in Midjourney With a bit of elbow grease and forethought, you can calculate the accounting (seen) cost of a particular action and the economic (seen and unseen) cost of that action. This is one of the most important skills you can develop. If you’re a parent, this is the one skill that, if your child learns it, will almost guarantee a high minimum level of success in life. I’m talking about the ability to calculate opportunity cost. What is Opportunity Cost? Opportunity cost is an economic concept that refers to the potential benefits an individual, investor, or business forgoes when choosing one alternative over another. In simpler terms, it's what you give up to do something else. This idea is crucial because it helps people understand the actual cost of their decisions, not just in terms of money but also in terms of forgone opportunities. Here are three examples of opportunity cost: - Investing in Stocks vs. Holding Cash: If you decide to invest $1,000 in the stock market instead of keeping it in a savings account, the opportunity cost is the interest you would have earned on that $1,000. On the flip side, if the stocks do well, the opportunity cost of not investing could be the gains you missed. - Going Back to School: If you choose to return to school full-time, the opportunity cost includes the salary you're not earning by working during that time and any career advancement opportunities you might miss. - Spending Time: If you spend the evening working on a project instead of going out with friends, the opportunity cost is the enjoyment and relaxation you would have experienced during the night out. Opportunity cost is about trade-offs. It helps you make more informed decisions by allowing you to consider what you're potentially giving up. If you’re struggling with grasping the concept, let my French friend Freddy help. The Broken Window Fallacy The Broken Window Fallacy is a concept introduced by the 19th-century French economist Frédéric Bastiat, illustrated in his essay "Ce qu'on voit et ce qu'on ne voit pas" ("What Is Seen and What Is Not Seen"). The fallacy begins with a scenario where a vandal breaks a shopkeeper's window. Some people (perhaps Paul Krugman) argue that the broken window has a silver lining because it generates business for the glazier (the window repairer), who will presumably spend his earnings elsewhere, thus stimulating the economy. However, Bastiat points out that this viewpoint is myopic because it considers only the immediate effects (what is seen) and ignores the broader implications (what is not seen). The shopkeeper must spend money repairing the window instead of on other goods or services that the shopkeeper might have preferred, such as buying new stock, investing in another project, or saving for future needs. The economy hasn't gained a new window; it merely replaced one already there. The real cost includes the opportunities foregone due to the money spent on repair rather than on something else. The relation to opportunity cost is direct and profound. In the Broken Window Fallacy, the opportunity cost is what the shopkeeper sacrifices as a result of the window being broken. It's the value of the opportunities lost—the goods or services the shopkeeper cannot now purchase or invest in because the money had to be used to fix the window. Bastiat uses this parable to illustrate a broader economic principle: true costs consider both the seen and the unseen, including what has been foregone or sacrificed. This underscores the importance of looking beyond immediate, visible effects to consider what other opportunities could have been pursued with the same resources. In summary, the Broken Window Fallacy cautions against the notion that economic activity alone (like fixing a window) is a sign of economic health. It emphasizes understanding opportunity costs and recognizing that resources spent in one area are resources that cannot be spent elsewhere, highlighting the importance of considering the full range of economic consequences of any action or policy. If you’re a parent or grandparent, let’s take the argument to the kids. The Stanford Marshmallow Experiment The Stanford Marshmallow Experiment is a famous psychological study by psychologist Walter Mischel at Stanford University in the late 1960s and early 1970s. The experiment focused on delayed gratification, or the ability to wait to obtain something one wants. In the study, a child was offered a choice between one small reward (a marshmallow) provided immediately or two small rewards (two marshmallows) if they could wait for about 15 minutes, during which the experimenter left the room and then returned. The study observed how long each child could resist the temptation of the immediate reward and wait for the larger, delayed reward. Follow-up studies also examined how the children's ability to delay gratification correlated with their future success in various areas of life, such as academic achievement, health, and personal finances. Relating this to opportunity cost, the marshmallow experiment illuminates the concept regarding self-control and evaluating future benefits versus immediate satisfaction. The opportunity cost of choosing the immediate marshmallow is the extra marshmallow that could have been obtained by waiting. The children who waited effectively decided that the opportunity cost of the immediate gratification was too high compared to the potential future reward. This experiment illustrates a broader principle in economics and psychology: individuals often face choices that involve trading off immediate benefits for greater long-term gains. The ability to evaluate and act in favor of long-term rewards, despite the opportunity cost of forgoing immediate gratification, is a crucial aspect of decision-making and significantly impacts life outcomes. Now that we’re on a first-name basis with opportunity cost let me tell you about my X experience. Ze Germans on X I came across this tweet on Wednesday: Credit: [@bizlet7]( I cracked up. I’m sure that tweet was made up, but nevertheless, I was in stitches. But it illustrates opportunity cost at the national level perfectly. For Germany, allegedly, they’ve got all these nice things. (Many Germans on the thread complained about their suboptimal healthcare and late Deutsche Bahn trains.) But let’s suppose all this is true. What has Germany given up for this? Essentially, it has given up its sovereignty, safety, and control by being a US vassal. That’s the unseen. The counterargument is that it gained the “world’s greatest military” as its ally (the seen). For the US, it’s got Germany under its thumb (the seen). But what could the USG have spent that money on (the unseen)? Hospitals? Libraries? Giving your money back to you? Wrap Up Opportunity costs are everywhere and occur every day in your life. Calculating them over time will help you and yours make better decisions. If only our politicians did the same. Bastiat once wrote, “The real cost of the State is the prosperity we do not see, the jobs that don’t exist, the technologies to which we do not have access, the businesses that do not come into existence, and the bright future that is stolen from us. The State has looted us just as surely as a robber who enters our home at night and steals all that we love.” That puts things in perspective. All the best, [Sean Ring] Sean Ring Contributing Editor, The Morning Reckoning feedback@dailyreckoning.com X (formerly Twitter): [@seaniechaos]( Thank you for reading The Morning Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Greg Guenthner] [Greg Guenthner, CMT,]( is chief strategist at Forge Research Group. He has spent the better part of the past two decades developing long-term and short-term strategies with a single goal in mind: to help everyday investors generate outstanding returns and control their financial futures. Greg’s charts, analysis, and insights have appeared in Marketwatch, Forbes, Yahoo Finance, and many other financial publications. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2024 Paradigm Press, LLC. 1001 Cathedral Street, Baltimore, MD 21201. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your The Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. We welcome comments or suggestions at feedback@dailyreckoning.com. This address is for feedback only. For questions about your account or to speak with customer service, [contact us here]( or call (844)-731-0984. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized financial advice. We allow the editors of our publications to recommend securities that they own themselves. However, our policy prohibits editors from exiting a personal trade while the recommendation to subscribers is open. In no circumstance may an editor sell a security before subscribers have a fair opportunity to exit. The length of time an editor must wait after subscribers have been advised to exit a play depends on the type of publication. All other employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of a printed-only publication prior to following an initial recommendation. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. Please read our [Privacy Statement.]( If you are having trouble receiving your The Daily Reckoning subscription, you can ensure its arrival in your mailbox by [whitelisting The Daily Reckoning.](