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Here’s your Alpha portfolio update for August 2024:

• Returns so far this year +4.57%

• Our leading stock is Turning Point Brands Inc currently at +42.1% while our position in Crocs Inc lagged by -15%.

• We have 7 new stock positions and 6 stocks sold.

• Total positions: 15
  _{See the investment portfolio for the rest of our positions.}

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This has been painful for most people. Before today, the Nasdaq was down -9.0% from its most recent high – just 15 days ago—the S&P 500 was down -4.0% over the same two weeks. No investment strategy got out of July unscathed. What went wrong?

The Great Rotation

One major US index that did not struggle in July was the Russell 2000. It’s a market index composed of 2,000 smaller US companies, and so far in July, the Russell 2000 has outperformed the Nasdaq by 12.8%. It’s on pace for its largest monthly lead since February 2001.

The idea of a coming rotation out of high-flying tech stocks into largely undervalued smaller companies has been a veiled threat hanging over the market for months. In the run-up to the AI frenzy, valuations for the tech behemoths had been stretched to historical proportions. But a good talking head on TV could justify said valuations, and buyers kept coming. All the while, small-cap stocks suffered in a pricing purgatory. As insiders are prone to say, they couldn’t ‘catch a bid’. The interest was all with the Big Boys.

Most analysts assumed that if a day of reckoning ever came, it would do so in fits and stretch over months. It didn’t. It came suddenly and violently.

Healthy?

A rotation can be healthy for the market; reducing concentration risk and overstretched valuations of key players, boosting other sectors, and helping to sustain the current rally.

That said, Big Tech has a staying power that small caps simply don’t. And the enthusiasm around artificial intelligence and accompanying corporate profits – at whatever point in the future they come – is real. The recent pause or pullback in tech, while it looks scary and has definitely been painful, is temporary.

Upcoming Stuff

Optimism over artificial intelligence has been the key driver in the broader market (that is, until July). The biggest tech players in the industry (think Microsoft, Meta, Apple and Amazon) are flush with cash, and they’re expected to be deploying that cash like drunken sailors to areas they see as the next engine for growth (think AI).

The problem is, all of a sudden Investors want to hear how all that spending will lead to profits. However, profiting from AI will take time. Tesla posted earnings last week, kicking their AI-dependent robotaxi vision down the road. Not helpful.

CEOs on upcoming conference calls will have to muster all their diplomatic skills to sell the need for massive spending to build out AI platforms while painting a pretty picture of colossal returns in the future. It’s been done before (the internet buildout in the 1990s and the cloud buildout more recently). But investors are impatient. We’ll see.

Wedbush’s Dan Ives is feeling positive. “When we end the week, we’re going to look back and say the monetisation of the AI revolution started. This will be a pivotal, historical week for Big Tech.”

Another key event – last week’s conclusion of the July Federal Reserve meeting, which will have ramifications into August. The policy statement released by the central bank left rates unchanged and included comments that could be construed as dovish and laying the groundwork for a September rate reduction.

Tom Lee, Fundstrat’s Head of Research, said the day before that investors should “buy the fear” heading into the Federal Reserve’s interest rate policy announcement. Lee believes small-cap stocks will lead a five-day rally post-Fed meeting, and the broader market won’t be far behind.

And with that, have a great summer!

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Ali is the Founder & Editor of The Insider Memo, Follow him on X @ASAInsights