Market Insights & Analysis from Kramer Capital Research

Not A Crash, Just A ‘Hot Money Correction’

While every day on Wall Street is impossible to predict, professional investors soon learn to trust certain statistical rules of thumb. That’s worth remembering as we watch the post-pandemic market twist.

When the market greets an economic speed bump with cheers, sentiment has drifted a long way from the usual fundamentals. And the rules of statistics tell me that the mood will get better… after it gets a little worse.

Look at the “hot money” themes that made aggressive portfolio managers like Cathie Wood famous when their bets were going well. Wood’s flagship ARK Innovation ETF (ARCA: ARKK) is down 27% in the last three months.

And the stocks stuffed into that fund are hurting. Tesla Inc. (NASDAQ:TSLA) has fallen 26% from its January peak. Square Inc. (NASDAQ:SQ) is down a relatively modest 17%.

Go up the Silicon Valley food chain and stocks like Apple Inc. (NASDAQ:AAPL) and Amazon.com Inc. (NASDAQ:AMZN) have shifted into reverse. The trillion-dollar titans are now circling 10% correction territory, becoming a noticeable drag on investor sentiment.

A few months ago, this end of the market looked invulnerable. What’s changed? And should investors run for the exits to sit out what could become a stormy season?

Money Rotates from Heat to Cold

The rules of statistics are like the market’s version of physics. They don’t predict every stock’s most intricate moves, but they are extremely useful when it comes to calculating probabilities and detecting abnormal patterns.

One of the most basic statistical rules around is also one of the simplest. When any asset makes an unusual or exaggerated move, there needs to be an external reason, or the market will ultimately recognize that it made a mistake.

External reasons are the stuff of most Wall Street commentary. Everyone loves a story. Companies that are doing well deserve to see their stocks become more valuable. Those that run into trouble pay the price.

But these narratives change a lot less frequently than people like to believe. Most of the motion on Wall Street really comes from money moving in something like a random trajectory, circulating like hot air.

Hot air obeys different laws of physics than solid objects. And as the system heats up, it becomes increasingly difficult to track every puff. All you can do at that point is rely on what you know about how the system “tends” to behave.

That’s statistics. One of the most reliable patterns is also one of the simplest: big moves always go at least a little too far to sustain their new position. Every rally gets overextended and needs to reverse course before it even has a chance to continue.

We call that reversal a correction. Cathie Wood, for example, had a fantastic 2020. Her investors more than doubled their money last year and now, in the absence of additional good news, it’s time for the market to take a little of that profit back.

I work extensively with these overextended stocks in my newly launched Triple-Digit Trader. When they’re hot, we ride the wave. But when they reverse course, it’s an opportunity to either buy the dip or pivot to the downside.

Cathie Wood’s stocks have gotten cold. We aren’t complaining. (You can see how I do it by watching the video.)

After all, the rest of Wall Street isn’t complaining. Over 85% of the members of the S&P 500 are up year to date (YTD). They just don’t include TSLA, AAPL and other “hot” stocks.

The companies currently leading the S&P 500 into record territory are more like the ones represented in my Value Authority, with solid fundamentals and real cash flow to support them across the market’s mood swings. 

It’s no coincidence that they’re the ones that suffered in the pandemic last year. While it might be hard to remember, a lot of people like Cathie Wood talked a lot about a “K-shaped economy” back then.

Their stocks were in the upward arm of the “K,” the side of the economy that seemed immune to a viral outbreak and even geared to grow explosively in total lockdown conditions. The rest of the world, the downward arm, felt the pandemic pressure.

A year later, the vaccines are working. Many states have completely opened back up for business. The “K” has inverted, with the old upward arm now pointing lower as the rest of the world recovers.

And in that inversion, there are bound to be aftershocks and adjustments. Today’s job creation numbers are a great example of how that works.

They weren’t as robust as anyone would have liked, but they weren’t awful either. Nonetheless, bad news for the economy was portrayed as good news for stocks.

Money flowed back into Cathie Wood’s end of the market, away from the companies that are truly on track to deliver strong year-over-year growth in the coming 2-3 financial quarters. It’s an overreaction.

But a little overreaction now and then is just the way Wall Street establishes what qualifies as “normal” in the long term and what is just statistical noise.

I don’t see a lot of reason to buy AAPL or TSLA for at least another month or two. As far as I’m concerned, they’re in a holding pattern now.

Of course, if the market overreacts and sells either of those stocks down another 20-30%, I’m interested. Wake me up when that happens.

I’m talking about all of this on my Millionaire Makers radio show (Spotify)(Apple) and video channel (YouTube). Subscribe now so you never miss an episode… or an opportunity!

Cannabis Corner: The New TLRY Changes the Map

Endless effort over the years has been wasted trying to evaluate “the cannabis map” in terms of state-by-state regulatory developments, but the real map for investors shows the major players and their market share. 

That map was too fragmented to be attractive. But this week changed those dynamics in a constructive direction as two of the biggest spaces on the map combined into a single industry leader.

Yes, Aphria Corp. is gone. APHA is no longer a useful ticker symbol anywhere. And while Tilray Corp. (TSE:TLRY) inherits APHA’s substantial assets and sales base, it is no longer a U.S. stock. 

The new TLRY only trades on the NASDAQ as a demonstration of goodwill. The old TLRY that made waves years ago is now only a piece of the company in front of us now.

This is a great thing. I’ve argued for years that there were too many lookalike stocks in the cannabis field robbing each other of the resources they needed to attract shareholder capital and the scale they need to succeed in the long term.

While I loved APHA, I’m happy to see it go under these conditions. And I’m excited to see where the industry goes from here. 

I take a portfolio-focused approach to IPO Edge, where cannabis is only a small piece of a unified buy list. We’re like a venture capital fund in that way, confident that triple-digit-percentage wins will more than compensate for a few missed swings along the way.

P.S Orlando MoneyShow, Championsgate Resort, June 10-12: The MoneyShow is back in person! Speakers not only include me but also Larry Kudlow, Mark Skousen,  Bob Carlson, Jon Najarian, Jeffrey Saut, Jeff Hirsch and Louis Navallier. Click here to register or call 1-800-970-4355 and mention priority code 052705 to attend free.

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