🗞 Transitory Bull Markets

WHILE YOU POUR THE JOE… ☕️

Last week, I walked you through factor regimes and their performances, so let me refresh your memory with an updated version.

This is the RSP (equal-weight S&P) / SPY ratio, and as you can see, it is now at extremes not seen since the 2008 financial crisis.

What this means is very simple: we have a stock market near all-time highs, while most of the economy hasn’t really participated in the rally.

Concentration, all into AI-related names.

Over the past two weeks, however, this ratio has started to break out, signaling a “real economy” recovery, with stocks in this theme outperforming the most.

Here are some of my successful pitches given to you over the past 2-3 quarters:

• RIG, PTEN, HP, CLX, TGT, CMG

As long as this RSP/SPY ratio keeps heading higher, the same factors that boosted these names will serve as tailwinds for several others.

But,

Not all industries are made the same, and that’s what we’ll get into next.

Speaking of tailwinds, let’s get on with today’s email 📧…

FROM THE TOP
Too Many Chips?

The doomsday narrative is leaning on a broader market selloff as the Magnificent 7 names underperform.

While there could be a doomsday scenario in the AI names, it doesn’t necessarily mean the entire market has to go along with them.

I can talk all day about how the AI trade is unwinding in real time, but I’ll let the industry’s capacity utilization readings do the talking for now.

73.6% down from 78.9% in July, that’s borderline anemic and a clear sign of inventory buildups all over.

Too many chips? What will happen when these inventory depreciations hit companies like NVIDIA, AMD, and others? Especially now that CapEx makes up more than 80% of free cash flow at these companies.

I say, why worry about all that, when you can go where the money is actually being made:

Last month, the manufacturing PMI expanded to 52.6% after being in a contraction for over 18 months.

This time, new orders jumped along to drive the index higher, so I guess that’s why names like SCHD, XLE, and even something as boring as XLP have led the way this year.

It all points to that “real economy” recovery I mentioned earlier.

But,

It’s still too early to tell, as one month gives us very little to chew on. I’d say wait for another month or two of confirmation in manufacturing expansion, then take your pick.

Where Money is Headed Now

When you spread out all of the factors in the market, it becomes very clear that the following themes are where investors want to be in:

• Value

• Upper Mid-Caps

• Real Economy Breadth

So when you take a look at a company like Wingstop (WING) failing to join in this real economy rally, it’s worth considering that money will eventually find its way into this catch-up.

Especially because of:

• 25% ROIC (Value/Quality)

• $6.9 billion market cap (Mid-Cap)

• Domestic consumption (Real Economy Breadth)

In fact, here’s how exposed WING is to these factors on a real quant basis. ⬇️ 

Yet the stock now trades at only 64% of its 52-week high.

Which is why Wall Street analysts, and I, see upwards of 30% upside in this company.

Oil Gains?

Another aspect of a real economy recovery is the rise in oil demand. I guess this is why you see /CL crude oil futures recover so far in 1Q’26.

When you think oil, you think Brazil, you think EWZ.

But most importantly, you think of Cosan (CSAN).

I can go on about this company, but I will just leave you with the fact that it has a net asset value (NAV) of $4.68, and it’s now below it.

Let’s see where this takes us.

To your success,

G 🫰