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WEEK AHEAD

July 29 - August 2, 2024

Tactical Signal 9

Last week’s downturn in tech and small-cap rotation is not unexpected, given their relative performance over the past year. Our technical indicators support a fully invested position (100%).

Last week's U.S. stock market was volatile following a very newsworthy week on the political front. The volatility was spurred by a pullback in the Mag 7 names, starting with the earnings announcement by Google, yet the rally and rotation into small caps and value stocks.  S&P Growth stocks were down -2.34% compared with S&P Value, up an amazing +1.14%.  If that wasn't enough, the Russell 2000, representing small caps, added another +3.47% for a month-to-date return of +10.42%.  All Mag 7 stocks were down with the worst performance surrounding Tesla, down over -8%.

This week's data continued to confirm that inflation remains on a downward trend, affirmed by another drop in two-year Treasury yields to a low of 4.39%.  10-year Treasury yields remained flat for the week at 4.21%.  No new data was revealed as PCE, GDP, and Initial Jobless Claims were reported as expected.  The market expectation did not change for a single FED cut later this year.  However, this week may be considered the week that marked the beginning of a market rotation into small caps and value stocks as market participants focus more on company fundamentals.  This makes next week's anticipated earnings reports for MSFT, META, AMZN, and AAPL more important to the market's potential inflection point.

We should expect further volatility this coming week, with many chip companies also reporting and representing the current pulse of technology and possibly AI.

"Volatility is a symptom that people have no idea of the underlying value."

– Jeremy Grantham, Founder and CIO of GMO, LLC

Wisdom of the "Crowd" takes down the cloud…

On July 19, 2024, a sudden technological disaster swept the globe, causing millions of Windows computers to crash with blue screens, leaving users in turmoil. The impact of this incident was extensive, affecting a wide range of sectors from airports to banks, medical institutions to hotels, and multinational companies to individual users. Almost every area utilizing Windows systems was not spared.

In the United States, major airlines like American Airlines, Delta Air Lines, and United Airlines were forced to suspend flights due to system crashes, leaving numerous passengers stranded. Key infrastructures such as the London Stock Exchange in the UK, Amsterdam International Airport in the Netherlands, and Singapore Changi Airport also experienced frequent flight delays and check-in failures. Additionally, the European banking system, Australian public service agencies, and many companies and individual users worldwide suffered varying degrees of losses. Microsoft's 365 services were also affected, with its cloud storage service OneDrive and email service Outlook experiencing outages, further exacerbating the chaos. In Australia, nearly all public places and service agencies using Windows systems were affected, causing significant disruptions to daily life.

The "culprit" of this incident was eventually identified as a defective software update released by the cybersecurity company CrowdStrike. At 04:09 UTC on that day, CrowdStrike issued a content configuration update for Windows sensors as part of its routine operations aimed at collecting telemetry data on new threat technologies. However, an undetected error within this update accidentally triggered the crash of the Windows system. Specifically, the affected devices were mainly Windows hosts running sensor versions 7.11 and above, which were online and received the update between 04:09 and 05:27 UTC. Fortunately, the flaw in the content update was quickly fixed by 05:27 UTC, but by then, a significant number of systems had already crashed.

This technological disaster caused significant trouble for users worldwide and triggered substantial fluctuations in the stock market. CrowdStrike's stock price plummeted by over $50 at the market's opening on July 19, significantly reducing its market value. Since then, its stock price has continued to fall, reflecting the market's serious dissatisfaction with the company's mistake. Meanwhile, CrowdStrike's competitors, such as SentinelOne and Palo Alto Networks, have benefited from the situation. SentinelOne's stock price rose significantly following the incident, with the market generally believing it might seize the opportunity to expand its market share. Although Palo Alto Networks experienced a more moderate increase, it still demonstrated investor confidence in its future growth. Microsoft, as the supplier of the Windows system, temporarily became a "scapegoat" despite not being at fault in this incident. Its stock price fell by nearly 2% at the market's opening on July 19. However, as the situation was clarified and recovery measures were implemented, the stock price gradually stabilized.

This incident underscores the deep integration of the global economy and how a single technological failure can have widespread repercussions. The cascading effects of this outage highlight the interconnected nature of modern infrastructure and the fragility of relying heavily on digital systems. The financial world's immediate reaction, with sharp declines in stock prices, reflects how investor sentiment is highly sensitive to technological stability. In a globally connected marketplace, the ramifications of such disruptions extend far beyond the initial technical failure, influencing markets, investor confidence, and economic activities worldwide. This event serves as a stark reminder of the critical need for robust cybersecurity measures and contingency planning to safeguard against future incidents and maintain the stability of our interconnected world.

Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.

 

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