Stock Market in "Collapsing" AI Trade? Gareth Soloway on Memory Rotation, "Topping" Yields

[00:00:00] Speaker 1: I do want to shift gears here, though, bring Sam back into the conversation and welcome in our next guest to take a look at the broader market. Joining us, Gareth Soloway, the chief market strategist at Verified Investing. Gareth, thanks for being with us today. I had a guest earlier on my earlier show, Trading360, call a top in yields. And I saw in the notes that you sent over that you are also seeing some technical signals telling you that we could also potentially be near a near-term peak. So I'd love to get your breakdown there to start. [00:00:25] Speaker 2: Yeah, absolutely. And so I would agree with that in that you had a topping tail on the daily chart of the 10-year yield last Wednesday. And then the weekly candle also formed a topping tail. And so topping tails that occur, so number one, that's a bearish reversal signal when you talk technical analysis. But when you get a daily that occurs in the same week as a weekly topping tail, it tends to be more dramatic and more true, meaning higher probability that we'll see downside. So while long-term, I still think rates will be problematic with the U.S. debt, near-term, I think we pull back now to basically 5% or just below. [00:01:01] Speaker 3: So then would 5% or just below, Gareth, be the new lower end of a higher range that we should be getting used to if you're still worried about the debt? Because some people are drawing a correlation between the 10-year and crack spreads. You've got refiners going through the roof more than AI. You've obviously got the resilience of this economy, which continues to drive yields higher as well. [00:01:25] Speaker 2: Yeah, and I think it's a little bit of everything here. So absolutely, the Valeros, the Phillips 99s, they've gone parabolic here based on diesel and the crack spread. And so I think that that's part of it. But I do think we're entering this new normal, right, where we're going to get these pullbacks, especially if the economy weakens. And I think to some extent that's already beginning, right? We're starting to see some of the economic data, like the last jobs report, come in just a little bit more shy. And if you look at Jamie Dimon's comments today after their earnings or on their earnings call, he also warned about the underbelly of the economy. And so when you have yields where they are, when you have gas prices and diesel prices where they are and inflation continuing to stay stubbornly north of 3%, there's going to be a point where it weakens that overall economy. And I think that's the one caveat that could take yields back below 5% is if we start to see that weakening. Now, again, like we talked about, there's this new normal. Well, we're not going back to COVID-style yields. There's probably going to be a floor at 4% or above for the longer term and eventually higher highs on yields as well. [00:02:31] Speaker 1: Before our break, I teased that you suggested the AI trade is collapsing here. So I want to dive into the specifics on that. What are you seeing in the fundamentals or in price action that is telling you that the market's biggest growth engine is starting to break down? [00:02:48] Speaker 2: Yeah. And it's really been amazing because just in the last couple of days, we've seen this rotation out of names like Micron and Sandisk. Those stocks have been coming down very, very sharply into some of these old school plays like Clorox and Nike. Nike, after those horrendous earnings, has gone up almost every single day since then and is now higher than it was when it reported earnings just a week or so ago. And so the money rotation is beginning. But I think you look at some of the fundamental stories like what CXMT reported out of China, where they're coming up with new advanced chips that can hold more data. And those type of things, it's just the beginning. Right. You have more plants coming online in late 2027 into 2028, even Micron building new plants. And what we have to remember is the market tends to price things in six to 12 months in advance. And so if we know that that's coming in late 2027, early 2028, that will ultimately discount the price of these AI stocks now. [00:03:44] Speaker 3: So put simply, is China a threat to your U.S. tech portfolio right now? [00:03:52] Speaker 2: It is. It is to some extent. And believe it or not, it's one of my growing investment opportunities. So I've started putting some money in Baidu and Alibaba down at these levels. I love buying things when everyone else hates them, right? And right now we have this flush of money that is just flooded into the AI trade in the U.S. markets. And I think it's leaving other areas underinvested, which will just see that money flow eventually, even a portion of it, rotate into those names. And that will ultimately give those names a big boost. And so, again, I do think the China trade is undervalued right now. And I do think that's one of the next pops that we're going to see. [00:04:27] Speaker 1: So if the AI trade is collapsing, and we already know that this rally has been driven primarily by many of these mega cap names that are heavily tied to the AI trade, whether directly or somewhat indirectly, how vulnerable then is the broader market? [00:04:46] Speaker 2: That's a great question. And so the thesis here that I have when I'm looking at the charts is that there's a combination of factors that have been driving the market. It's mainly the AI trade, the market caps of these things, but there is room for a little bit more upside in the S&P. And the key catalyst would be a lower oil price and a lower yield. And if you can get those to be combined, that gives the S&P a little breakthrough, this current resistance level around the 7,800 level. And it should push us up to about 8,000. And up at 8,000, there's this epic trend line that goes back to 2022 and even earlier on to the 2020 lows that will act as major resistance. And so the thesis here is the yield pulling back with oil pulling back over the next month or so should be enough to be the catalyst to push the S&P up. But once it gets to 8,000, I think that the narrative flips to a weaker economy and we start to see the markets coming in substantially with the AI trade leading. [00:05:42] Speaker 3: What about all these high profile warnings we've heard from the street just in recent weeks? I mean, you had Paul Tudor Jones today having this 2027 warning that's catching a lot of attention. Obviously, you've had Ray Dalio's of the world talking about yields, talking about an AI bubble. I had Jim Poulsen on my show the other day who was sort of suggesting that the next six months could look a little bit tougher. But not just those guys. I mean, you have heard from the tech companies themselves, Lit Boutan, Hocktan, now talking about how the cost of capital could become the next constraint. I mean, obviously, Broadcom today warning about gambling, casino-like nature of the AI trade. I mean, I had a guest on the other day that said it's tech, tech, tech, just drown out the noise. But if the tech, tech, tech people are making these comments, not just the big sort of veteran investment guys, what does that tell you? I mean, should we be paying attention to what they're saying or is it just noise? [00:06:45] Speaker 2: No, I think you should pay attention. And I think what we have to recognize is that these warnings always come out in advance. And it seems like people ignore them, right? The retail investor, just like in 2007, there were warnings, like Michael Burry warning about things. And then there was a period where people said, oh, he's wrong. Look, the markets are just going up, up, and away. And then eventually it all comes crashing down. And I think some of the great visionaries, they see what's on the horizon, but the timing is where it comes in. Like, you have to ask yourself, how many levers can the Federal Reserve pull? How many levers can the government pull? How many stimulus checks or spending can these things do? How much stimulus is the AI trade injecting into the economy to keep things afloat? Eventually, does it come crashing down? Absolutely. But it's a matter of timing. And I actually put that a little further out. If you're looking at where the big collapse, like where things get nasty like 2008, 2009, I put that out towards the 100-year cycle of the Great Depression, where things will get really broken and have that big flush out. And I think until then, you're looking at 10% to 20% corrections, which we've seen over the last couple years. But the big one, I'm really pushing off due to the levers that can be pulled by the Fed and other players. [00:07:58] Speaker 1: Gareth, some great insight there. Really appreciate you talking to us this afternoon. Gareth Soloway, Chief Market Strategist over at Verified Investing.