Why Defensive Stocks Have Disappeared

Summary

Podcast Summary: The Compound and Friends - "Why Defensive Stocks Have Disappeared"

Episode Information:

• Title: Why Defensive Stocks Have Disappeared
• Host: Downtown Josh Brown
• Guests: Todd Sohn (Strategus Securities), Matt Serminaro (Exhibit A)
• Release Date: June 20, 2025
• Description: Downtown Josh Brown, Michael Batnick, and their guests delve into expert insights and hot takes on the latest in business and investing. This episode explores the diminishing role of defensive stocks in today's market dynamics.

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1. Introduction and Guest Presentations

The episode kicks off with Josh Brown introducing the show’s new format featuring two special guests: Todd Sohn, an ETF and technical strategist at Strategus Securities, and Matt Serminaro, co-founder and Chief Product Officer of Exhibit A.

Notable Quotes:

• Josh Brown [01:24]: "We're remote. I would like to just say this is going to be a new format of the show, not permanent. Just because we felt like having some fun..."
• Matt Serminaro [03:10]: "I'll let the charts talk. That's it."

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2. Federal Reserve’s Current Stance and Economic Projections

Josh Brown initiates the discussion by analyzing the Federal Reserve's recent statements. He highlights that the Fed maintains its stance on solid economic activity, low unemployment, and somewhat elevated inflation, citing Peter Boockvar’s critique that the Fed appears complacent ("lying on a chaise lounge").

Key Points:

• Economic Projections:
  • GDP Growth: Forecast decreased to 1.4% from 1.7%.
  • Unemployment Rate: Expected to rise to 4.5% from 4.2%.
  • Inflation (PCE): Headline PCE increased to 3% from 2.7%, and core PCE to 3.1% from 2.8%.

Matt Serminaro comments on the Fed’s hesitancy to make definitive moves due to insufficient deterioration in economic data.

Notable Quotes:

• Matt Serminaro [05:29]: "It's hard for them to cut or make a move or telegraph that to the market right now."
• Josh Brown [08:12]: "I think you need to cut the rates. The housing market is literally a disaster."

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3. Disappearance of Defensive Stocks

The core of the episode revolves around the decline of defensive stocks' prominence in the market. The hosts explore reasons behind this trend, questioning the traditional categorization and effectiveness of defensive sectors like utilities, healthcare, and consumer staples.

Key Points:

• Market Concentration:

  • The S&P 500’s composition has shifted, with defensive sectors now comprising less than 21% of the index—the lowest in 35 years.
  • Michael Batnick [26:34]: "Know what you own when you're buying an S&P 500... understand that the traditional defensives do not work anymore."

• Sector Performance:

  • Industrials, driven by AI and defense technology, are outperforming traditional defensive sectors.
  • Josh Brown [30:26]: "The whole concept of breaking the market into two pieces... defensive versus cyclical."

• Redefining Defensive Stocks:

  • Modern companies traditionally seen as defensive (e.g., Visa, MasterCard) are now intertwined with growth themes, blurring the lines.
  • Matt Serminaro [32:00]: "Is Netflix a defensive stock? To somebody who says, look, no one's going to cut their Netflix subscriptions..."

Notable Quotes:

• Michael Batnick [27:06]: "Traditional defensives do not work anymore. You have to think differently about playing defense."
• Josh Brown [32:59]: "We don’t really know what's a defensive stock anymore..."

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4. Market Cap Concentration and Sector Shifts

The discussion shifts to the concentration of market capitalization within the S&P 500, particularly the diminishing dominance of the "Mag 7" (the top seven large-cap stocks).

Key Points:

• Chart Analysis:

  • Matt Serminaro presents a chart showing that while the S&P 500 is near all-time highs, the Mag 7 have only recovered about 60% of their previous declines.
  • Todd Sohn [33:35]: "Is it bearish or bullish or neither that Apple is relatively weak?"

• Expansion of Market Influence:

  • There's a growing influence from stocks just below the Mag 7, indicating a broadening market.
  • Matt Serminaro [38:05]: "The companies that you're talking about, they're in like that eighth, ninth decile. They've been the sweet spot."

• Implications:

  • The redistribution of market cap suggests diversification and reduced risk from over-reliance on mega-cap stocks.
  • Michael Batnick [41:19]: "The influence is declining, which is not a bad thing."

Notable Quotes:

• Matt Serminaro [33:35]: "This is kind of like a broadening story and also highlights that the Mag 7 has been a drag this year."
• Josh Brown [41:36]: "The market cap is being redistributed. It’s going elsewhere."

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5. Proliferation of Leveraged Single Stock ETFs

Michael Batnick introduces the topic of leveraged single stock ETFs, highlighting their rapid growth and the potential risks associated with their existence.

Key Points:

• Growth of Leveraged ETFs:

  • A scatter plot reveals numerous leveraged ETFs tied to volatile, often small-cap stocks.
  • Michael Batnick [43:21]: "Leveraged single stock ETFs are a three-year-old category that’s gone crazy recently."

• Potential Risks:

  • These ETFs can escalate beyond the underlying stock's market cap, posing significant operational risks.
  • Josh Brown [44:16]: "If you read the headline, IonQ's 2x ETF now has more money in it than the company's market cap. You just buy it, ask questions later."

Notable Quotes:

• Matt Serminaro [47:15]: "And there’s no reason to be a publicly traded small cap. Many can raise money in the private market."
• Michael Batnick [46:58]: "The ETF industry has always been a spaghetti cannon. And I'm old enough to remember..."

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6. Breadth Signals and Historical Performance

Matt Serminaro presents a chart analyzing the S&P 500's performance one year after 58% of its stocks hit a four-week high. The data indicates a strong historical trend where such breadth signals correlate with positive returns.

Key Points:

• Historical Analysis:

  • Instances where 58% of S&P 500 stocks reached a four-week high typically result in an average 19% return after one year, with no cases of negative returns.
  • Josh Brown [48:09]: "If you genuinely see 58% of stocks making a four-week high, historically, it has never been negative."

• Current Market Situation:

  • As of mid-May, 58% of S&P 500 companies were achieving four-week highs, akin to historical bullish signals.
  • Matt Serminaro [55:25]: "The market is making its recovery from the March low... every stock is up."

Notable Quotes:

• Michael Batnick [51:44]: "If I had to pick one measurement to use all the time... it would be that data."
• Todd Sohn [51:40]: "These are the type of dates that most investors, especially those who went to cash, would never buy."

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7. Valuations and Forward PE Ratios

Matt Serminaro discusses the current valuations of S&P 500 stocks compared to their 2021 peaks, demonstrating that even the most expensive stocks are trading at lower forward P/E ratios today.

Key Points:

• Valuation Breakdown:

  • Average forward P/E ratios across all deciles of the S&P 500 are lower today compared to the 2021 peak.
  • Matt Serminaro [20:35]: "Across the board, regardless of forward P/E decile, we are cheaper across the board right now."

• Implications:

  • Relative valuations suggest that stocks may still hold growth potential despite appearing expensive.
  • Josh Brown [21:19]: "I think we're not that overvalued."

Notable Quotes:

• Josh Brown [21:04]: "But that's gotta play a role in why we were paying up for stocks."
• Todd Sohn [21:19]: "We really had it all, didn't we?"

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8. Final Thoughts and Market Outlook

In concluding the episode, the hosts share their perspectives on the market's health and future directions.

Key Points:

• Healthier Markets:

  • Despite rotations and sector shifts, the overall market remains healthier than at previous highs.
  • Matt Serminaro [57:54]: "Markets are healthier than they were at the February high."

• Investment Strategies:

  • Emphasis on diversification and exploring beyond mega-cap stocks to capture broader market gains.
  • Josh Brown [42:09]: "There's a lot of money being made elsewhere, not just in the top decile."

Notable Quotes:

• Matt Serminaro [57:54]: "I just wouldn't be bearish. Personally."
• Josh Brown [58:27]: "Thank you so much to Todd Sohn of Strategus and to chart kid Matt Serminaro of Ritholtz wealth slash exhibit A."

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9. Conclusion

The episode sheds light on the evolving landscape of the stock market, particularly the reduced significance of traditional defensive stocks amid increasing market concentration and the rise of diversified large-cap influencers. The discussions underscore the importance of adapting investment strategies to align with current market dynamics, emphasizing diversification and caution against over-reliance on mega-cap stocks.

Overall Takeaways:

• Defensive Stocks: Their traditional roles are diminishing, necessitating a reevaluation of what constitutes a defensive investment.
• Market Concentration: A shift away from the Mag 7 suggests opportunities in mid-tier and diversified market segments.
• Valuations: Current P/E ratios indicate potential for growth despite high valuations compared to historical peaks.
• Investment Signals: Breadth indicators remain a reliable signal for future market performance.

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This summary encapsulates the key discussions and insights from "The Compound and Friends" episode on the disappearance of defensive stocks, providing a comprehensive overview for those who haven't listened to the episode.

Transcript

[Josh Brown]

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[Michael Batnick]

Welcome to the Compound and Friends.

[Josh Brown]

All opinions expressed by Josh Brown, Michael Batnick and their castmates are solely their.

[Matt Serminaro]

Own opinions and do not reflect the.

[Josh Brown]

Opinion of Ritholtz Wealth Management.

[Matt Serminaro]

This podcast is for informational purposes only and should not be relied upon for any investment decisions.

[Josh Brown]

Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Special edition. It's the Compound and Friends. We have two friends with us today and we are remote. I would like to just say this is going to be a new format of the show, not permanent. Just because we felt like having some fun, we're gonna do. What is it like a chart of palooza? Is that the best way you like that? All right, ladies and gentlemen, first time viewers, first time listeners, my name is Downtown Josh Brown. I am a co host of the Compound and Friends. My co host Michael Batnik is here. Michael, say hello.

[Todd Sohn]

What's up everybody?

[Josh Brown]

All right. And we have two very special guests. Returning champion, Todd Sohn. Todd is an ETF and technical strategist at Strategus securities and Strategus Asset Management and Institutional Research and Asset Management Platform. Prior to Strategus, Todd has held several roles at J.P. morgan and SAC Capital Advisors. And joining us for the first time ever, you've heard his name a million times literally on this show and other shows here at the Compound. His name is Matt Sermonaro, otherwise known as Chart Kid Matt. I wish I had the the round of applause button. I would be smashing it right now.

[Todd Sohn]

Look at that guy. Look at that punnel.

[Matt Serminaro]

So excited to be here. Let's do it.

[Josh Brown]

Yeah, we'll add that in post. Matt is the co founder and Chief product officer of Exhibit A, a tech platform providing custom branded visuals to financial advisors and financial institutions. Matt is also a research associate providing content and visuals to the Compound and Ritholtz wealth management. Matt, welcome to the show. So happy to have you.

[Matt Serminaro]

Thank you. So happy to be here.

[Josh Brown]

Are you nervous?

[Matt Serminaro]

A little bit of nerves in here. I'll let the chart. I'll let the charts talk. That's it.

[Josh Brown]

Because I was gonna say. I was gonna wait for you to say. No, I'm not nervous. And I was gonna tell you maybe just like a little bit. B.

[Matt Serminaro]

It's just like a little bit.

[Josh Brown]

All right.

[Matt Serminaro]

Just enough to prepare. Yeah.

[Josh Brown]

All right, awesome. We're so happy to have you on the show. So I guess we have to start with the Fed, right, guys? If you want to put it, we can start there.

[Michael Batnick]

Yeah, you can do that. Or hopefully people don't fall asleep.

[Josh Brown]

I know. All right, so I said a couple days ago on what are your thoughts? Like the Fed's posture? The Fed's posture is lying on a chaise lounge effectively. All right, so this is from Peter Boockvar reacting to the Fed's statement. And I think he put this out before the press conference, but it doesn't appear that anything really came out of the press conference. Of substance, the Fed maintained its stance that economic activity has continued at a solid pace and that the unemployment rate remains low and labor market conditions remain solid as well as inflation remains somewhat elevated. So those are just copy paste from probably the last six statements, if I had to guess. Then he said the committee is attentive to the risks to both sides of its dual mandate. That's something they didn't say in the May meeting. According to Peter. He also said the risks of higher unemployment and higher inflation have risen. Of course, this is the thing that we don't want to see stagflation. Lastly, they updated their economic projections. 2025 estimate for GDP fell to 1.4%, down from 1.7%. Somewhat notable, their unemployment rate expectations rose by 1/10 from the March statement to 4.5%. That's versus 4.2% as of May. Headline PCE, which is the Fed's preferred gauge of inflation, went to 3% from 2.7. Core went to 3.1 from 2.8. It seems as though they are not changing much, but the two changes they're making I think are both in the wrong direction. Slowing gdp, rising employment, and then a slight uptick in their inflation expectation. Thoughts?

[Matt Serminaro]

Yeah, I don't think it's great. I think it's hard for the Fed to make a definitive move right now. Sort of wait and see mode for them. Obviously, inflation has come down a lot and I think it's hard for them to make a move based on the labor market. We had the continuing claims really kind of spike this month. I think their eyes probably on that. But it's hard for them to, like I said, cut or make a move or telegraph that to the market right now. Just the data hasn't deteriorated enough.

[Josh Brown]

They're not getting fireworks in anything to do with unemployment. Wall Street. Seth Rogen, what do you think?

[Michael Batnick]

I'm glad. Glad you saw that.

[Josh Brown]

Are you really leaning into it too? You're doing the.

[Michael Batnick]

That'S a deep cut for all the listeners out there. What do I think? I don't think it's unreasonable. I'm not big Fed watcher like other folks.

[Josh Brown]

Do me a favor, say old school Hollywood Buffet.

[Michael Batnick]

Old school Hollywood Buffet.

[Josh Brown]

Oh my God, it's so. Close your eyes.

[Todd Sohn]

All right. So Tata's no take.

[Michael Batnick]

Yeah. I just think that, I just think it's not unreasonable to look for stocks to just consolidate here. You just had one of the best 40 day runs in history for the S P. So whether the Fed is.

[Josh Brown]

The catalyst or not, it's not going to be the catalyst.

[Michael Batnick]

We just found out just sit tight here. And rates, there's no, there's no call, especially up the curve.

[Josh Brown]

You know who has an opinion on this? You, Michael Batnick. I really don't, John. Play my clip.

[Donald Trump]

Doing well. Well and as a country, if the Fed would ever lower rates, you know, would buy debt for a lot less. It's a shame. This guy, I have a guy. Do you ever have a guy that's not a smart person and you're dealing with him and you have to deal. He's not a smart guy. He's worried about inflation. I said, that's right. If there's inflation in six months or nine months, you lower the rates or you raise the rates. You can do whatever you want. Brian. Right. So let's say there's rampant inflation, which there's none. You know what? There is a success. I got a call from Congress last night, sir, there's a problem. I said, what is it? Money is pouring in. We don't know how to account for it. I said, check the tariffs. $88 billion came in from tariffs. No inflation and it's going to get even more. So I know what I'm doing. So we have a stupid person, frankly, at the Fed, he probably won't cut today. Europe had 10 cuts and we had none. And I guess he's a political guy. I don't know. He's a political guy who's not a smart person, but he's costing the country a fortune. So what I'm going to do is, you know, he gets out in about nine months. He has to. He gets fortunately terminated. Biden, I would have never reappointed him. Biden reappointed him. I don't know why that is, but I guess maybe he was a Democrat. You know, I got great advice from Mnuchin on this one. Great advice, but he's done a poor job. So we have no inflation, we have only success. And I'd like to see interest rates get down now.

[Josh Brown]

All right, all right. It's enough of that. I could listen to that all day because it's amazing that like free associate, free association, it's the. What does he call it, the weave. I actually don't disagree with President Trump on this. I think you need to cut the rates. The housing market is literally a disaster. It's going to have a negative effect, I think, in the second half. Not just on gdp, but there are certain measures you look at like construction permits versus how many workers there are. And you get the sense that at a certain point, if we don't get starts, housing starts to move up, you're going to start seeing construction sector layoffs, which are hugely important to people that follow the cycle. And I don't really understand what. He can't create inflation with low rates. We already figured that out. So I don't really understand what the problem is.

[Michael Batnick]

Housing stocks are, and I'm not talking just home builders. The derivatives of it to Home Depot, Lowe's, building product names, those are, those are in the dumps still.

[Josh Brown]

Yeah.

[Todd Sohn]

I also agree with Josh, agreeing with the President. I think the downside risks to the economy significantly outweigh the potential for higher inflation over the summer. I don't know what Powell is waiting for. I don't, I don't understand.

[Josh Brown]

It's not just Powell. According to the dot plot, more of the voting members are now like on one or two cuts. Like the, the whole apparently either all see something that we don't see, or they're just super comfortable at four and a quarter to four and a half and they just don't want to make any change. Maybe nobody wants to make the first move, but so like the Fed is still on its chaise lounge and, you know, we'll go into Jackson, we'll go into Jackson Hole and I wonder what the topic of the speech will be. Maybe they don't even bother showing up.

[Todd Sohn]

As far as this particular presser goes, it is a bit of a nothing burger. The market's not really moving very much. S and P is flat as we tape this, rates are going nowhere fast. Todd, I'd be curious to get your take on the market overall. Do you see either like glass half full, we just had a V shaped recovery and we are now going sideways, or do you see us stalling out lower than the previous highs and we're. We've got some give back in the, in the next couple of weeks.

[Michael Batnick]

Yeah, I don't think I'm like glass half full number one. I don't think a give back would be too shocking. Anytime you get these price momentum surges and then also the new high data surging, which I think we're all aware of, the next one to three months are sloppy and maybe it's rates that cause the sloppiness, maybe it's whatever's going on overseas in the Middle east is the sloppiness. But that was a big bottom to us. So I'm very much a glass half full. The one thing I'm slightly concerned by is, okay, housing stocks are still struggling and you're seeing some of it leak maybe into the industrial sector outside of building products like junior names are still a little bit lethargic. So that concerns me to some extent. But high yield basis, high yield spreads are back below 300 basis points. Hard to. Yeah, you know, that's maybe it's just not a credit thing.

[Josh Brown]

Yeah. I think there was so much fear in the market in April and May and just, you know, justifiably so, given what was being talked about, that it's hard to see that fear come out and then all of a sudden come surging right back. Because people have. People remember things that took place two months ago. So if you didn't get crazy bearish two months ago, you're probably not about to. And if you did, you probably don't want to do it again. And that's how it's.

[Michael Batnick]

I mean, I get the sense there's just a lot of skepticism of the staying power of what we've seen.

[Josh Brown]

Yeah. All right, we're going to do some charts. And I don't really know. We didn't really, we didn't really finalize the order of how we want to do this.

[Todd Sohn]

I got this. Why don't we do it like this?

[Michael Batnick]

Chart draft.

[Todd Sohn]

Why don't we do it like this? So which one of you handsome devils has the best chart to maybe segue the conversation from broader markets and where we are today? Do either of you have one of those? If not?

[Matt Serminaro]

I do. Yeah, I do.

[Todd Sohn]

Let's go, man.

[Michael Batnick]

Let's go, Matt. Go. The man child.

[Todd Sohn]

Let's go.

[Michael Batnick]

He's the man child now.

[Todd Sohn]

He's chart goat to me. What do you got?

[Matt Serminaro]

All right, John, can you throw up chart two? All right, so we've been churning within 5% all time of all time highs for like a month now. And like Todd was saying, the market has had this ferocious rally off the April low. I would have expected us to just rip through the highs. So the real question I wanted to answer with this chart is how long might it take to actually make a new all time high from here? And so I looked back in history and said every single time there's been a 20% drawdown, which we actually had this year. If you measure the intraday peak to the intraday low and then you round.

[Josh Brown]

Is there another way to measure.

[Matt Serminaro]

Well, people could use closes conventionally use the closing prices.

[Josh Brown]

Yeah, I'm gonna say close enough and I'm gonna call it.

[Matt Serminaro]

Okay. All right, so we're looking at is, let's say you fall 20%, you rally to within 5% of all time highs. How long in months is it gonna take to actually achieve the new all time high historically? And so all of the instances on the x axis here are showing the day that we rallied to within 5% time highs after a 20% drawdown. We got that on May 12, 2025. And on average it takes 3.6 months to actually go ahead and make the new all time high from being within 5%. So yeah, so I actually was pretty surprised by this. I thought that a lot of these would be within three months. But some of these, I mean, coming out of the 2022 bear market, we actually got to within 5%. It took six months to actually make the high in early 2024.

[Josh Brown]

What are the dates listed at the bottom? That's when you get back to within 5% of a high.

[Matt Serminaro]

Yes, correct. Yeah, that's when you get back to within 5% of a high after you just drew down 20%.

[Todd Sohn]

So beautiful. Chart off for a second. Matt. This is great work. I think this makes sense to me because once you have a 20% drop, like V shaped recoveries that we've seen recently are the outlier in history, normally that doesn't happen. And if you do have a 20% correction and then you bounce all the way back to within 5% of the all time highs, it makes sense to me that you would see some supply Hit the market and not just rip to new all time highs.

[Matt Serminaro]

Yeah, yeah. My thought here is, is there's something technical at play because you're effectively approaching a previous resistance point. And so like you said, there's overhead supply and I think just natural selling.

[Josh Brown]

Todd, it's a really good point. Like when you, when, sorry, when you hear technicians say price as memory, that's what they mean. Like it's, it's beyond technical, it's behavioral. It's like, all right, I didn't sell. The market fell 20%. Now it came all the way back to within 5% of the old price. Well, maybe now would be a better time to, to take something off just in case that happens again. And I'm not talking about one person saying that. I'm talking about 50 million people saying that all at once. And that's why they're being a little bit of a lid on us before we can pop to a new high. Like, just knowing people has always made sense to me.

[Todd Sohn]

Todd, I want to get your take on this, but before you chime in, I just want to give a shout to the media team because this type of show is exactly why we need it to be on Spotify concurrent with the episode drop. Because if you're listening to a chart heavy show, it's really tough. So credit to Duncan and Daniel and John and Travis and the rest of the team for doing the outstanding work there. Todd, what do you think about this idea of overhead supply coming in after a bear market than a monster rally?

[Michael Batnick]

Yeah, it's all, it's all behavioral to me. Like to Josh's point, you get this rally and you have investors out there, whoever they might be, start to say, okay, well what's the next catalyst to get you higher? Is it earnings? Is it some development out of nowhere? And I think you get people that are skittish, they don't like the risk reward.

[Josh Brown]

Yeah, it could have been a rate cut, but we have a dumb, stupid Fed chairman, but we're dealing with a dumb guy. Maybe he's a Democrat, I don't know.

[Todd Sohn]

Yeah, could be anything.

[Josh Brown]

Can we put that chart up one more time? This was this February 14th, 2007. Oh, boy, was that a doozy. I sort of remember what happened next. Within a month of that bear, stearns went to zero and then got acquired for $2. And the $2 was so insulting that they changed it to $10. But I sort of remember, like that was right. So obviously that's a different market with much different things happening in the economy than what we're dealing with today. Thank God. But I think the point is some of these recoveries back to within 5% of a high, you eventually do get another high, but like it's not all good or actually I think the Bear Stearns thing was.08, so it was a year ahead of then. But 07, that was tricky because they actually fooled you into the fall. You got the new high, they fooled you and then, you know, the rest is. The rest is history.

[Matt Serminaro]

It's painful.

[Josh Brown]

Yeah.

[Michael Batnick]

Can I, can I bring in a chart here that actually kind of ties somewhat into this, the chart draft. John, you have chart one from my, from my doc here. Okay. So we were talking about us all time highs. There's not a certain statistic here, but this is an easy chart to ease us in here. MSCI eth. Right. All developed international markets, all time high, first time it's made one. Speaking of 07, Josh, there you go. Back to 07 highs. I think it's totally reasonable to see this retest the breakout from 2007 and from 2023. But this is important. International portfolios actually have something working again. Whether it's Japan seems to be percolating right now and Europe has worked. And I think it's important when you look at the sector construction, the industrials from 10 years ago are up about 5.3%. Financials are flat. That's a good thing. So the more industrial exposure, I like that. And tech's even up too. So international's getting more cyclical.

[Josh Brown]

One of the things happening in the best stocks in the market list that I keep with Sean is that industrials are dominating by the number of companies that are on the list. It flipped. It was utilities in the first quarter when people were worried about trade and the economy is going to slow down and blah, blah, blah. And now it's industrials. And when you dig in like, well, which industrials, it's kind of a mixture of some of them play very heavily into the AI theme and then some like literally the construction of data centers. But then a lot of them are defense, defense, defense and defense tech, which are under the industrial umbrella. Almost every one of those stocks is in a bull market.

[Michael Batnick]

The defense ones, I think in the very short term are a little overcooked. But that's a big time bull market. And then, yeah, as you said, the AI construction type stuff is awesome.

[Josh Brown]

100%. All right, what do we have next?

[Matt Serminaro]

Could we talk about valuations now? Because I think I have a chart here that would be Interesting. So could we throw up chart one, Michael? This is the one that I mentioned to you earlier that this is. This might be the best in the dock. Okay? So for the listeners, I'm going to do my best to paint this picture for you and for the people watching, the chart on the left here is where I want you to focus first. So I've broken out the average forward PE ratio by decile in the S&P 500 at the 2021 valuation peak. And so those are the light blue bars and then the dark blue bars are the average forward PE ratio by decile as of today. And so you'll notice that across the board, indiscriminate of what forward PE decile we're in right now or indiscriminate of any forward P decile we are cheaper across the board right now. And that's what the chart on the right is showing, is the discount today versus the 2021 peak.

[Todd Sohn]

So, Matt, we talk about some of the names Palantir now circle most recently Core. We have some of these really high flying nosebleed valuations. But you're saying compared to 2020-21. Did I just say 2021? 2021. These stocks look like cigar butts.

[Matt Serminaro]

Yes, and. Well, cigar butts, but yeah, but if you look at the 10th decile here on the left, so this is the top 10%, the. The 10% most expensive stocks in the S&P 500. In 2021, those stocks traded at an average Ford P of 104 times.

[Todd Sohn]

We really had it all, didn't we?

[Matt Serminaro]

But the air pocket's gone right now. The average 4p of that cohort is 63. It's a 40% discount. I'm not saying 63 is expensive.

[Josh Brown]

I want to throw one monkey wrench into the story, though. All right, so I like the story where you break down the S and P on a cheap to expensive spectrum in deciles. And the most expensive stocks in the market right now are 63 times earnings, which is not cheap, but versus how expensive stocks were in 2021. At 104 times earnings, it's a relative bargain. Or maybe it's like, we're not that overvalued, guys. And I totally agree with that. Except. And that, by the way, that holds true across the board, every decile. Except understand what was happening in 2020 and 2021 were companies taking massive accounting charges because of the pandemic. And that's what they should have been doing. And I don't know to what degree that impacted per share earnings. I don't know if we're looking at operating earnings or just net earnings, but that's gotta play a role in why we were paying up for stocks. It's because we understood that there were artificial charges in these earnings that were not going to repeat and had nothing to do with the long term earnings quality of these businesses. So it's almost like a little bit of an asterisk on this. Right, for sure.

[Todd Sohn]

Okay, I want to bring in a chart to go with this thread. One of the most expensive stocks back in 2021, I believe was Nvidia. I've got a chart and the chart that I want, John, is. Well, it's the Nvidia chart. So we have a five year price chart.

[Michael Batnick]

And I like the images do it for me.

[Todd Sohn]

One of the dots was the absolute magazine indicator sentiment fever pitch of all fever pitches, which was Jensen Wang signing the bra of a woman in the.

[Josh Brown]

Audience could say dude, you could say boob on this show.

[Todd Sohn]

I think it's a bra that looks like a bra. And then the second one, the second one equally as antenna raising. This is the top was the watch party for one of the earnings. And actually it's really easy with the benefit of hindsight, sometimes this stuff works out. The sentiment analysis, this, this anecdote, adding data type stuff, sometimes it works out. But for every magazine indicator that we look backwards at that nailed it. You've got 5,000 that just don't matter. So listen, I giggle too. I definitely said it too. But it doesn't always work the way that you think it would.

[Josh Brown]

This is interesting because. So Nvidia is now higher than where it was. Put the chart back up. What's the Nvidia is up 25% and 16% total return from both of those events. The bra signing was 24-6-4 and the watch party was last August. The earnings were.

[Todd Sohn]

So if you took that as your Q is like, all right, I'm out of tech. I'm, I'm maybe even shorting. I'm getting out of the way. It didn't really work out so well.

[Josh Brown]

Yeah, would you guys tell young investors to just throw this stuff out? The like the extreme sentiment stuff. That's like an indicate magazine cover. We used to call it. There's hemlines, there's Hampton's traffic, like all that shit. Would you just tell a young investor to throw it out? I kind of think I would.

[Todd Sohn]

Not all of it.

[Michael Batnick]

Yeah.

[Josh Brown]

Well, how do you know when it works?

[Michael Batnick]

When you get Enough crumbs to build a little bit of a cake in the mat.

[Josh Brown]

You need three.

[Todd Sohn]

No, here's, here's, here's what I like. I say this all the time. I always rely on Ryan for this sort of stuff. I love the washouts. I love the breadth thrust. When you've got that behavioral thing that is market driven, psychology driven, that will never change. Like that sort of stuff I love. And when it lines up with every sentiment survey indicating the same thing, extreme fear, that's when you pounce. But for, for shit like this, just the one offs the. Oh, the Economist. Lol.

[Josh Brown]

Like did you see blank garbage?

[Todd Sohn]

Yes, saw it. So did everybody else.

[Josh Brown]

Yeah, we, we, we almost threw Dan Ives into that. He, they covered the fashion of Dan Ives in the New York Post. Do you remember that?

[Todd Sohn]

Yeah, yeah, yeah, yeah.

[Josh Brown]

I don't remember exactly when that was. Dan's a friend of the show but like they did this fashion spread because he, you know he dresses like a volume level.

[Todd Sohn]

It felt like, it felt like a Madden cover when Dan was on the COVID of or whatever it was in the Times and it didn't work. So. All right, we've got a lot of charts.

[Michael Batnick]

Let me. This is going to fit nicely with, with the valuations in video thing. John, if you have a chart 2 from my, from my deck here. Okay. So this is the sum of the defensive sector weights in the S P 500. Staples, energy, healthcare, utilities. And some people ask me why energy? The MSCI Defensive Sector Index has energy in it. So I'm going off of them and I get Energy has some yield and it can work.

[Josh Brown]

No, that's right. Exxon and Chevron are not considered growth stocks. I don't think.

[Michael Batnick]

They're not risk on stocks. To me maybe some of the nuclear stuff is. That's a different story. Okay, so tin.

[Josh Brown]

They're tiny.

[Michael Batnick]

Nvidia back almost at a new high.

[Josh Brown]

Right.

[Michael Batnick]

That's a six and a half percent weight in the index where the cheap stocks are all going to be here. And the sum of those four sectors is now below 21%. That's the lowest I have in 35 years of data.

[Josh Brown]

So there is just no data below 21% of market cap in the S.

[Michael Batnick]

And P is the S and P. Yeah, yeah.

[Todd Sohn]

I love this.

[Josh Brown]

Wow.

[Michael Batnick]

I mean this is.

[Josh Brown]

So what's crazy is that healthcare has. I could understand I guess the question. My question for you would be is it because they're shrinking or is it because technology and financials have grown so.

[Michael Batnick]

Much their healthcare has. Healthcare took a GLP one basically by itself it went from is down below 10%. That's rare. I mean Utes have been small forever, right? There's no doubt about that. Energy was big, now you're back down to 3%. And then staples can fluctuate between 5 and 10 I guess over time. But a lot of it's healthcare driven.

[Josh Brown]

What's your takeaway from just the shrinking of these four, quote unquote defensive sectors?

[Michael Batnick]

There's two takeaways. One, know what you own when you're buying AN S&P 500 or large cap index because you're really getting a lot of tech growth stuff. That's fine, it's great, but just understand that. And two, the the idea that traditional defensives do not work anymore. You have to think differently about playing defense. And so I wrote on that chart we could argue thematic rotation is a better route because we have a thematic rotation ETF here at Strategist. I don't want to stuff the home cooking down everyone's throats but Samt, they buy thematic energy, they buy cash flow aristocrats like Costco and Walmart, etc, so think differently about traditional defense.

[Josh Brown]

You know what's interesting? The whole concept of breaking the market into two pieces. It was never defense versus growth. Just so people understand how this all came about. It was defensive versus cyclical. Okay, so that's number one. And tech used to be considered cyclical, which I think we have all now come to the conclusion that actually no tech is some form of consumer staples slash industrial, but it doesn't even matter. The original concept was, and this goes back to like Charlie Dow in the late 1800s, was that there was a cyclical side to American capitalism. Companies that did industries that did better when the economy was growing faster. And to invest in those sectors or those industries was to make the bet that the economy will be better than expected. And the defensives were for portfolio managers who didn't have the option to swing to cash, so they had to be fully invested. So they would say to themselves, well, if I'm bearish on the overall outlook or I'm not seeing enough earnings growth to justify buying growth companies, then I'm going to shift the dollars that must own stocks into stocks that do well regardless of what's happening in the economy. Defensive stocks like Hershey and Coca Cola. And that was a very sound way of thinking about the market until we reached the point where every year dollars are being yanked away from fully invested stock picking managers in the mutual fund space. And more frequently appear, those dollars more frequently show up in ETF portfolios. And people just have other options besides. I'm going to rotate to defensive stocks. They can literally buy anything.

[Michael Batnick]

And they are those, I feel strongly the Staples stocks just aren't built for this era. Hershey, General Mills, Kraft, Heinz, like they're just the influencers know they're full of junky ingredients. So they go on Instagram and say, hey, don't buy this, buy another brand.

[Josh Brown]

Well, though, Coca Cola, new highs this summer.

[Michael Batnick]

Yeah, so I'll give you that.

[Josh Brown]

So you know you can make, you can make money in these stocks. I'm trying to picture in my mind. I'd love to hear what you guys think. A scenario where that reverses. How to con. How did defensive stocks in their current incarnation go back to being 35% of the S&P from 20%?

[Todd Sohn]

That's what could happen.

[Josh Brown]

But that's what you would have to have. A massive market crash in AI stocks.

[Michael Batnick]

Recession and AI just completely sputtering for some reason. Regulatory regulations or something like that. You'd have to ruin the entire AI story.

[Matt Serminaro]

Yeah, I agree.

[Josh Brown]

I agree.

[Matt Serminaro]

I also think the question here is how are investors categorizing their own minds what a defensive stock? Is Netflix a defensive stock? To somebody who says, look, no one's going to cut their Netflix subscriptions. It's like we're almost redefining what a defensive stock is. Over the past few years, just these companies have compounded their capital at such high levels. Despite Fed, that was on the fastest hiking cycle ever, despite 9% inflation, despite everything. And so in the, in, the defensives have actually gotten hit the entire time. So it's just a question of redefining what are defensive.

[Josh Brown]

Great point. I've spoken with people who say Visa, MasterCard and Amex are defensive because you still have to pay your bills and more and more of your bills are being paid on credit cards. Therefore they're raking in their fees no matter what the economy does. I've spoken to people that point to the un cancelability of Netflix. You know how bad things would have to get if you not want to have TV utilities. Are they defensive or are they an AI play? Because you can't really be both. You've got utilities making all time record highs selling at 15/17 earnings. Are those still defensive? Would those be defensive if there's a crash in the AI theme? I doubt it. So I totally agree. We don't really know what's a defensive stock anymore, which is why I Think that old paradigm kind of needs to go and we need to just focus on industries more than sectors and companies more than industries if we're really trying to understand what's going on.

[Todd Sohn]

Matt, you got a chart?

[Matt Serminaro]

I do have a chart, yeah. John, can you throw up Chart three. Awesome. All right, so I wanted to highlight this sort of market dynamic shift that's happening right now. And there's kind of this divergence where the S and P has recovered almost all of its loss from the peak in February, but the Mag 7 weight in the S and P has only recovered like half of its decline. And so I think this is kind of like a broadening story and also highlights that the Mag 7 has kind of been a drag this year.

[Todd Sohn]

Matt, this is so good.

[Josh Brown]

Yeah.

[Todd Sohn]

So for people that are listening, Matt's got the Mag 7 weight in the S&P 500, which peaked in early January and has now recovered, let's say, I don't know, 60% of the decline versus the S&P 500, which is just 2% away from its all time high. And I've got a reason, my friends. John, throw my Apple chart on. I've used this chart in the past with Josh, but we are at an absolutely critical juncture for Apple. I'm looking at Apple divided by spy. And for whatever reason it has bottomed exactly where it is today in a meaningful way. In a meaningful way three times previously. And I, I don't know if I suspect this holds or not. I really will, will not give an opinion because I just, you know, who the hell knows? But this is a big reason why Apple was the king, was the biggest stock in the market for the better part of the last 15 years. And it is relatively on the ropes.

[Josh Brown]

Is this bullish?

[Todd Sohn]

That's great question.

[Josh Brown]

Not for Apple. Is this bullish. Bullish for the S&P 500.

[Matt Serminaro]

I think this idea that the S and P is so over concentrated, what will. Will actually scare some investors away. So the question is if we're. If the S and P composition is starting to become less and less concentrated because of an Apple following or because then I think it might actually encourage new investors.

[Todd Sohn]

Historically, historically, Michael Maubouson did a post that shows empirically concentration is bullish. Like you be careful what you wish for. When you get a broadening out of the market, it usually happens in a bear market. Now it's not to say, yeah, is not to say that that holds always and forever because we are experiencing Apple lagging for a long time, Amazon lagging for a long time and you see the 493 coming up the rear. So who knows? But that's a really good question. Is it, is it bearish or bullish or neither that Apple is relatively weak?

[Michael Batnick]

It may just be leaving its peak dominance.

[Todd Sohn]

I mean, that's what that chart tells me.

[Michael Batnick]

It's like 40 year old LeBron. You know, it's still there, but chart back on.

[Todd Sohn]

Chart back on. So let's, Let me, let me frame it this way. Will Apple ever make a new high relative to The S&P 500? I say no.

[Josh Brown]

I mean, they would have to just have like this killer. They're talking about foldable phones now. Like they're following the Chinese at this point. I don't know. They would have to have just some killer product cycle and then it could happen.

[Todd Sohn]

But Josh, what do you think? Will Apple ever make a new relative high to the S and P?

[Josh Brown]

Like, will Apple get back to where it was at the start of this year in terms of its size itself? Oh, this is price chart.

[Todd Sohn]

Will this chart ever make a new high? I don't think so.

[Josh Brown]

You know what? I'm gonna say? No.

[Michael Batnick]

Tough call.

[Josh Brown]

I'm gonna say no.

[Michael Batnick]

The other, the other part of this with the weight is also Alphabet, because that's having an issue too. And if I can play devil's advocate, if you inserted broadcom into the mag 7, you know, or if you just, if we made a substitution here, that makes that chart a little trickier. But I'm in agreement with Matt. It's a good chart. It's just you have a rotation going on with what the big influences are now.

[Josh Brown]

So one of the good things that's going on that I just want to point out is that there's this tier beneath the mag 7, call it 30 stocks that has just increased in market cap so dramatically over the last year. So I want to throw out like Oracle being a really great example of this. I want to throw out Uber, which everyone knows I'm long, but like, this is a stock that had a $75 billion market cap like a, a year ago. Maybe it's 180. Is it $180 billion market cap now on its way to 200? I think there are a lot of. CrowdStrike is a $500 stock. Now. There are a lot of stories of companies that have gone from 30 to 50 billion to 100 billion in market cap. And like we have. We have to say that's a net positive.

[Todd Sohn]

Absolutely.

[Josh Brown]

That the second tier of stocks I'm so excited.

[Matt Serminaro]

Yes. I'm so dropped because I have a. I have a chart that is kind of showing what you're saying here.

[Josh Brown]

All right, good. Because it looks. Because the look on your face is like you just the girlfriend, and I'm sitting around the campfire telling you guys how much I love her. Show us the chart.

[Matt Serminaro]

Excited?

[Michael Batnick]

Okay.

[Matt Serminaro]

Chart four. Chart four. Okay. All right, so what I did here was I took the. I took the all the S&P 500 constituents and grouped them into 10 deciles by market cap. So deciles 6 to 10 are the top half, the largest S&P 500 stocks and deciles 1 through 5 are the smallest. And so, Josh, the song. I then showed the contribution to the year to date return by each of these decile cohorts. So the bottom five deciles, the smallest half of the S&P 500, is detracting 21 basis points to the year to date return. And the larger half is contributing 192 basis points. So the companies. And the reason why I was getting excited is the companies that you're talking about, they're in, like, that eighth, ninth decile. They might not be the tenth, but they're, like, right in there. And that's been the sweet spot.

[Todd Sohn]

So good.

[Josh Brown]

Yeah. I don't know. Is that like. Is that like the snowflakes of the world or not? Not even bigger than that. Maybe even trying to. Trying to think, like, what would be, like, what would be in there?

[Matt Serminaro]

Like. Like Oracle, for example, when you. When you said Oracle, I think it would be in there.

[Josh Brown]

Cisco, definitely. Cisco's having an amazing year. Netflix, of course. Okay. So that look, that's one of the definitive trends of the last. Let's call it 10 years, is that size matters. And large market cap stocks, on average have had better returns year in, year out than companies on the smaller end of the spectrum. And I don't know if that's an industry thing. You have a lot of small cap, like, banks that can't get arrested or.

[Todd Sohn]

Dude, it's a lot of Disney, American Express, McDonald's. A lot of banks are in here. IBM is on fire.

[Michael Batnick]

You know, this just. This just blew off a light bulb in my head. There's a. An ETF that's coming out that will take out the top 100 names by size. Yeah. So it's like the S and P 200 or 500. I forget the. I forget it might have been iShares who did it. It's coming out later this summer, so.

[Josh Brown]

If you want to make a contrarian bet or if you want to own the next tier, that would be the.

[Todd Sohn]

Way to, you know, that's a better, that's a better expression of what you're trying to actually target than the equal weight.

[Michael Batnick]

True. Yeah. It's like a spin on equally weighted.

[Todd Sohn]

Yeah, yeah.

[Josh Brown]

Equal weight is like a mean reversion bet that the market will still do well, but that there'll be more participation from the rest of the market. Therefore, you want to downplay the mega market caps. But I don't, I don't, I don't like that idea. As an investor, I understand it as a trade. I just. That's not for me. I do like the concept of, like these are. This is the next tier below the mag 7. And if you want to make a representative bet on the stock market, but negate the size of Microsoft like the S P150, this is how you would. This is. Yeah, I like that idea. Anyway, if somebody said, is that bullish or bearish? I would say bullish. I would also say this directly contradicts the people that were saying the only reason the market had a great year in 23 or in 24 was seven stocks.

[Todd Sohn]

Well, it was true in 23.

[Josh Brown]

Right. But it's becoming less true. And the market is still at record highs.

[Todd Sohn]

True.

[Josh Brown]

What are you going to say now?

[Michael Batnick]

The influence is declining, which is not a bad thing.

[Josh Brown]

Well, the market cap is being redistributed. It's going elsewhere. It's not going everywhere, but it never will.

[Michael Batnick]

And it's also just the disparity among those big names too, like Apple we were talking about. And alphabetical. Right.

[Josh Brown]

Okay. Love it. Great chart, Matt.

[Matt Serminaro]

Thank you.

[Josh Brown]

When you show that to advisors, that strikes me as the kind of thing that advisors would say. Oh, this is a really. This actually helps me make the point I want to make to my clients when they ask me, why don't I just buy Nvidia Tesla? Well, here's a really good reason why. There's a lot of money being made elsewhere, not just in the top decile, 100%.

[Matt Serminaro]

And also just the benefits of diversification. The S and P's up 1.7% year to date, price return as of yesterday's close, but it's not evenly distributed among all of the members. So you got to buy the basket effectively to actually achieve the return.

[Josh Brown]

Okay, love it. Who's got the next chart?

[Michael Batnick]

You want me to roll in here? I don't know if one of you guys got. Okay, John on Chart five. Chart five, John. Okay, I want to stay with this market cap idea that we're talking about, but we're going to go a little Wild Westy. So this is a lovely scatter plot of levered long single stock ETFs. Okay. So this is a three year old category in the world of ETF. And if you're unfamiliar with them, what they do is just take a single stock like Apple or Nvidia and put leverage on it, usually two times. On the X axis is the inception date of all these funds and the Y axis the size of the underlying today. And I'm, I point this out because levered single stock 1.0, the initial batch, we're all up, we're all max seven in the last three to five months they've gone crazy in terms of the size of the stocks that they're involved in. Now we're talking three to five billion dollar names.

[Todd Sohn]

Dude, this is nuts. Qbts. What in the world?

[Michael Batnick]

Archer Aviation, Upstart, D Wave, Quantum, Rigetti, Lucid, GameStop, Tempest, AI.

[Josh Brown]

Wait, we're throwing leverage on. Hold on, hold on, hold on, hold on. There's a 2x ETF for every one of these companies on here.

[Michael Batnick]

Yeah. And sometimes multiple. Right. Multiple issuers are involved.

[Josh Brown]

Somebody launched a 2x intel for like.

[Michael Batnick]

Yeah, yeah, that I don't know what with. That was silly. You got DJT on here hims. Right.

[Josh Brown]

Mara Rigetti and Ionq. The quantum stocks need a 2x. They're not volatile enough.

[Michael Batnick]

Yeah, exactly.

[Todd Sohn]

Todd, are any of these tiny ETFs getting traction asset wise?

[Michael Batnick]

I can't imagine there'll be some hits, but most of that's going to come price appreciation, the flow.

[Josh Brown]

I want to, I want to see the first one of these that ends up with more market cap than the stock it's based on.

[Michael Batnick]

Oh that, that's very.

[Josh Brown]

That's going to happen, right?

[Michael Batnick]

That's. Yeah. I don't see why that wouldn't be possible.

[Josh Brown]

Which can happen with. It can't. It's probably not going to happen with like a microstrategy because that's already really big. Yeah, that's strategy, whatever we call it but like something like a Rocket Labs or a Rivian if one. Or like if one of those hits a trend and starts to really go, it's still going to be small enough where you might see the betters put more money into the 2x. Yeah, like that's a very.

[Michael Batnick]

That could create operational problems. I don't know how. Like I'm jealous Of the people having.

[Josh Brown]

To deal with that, I'm going to tell you that's 100% a buy signal short term and a sell signal intermediate term.

[Michael Batnick]

Yeah.

[Josh Brown]

If and when. Like if, if you read the headline. If you read the headline. IonQ's IonQ's 2x ETF now has more money in it than the company's market cap. You just buy it, ask questions later and then. And then sell it really fast.

[Michael Batnick]

There's more of these coming too, like real Nichi small cap stock, because that's where the volatility is.

[Todd Sohn]

Todd, you have any ideas that you're surprised don't exist.

[Michael Batnick]

Man. That's a no.

[Josh Brown]

That's a Pineapple Express question. Right. Seth, if you were, if you were.

[Todd Sohn]

To launch an etf, what would it look like?

[Josh Brown]

He would launch an old school Hollywood buffet.

[Michael Batnick]

Hollywood. Yeah, I mean, Hollywood all you can do for $30.

[Josh Brown]

How do you think the companies feel about these? Do you think they care?

[Michael Batnick]

I do. They know about them.

[Josh Brown]

Yeah, I'm sure. I think there's probably, there's probably somebody working at every, at every one of these companies that like, they have to distance. It's their job as an investor relations professional to make sure that they distance themselves.

[Michael Batnick]

They want, they want the Deegans. Deacon investors were open. I mean, like.

[Josh Brown]

All right.

[Michael Batnick]

It's crazy.

[Josh Brown]

Yeah. I think one of the things that's happened with ETFs is that they used to be more expensive to just like let them exist. And because the costs have been driven so low, it's almost like they're just. You could have zombie 2x company ETFs that just live forever because there's. Nobody has a reason to need to shut them down.

[Michael Batnick]

Yeah. So speaking of Hollywood, I think that a lot of these issuers who are smaller niche issuers take this Hollywood approach where you release 10 films in a year, two or three of them are your winners and then six or seven flop or, you know, they do better on. Eventually on demand and stuff like that. You know what I'm saying?

[Josh Brown]

The ETF industry has always been a spaghetti cannon. And I'm old enough to remember people in 2011 and 2012 being angry at all like ETF launches. I think at this point nobody really cares.

[Todd Sohn]

And now the costs are a fraction of what they used to be. So launch it.

[Matt Serminaro]

Who cares?

[Todd Sohn]

See what sticks.

[Josh Brown]

Launch it and let and leave it. What's the difference if you watch it?

[Todd Sohn]

They might come.

[Josh Brown]

They may.

[Todd Sohn]

Matt, what do you got?

[Matt Serminaro]

I've got a chart.

[Todd Sohn]

Yeah, I know. You Do?

[Matt Serminaro]

Yeah. All right, chart five. John, could you throw? All right, awesome. All right, this chart which comes from exhibit A is showing the performance of the s and P one year after at least 58% of stocks hit a new four week high. So this is kind of like a breath rust. Right. And so we got this signal in the middle of the just face ripping rally we had off the April low. And you'll notice across the board, one year later, the S and P has never been lower. And the win rate, in other words, the number of instances that saw a higher market one year later is 100%. The average return is 19%. So it's great for returns.

[Josh Brown]

Could this be, well, 12 months later, anytime the stock market has hit 58% of companies making a four week high. A year later the average return is 19%. And it's never negative.

[Todd Sohn]

And think about when these events happen. Look at all the dates in here. They're all bottoms.

[Josh Brown]

And they cluster. Did you notice that, Matt? Like they're a lot of them are around these bear market lows.

[Matt Serminaro]

Yeah, they happen typically after a large drawdown and coming out of that drawdown. And it's exactly kind of what we had actually.

[Josh Brown]

But there's stand out to me because I lived through them. One of them is March of 2003. That was the end, that was the end of the dot com meltdown. Slash Enron, slash 9, 11, bear market. And I actually remember that bread thrust because I was working at a retail broker dealer and we were selling biotech stocks like these little shit small cap biotech companies that don't even exist anymore. But they were doubling and tripling like we were selling them because people were buying them.

[Michael Batnick]

Right.

[Josh Brown]

And all of them worked out. Like I remember that summer was just a field day. No matter what you bought, it went up. I didn't know the breadth data that you're showing me here, but like that one stands out. The other one is one more time, same thing July of 09. I don't know specifically what happened on July 23 of 09. I'll take your word for it that there was a big bread thrust. But effectively like that's when the market is making its recovery from the March low. It's like still in the midst of this massive rally where every stock is going up. I think that one was just like there's no sellers.

[Todd Sohn]

You know why this is such a great chart? I'm just eyeballing some of these. Like these are the type of dates that most investors especially had they gone to Cash would Never buy. Like July 2009, you're like, oh, I can't buy now.

[Josh Brown]

We're, we're double 40 off the lows. Right? Right.

[Todd Sohn]

Like, so I'm looking at like December 2023, for example. And like that was questionable. I feel like you could have bought that. That looked like breakout was coming. But other than that, who the hell was excited to buy June of 2020? It was like, what? Why are we up so much from the lows? You're telling me to buy now? No way. I'm gonna wait and see. We're gonna retest. Like this doesn't, this bounce, doesn't make sense. Same thing with, with July of 2022, with inflation screaming. But guess what? The market isn't dumb. And when you see this number of stocks making a 52 week high, you just shut up and you don't worry about what's going on and you buy them.

[Josh Brown]

Yeah, I think they don't mark the lows too. They're like three months later by definition. By definition, because that's enough time to reach 58% of stocks hitting a four week high. Like that's not going to happen within a week of a 20% bear market low. So all of these are like a few months after the recovery has already started. And they were not sell signals.

[Todd Sohn]

So my point is you could convince somebody to catch a falling knife, right? Like if you're like, if you're like, oh, oh, whatever, I can't keep going down forever. It's harder to convince somebody to buy that 58% because by that time, Josh, to your point, you're three months late and you're already 30 off the lows.

[Josh Brown]

I missed it.

[Todd Sohn]

I missed it.

[Josh Brown]

I missed it.

[Todd Sohn]

No, you didn't.

[Michael Batnick]

The, the, the, the, the chart, to me, I mean, if I had to pick one measurement to like use all the time and get rid of everything else, it would be that data. 20 day high data, because it's about probabilities. The probabilities are way in your favor and it signals durability too.

[Todd Sohn]

Yeah, that's some of my favorite data. When you, when you see a giant washout followed by the bread thrust, that's it.

[Michael Batnick]

The bottom's usually really good.

[Josh Brown]

The other thing is you could be wrong. So like, in other words. All right, so right now, so as of the middle of May, 58% of S&P 500 companies were hitting, we're hitting a four week high. So like you really had like a short term rally at minimum. That's all you knew you had, right? But looking at that data like, no, guys, this, this has always worked in the past with the caveat one time it might be different, but like, is that the way you want to invest? You want to, you want to bet on extreme outliers?

[Todd Sohn]

It won't work forever. You're 100. Right. But yeah, the odds are the odds. Take them.

[Michael Batnick]

I'm also appreciative that, Matt, you put a little asterisk on there that it's only the first instance over a 30 day period. So you're not cheating the data.

[Matt Serminaro]

Yeah, sometimes, like so sometimes you'll have a cluster. May 12th could have been 58 hit four week high. And then May 13th it could still be 58%. Just.

[Josh Brown]

You're not double counting the instance because then what happens?

[Matt Serminaro]

If you double count the instance, it will skew the average and it's not. That's, that's not the right way to show the work.

[Michael Batnick]

That's the worst data integrity man child chart kit.

[Josh Brown]

Very good point, Todd. Very good point. All right, we did, we did match charts. Do we have any more?

[Michael Batnick]

I can give you one more to whatever you want.

[Josh Brown]

Yeah, throw it up. Let's go.

[Michael Batnick]

John. Chart 3. This is a sore subject for me. So we talked about the new high data expanding for the S and P. We talked about market cap. Here are flows to small cap ETFs. Because it's just been awful, freaking awful going on. We've had some runs in there, but it's been a four year bear market for small caps. Maybe, maybe the April low is the purge. But I just think it's interesting that over the last few months.

[Josh Brown]

Wait, wait, let me, let me, let me. For the listeners, this is the rolling month. The rolling three months.

[Michael Batnick]

Three months.

[Josh Brown]

Sum of all of the money that is either come into or left small cap ETFs. So what are these ETFs, the tickers.

[Michael Batnick]

Or just the general.

[Josh Brown]

IWM.

[Michael Batnick]

IWM IJR CAF. IWO. I think it's gonna be small cap growth, if I'm remembering correctly. Okay, there's a few hundred of them in this.

[Josh Brown]

So this is now at an extreme that we haven't seen since the end of 2006, which not a great harbinger, which is the start of the mortgage crisis. So I have to tell you, this is the chart. So on its surface I think all of us would agree. Chart off. On its surface, all of us would agree this is the mother of all contrarian buy signals. Okay, Hopefully. But the biggest asterisk Also, market structure has changed. It's not that there's no money. It's not that there's no money going into small cap companies on the equity side. It's that most of the money now, new money going into small cap companies is going into venture funds and private equity funds. And those, those companies that are in receipt of these equity investments do not trade, don't have tickers, don't appear in these ETFs. Like, if we don't. I don't know how to do this. I don't know how to like, get that data and harmonize it with the publicly traded small cap. But there is no reason to be a publicly traded small cap. And many small, many companies that in prior generations would have been in the small cap index are very easily, very happy, very seamlessly raising money in the private market. And they will come public as mid caps or large caps. Yeah, and we can't pretend that that's not happening.

[Michael Batnick]

I've had a few people tell me they took away their small caps and just put in high yield bond instead. Similar return profile. Right. Volatility.

[Josh Brown]

Just put it in the toilet instead of, oh, you're gonna, oh, you're gonna buy small, right? I mean that's, that's as bearish as it is right now in small cap land. And it just, like on its surface, you just want to say, I don't care if it takes three years, I'm gonna make a ton of money on this.

[Michael Batnick]

Small cap stocks. Look at Cheesecake Factory. I hear that's the new jam. It was the last time you went to one.

[Josh Brown]

The only thing sep. The only thing that forces a company to be a small cap stock is not having an AI strategy.

[Michael Batnick]

Well, Cheesecake Factory, guess what.

[Josh Brown]

Yeah, like if you want to graduate from small cap to mid cap, if you're Cheesecake Factory, tell Wall street how you're using AI to blah, blah, blah, blah, blah. And that's your best shot right now.

[Michael Batnick]

Mint chip cheesecakes.

[Josh Brown]

I own a few small caps and when I talk about them publicly on tv, I'm the top news article for three months because nobody else has anything to say. Yahoo Finance is not publishing the analyst commentary on these stocks. The only outlet that I ever see with an article is either Seeking Alpha or Benzinga on. On some of these tippers, like, they almost don't exist. It's incredible.

[Matt Serminaro]

Seeking Alpha could have been me, like junior year of college.

[Josh Brown]

So like, literally, it could have been a very young chart kid Matt doing a post. All right, guys. The charts were unbelievable. Let's do final thoughts. And then. And then we'll say. And then we'll. We'll say goodbye.

[Michael Batnick]

Am I doing. I was my doing. What am I. What am I liking right now?

[Josh Brown]

What's your final thought on the market? Because I did watch Buy or sell? Boil it down for us, dude.

[Michael Batnick]

The Titan documentary on Netflix. I'm a buyer of that. What is that on the submersible that, like, just vanished?

[Josh Brown]

Oh, that keeps coming in my algorithm. They think I'm gonna like it. Should I watch it?

[Michael Batnick]

I didn't know it was made out of carbon fiber.

[Josh Brown]

Okay.

[Michael Batnick]

And it was pretty. They have footage of some other their dives and you can hear the ship basically popping, foreshadowing what happens. It's pretty spooky.

[Josh Brown]

Yeah. I'm gonna stay with jet skiing chart kid Matt, any parting thoughts?

[Matt Serminaro]

Yeah, I think the. I think that markets are healthier than they were at the February high. There's obviously some rotation away from some of the Mag 7 names and into other areas. I think that's overall good. Getting some breath thrust in the data. I just. I just wouldn't be bearish. Personally.

[Josh Brown]

I like it. Michael.

[Todd Sohn]

I'll give a plug for the unlock. Phil Huber and I did 50 minutes today on the megatrend of alternative asset managers infiltrating wealth managers. It was a good one. That's over at the unlock.

[Josh Brown]

That's the unlocked channel on YouTube. When is that going out? Is that out now?

[Todd Sohn]

It was out live this morning at 11. See the replay?

[Josh Brown]

All right, I'm all in. All right, guys, thank you so much. Thank you so much to Todd Sohn of Strategus and to chart kid Matt Serminaro of Ritholtz wealth slash exhibit A. Wonderful to have you guys. Thanks for doing this and to all of you out there, thanks for listening and we'll talk to you soon. Sa.