The Historically Weakest Week Of The Year Just Ended

1.) GOOGLE - As I've stated in the apt, I don't like to comment on individual companies too much. But Google’s parent company, Alphabet (GOOG), officially joins the Dow Jones Industrial Average today. Who cares, right? I mean many investors think the Dow is old and stodgy. Besides, it's easy to disregard the Dow. Thirty stocks couldn’t possibly tell me much about a market with thousands of publicly traded companies. But, here's the dirty little secret...if you get the direction of these 30 stocks right, you’ll probably get the market right. The Dow isn’t trying to own every stock. It's simply trying to represent America’s greatest businesses, which is why Google's addition matters. This is a reminder that this index is constantly evolving. Interestingly, Google isn’t even officially classified as a technology company anymore. In 2018, S&P moved Alphabet into the communication services sector alongside companies like Meta Platforms (META) and Netflix (NFLX) because that’s a better reflection of what the business actually does today. Markets evolve, businesses evolve and the Dow evolves with them. One mistake investors make is assuming every Dow change is a buy signal. History says it's not. In 2020, the Dow removed Exxon Mobil (XOM) and added Salesforce (CRM)...tech was unstoppable and oil was dead, right? Exxon Mobil soared more than 400% over the next several years while energy became one of the market’s strongest groups, while Salesforce lost 40% of its value since inclusion in the Dow. That’s the market reminding us that consensus isn’t always right. Today, Verizon Communications (VZ) leaves the Dow after more than four decades. Bottom line is that this isn't about GOOGL or VZ...it's about paying attention. The evolution of the index tells us a lot about where leadership was and might be headed.

2.) FAIR VALUE - For the first time this year, a fundamental investor can justify a bullish view on the S&P 500 using simply consensus earnings estimates and a historically average PE ratio. Against these modest assumptions, the index has 8% upside from here.

3.) LAG 7 - Are the LAG 7 ready for a catch up? Maybe. The MAG 7 Hyperscalers are trading at their lowest forward Price / Earnings ratio since the launch of ChatGPT. They are also trading at a discount to the S&P 500. This on top of an oversold scenario developed in tech. Last week's net selling in US Info Tech, in both dollar and percent terms, was the largest in more than 10 years and registered a -4 z score. What's that? That's a lot. You might call that "overdone". So, a reminder that when things "feel" the worst, sometimes they are not. Also, as we leave the historically weakest week of the year, we now enter the 12-Day Midyear Rally: the last three trading days of June and the first nine trading days of July have a good history. Since 1985, the Nasdaq has returned an average of +2.5% during this period and has finished higher 78% of the time.