Growth, value, and the danger of following the herd.
KEY TAKEAWAYS
Markets experienced a sharp divergence with tech selling off and value sectors rallying. This move was driven more by algorithmic behavior and fear amplification than by fundamental change.
Algorithms exploit headline risk and technical levels to force human reactions. Their edge comes from speed and emotional detachment, not superior insight.
Sector labels are increasingly misleading in modern markets. Some defensive stocks now offer growth while some tech stocks behave like utilities.
Short-term volatility does not automatically invalidate long-term investment theses. Reacting emotionally often benefits systematic traders at the expense of individuals.
Volatility is the cost of achieving strong long-term returns. Avoiding it entirely usually means avoiding opportunity.
MY HOT TAKES
This was a classic example of bots manufacturing urgency rather than markets discovering truth. Humans still lose most battles fought on emotion.
The so-called “great rotation” is often overstated and poorly timed. Stock-specific fundamentals matter more than sector narratives.
Investors confuse movement with meaning. Not every selloff is a signal–some are just stress tests.
Modern markets punish impatience more than ignorance. Time horizon remains the most underrated asset.
Staying disciplined during volatility is harder than picking stocks. That difficulty is precisely why it pays.
You can quote me: “Algorithms don’t predict the future; they exploit your reaction to the present.”
Feel the rhythm–algorithm. To bot or not to bot? That is the question. Yesterday, I spoke about Clawdbot, but today I am referring to Clawdbot’s great, great grandfather. You know, the guy that has been mucking with markets for many, many years. My longtime followers know that we have been using some forms of machine learning to trade markets and manage portfolios for many years–well before my mother-in-law even heard the term artificial intelligence–even well before OpenAI CEO Sam Altman graduated elementary school. A form of those old “algos” as we collectively refer to them, roves the markets all day, everyday, sniffing out fear–usually around flash news headlines, technical inflection points, and market misalignments. When they find slight punctures in the fabric, they aim to tear them wide open, grossly accentuating the pain, eliciting a reactive response, which begets even more pain as the bulk of carbon-based traders (you and me) rush in to respond by doing what our weak, carbon-based, emotionally-laden constitutions know best: panic and follow the crowd.
Have a look at market returns yesterday.👇 The shiny, shiny Nasdaq was pummeled yesterday, ultimately falling by -1.51% when all was said and done. That, by itself, is not odd. What is off was that the crusty, dusty Dow Jones Industrial Average gained +0.53%. Aha, there it is. The great rotation you have been hearing about–and fearing. You have watched some of your favorite stocks fall fast enough to mimic that feeling you get when Hershey Park’s famous Comet rollercoaster plummets down its first dip. 🤮 Your biological instincts take over in an instant. You don’t want to give up 1 cent of your hard-earned double and even triple digit 12-month gains. You sell and tell yourself the misquoted Wall Street saying “no one ever got fired for taking a profit.” That is patently untrue. Ok, there is nothing wrong with booking a profit, but where do you go with the proceeds of your sale? Have a look at the following chart and see if we can get a clue.
This is a down-and-dirty chart I plotted using R-code that shows sector returns over the past 2 trading sessions. The loser? Tech. Are you surprised? Of course not. You sold some of your tech investments (or at least considered it). Well somebody sold tech–something sold tech. Well, if we are reading this chart correctly, it surely looks like funds flowed out of growth sectors: tech, comm services, and discretionaries and into value-oriented, defensive sectors: energy, materials and staples. The common wisdom of investing says, when you expect 💩 to hit the fan, you buy stocks that are grossly undervalued that sell goods and services that everyone keeps buying in the troubled times expected. First, are there troubled times ahead? If so, what does the fact that AMD’s forward guidance was slightly below analyst’s estimates have to do with them. Was Alphabet’s admission that it will be spending a helluva lot more money on CAPEX this year than last year a sign of the end of days? Does some obscure beta release of an AI tool used to review legal documents mean that the US economy is on the brink of collapse? No, definitely no, and certainly not.
Let’s look at those three newly fascinating sectors, energy, materials, and consumer staples. The energy ETF’s (XLE) top holding is Exxon Mobile, a fine company. Its expected earnings for the current quarter are expected to be down by -12% YoY, and Q4 of 2026 EPS growth is expected to be 1.6%. The heavyweight in materials is Linde, an industrial gas company. Its EPS growth prospects are much better with Q4 of 2025 (it didn’t report yet) YoY estimates at 5.3%. In the staples sector, Walmart dominates the index. Its Q4 2025 results are expected to show an increase in YoY EPS growth from 6% (actual Q3) to 9.8% (est). That looks better yet.
In contrast, let’s look at the top two holdings of tech and comm services. For tech, we are looking at NVIDIA and Apple. Year over Year EPS growth for 2026 is expected to be 56.8% and 13.5% respectively. Those are quite good. The largest holdings in communications services are Meta and Alphabet. 2026 expected YoY EPS growth is expected to be 3.8% and -8% respectively. Now, those numbers are not so exciting are they?
Were you expecting me to show you that all of those tech stocks had massively higher EPS growth prospects than those old, slow moving defensive stocks? Unfortunately, there is no clear answer here–there rarely is when it comes to investing. But there are a few messages. First: not all stocks are created equally! Second: in this modern era, defensive stocks can sometimes act like growth companies (Walmart). Third, sometimes tech stocks can behave more like defensive stocks (Google). I am chuckling, because you are probably more confused now than you were at the start.
My daughter taught me a military term yesterday: BLUF. It stands for Bottom Line Up Front. I love it, but I have not quite adopted it yet. I am, however, going to give you the bottom line right now. I will remind you first, stop thinking reactively. Now go and check your investment thesis on all your stocks that have been under pressure. Do they still hold today? If so, ask yourself if you can afford to be a long term investor. Meaning, do you need your money in the coming days or months, or are you in it for longer-term, compounded growth 24 months and beyond? If you are a long-term investor: calm down. Consider trimming stocks that are not holding up to your initial investment thesis, there are plenty that are holding up. More basically, look at the stocks that got beaten up over the past few sessions. Are they down for the right reasons (company specific, or idiosyncratic risk), or the wrong reasons? Wrong reasons would be general market (systematic) panic or algorithms looking to push you into being reactive to increase speculative gains. Finally, don’t overlook stocks that are in boring sectors that can offer growth. This volatility is not going to go away overnight, but volatility, as I always remind you, is the price we pay for great expected returns. You simply can’t get the latter without accepting the former. Stay sharp, don’t let the bots bully you into abandoning your investing values. If you are still struggling, picture those nature shows where they show clips of Wildebeests following a panicked herd over cliffs only to drown. Hint: don’t do that. 👈 That would be my BLUF.
YESTERDAY’S MARKETS
Stocks had a mixed close yesterday as growth stocks were ditched in favor of defensive stocks as traders responded to lower than expected forward guidance from AMD–plain and simple. Silver and gold caught a dip-buying bid as speculative fever broke along with Bitcoin. 10-year bond yields remained stuck on the upper end of their recent range.
NEXT UP
Initial Jobless Claims (January 31st) came in above estimates at 231k and above last week’s 209k claims.
JOLTS Job Openings (December) may have increased to 7.25 million from 7.146 million.
Atlanta Fed President Raphael Bostic will speak today.
Important earnings today: Estee Lauder, Huntington Ingalls, Carrier Global, Blue Owl Capital, Hershey, Ares Management, KKR, Linde, Rockwell Automation, Bristol-Myers Squibb, Peloton, Cummins, Ralph Lauren, Reddit, Monolithic Power Systems, Fortinet, Microchip Technology, ROBLOX, Amazon, Cleanspark, and MGM Resorts.