Larry Berman CFA, CMT, CTA A Comment -- General Comments From an Expert A Commentary COMMENT Jan 27, 2025

That's the $1M question. Things are very fully priced right now. NASDAQ's trading at just over 28x PE, and S&P just over 24x. Historically it should be ~19x. There's sentiment that the US Fed Reserve will cut come September by 0.25%. 

When you look at what's really driving it, it's the AI story. Here in Canada, the commodity side has done extremely well except for the energy complex. But base and precious metals are ruling the roost. 

If you look back to 4 years ago, CPI topped out around 9%. It's come down and, really for the last year and a bit, has stabilized. He rather doubts it's going to get down to the Fed's target 2%. Everything's lined up now for them to cut by 0.25%. 

Who knows what happens come December. Interest rates coming down will be reflected in the valuations, and that's why you can get PE multiples up this high. They're at nosebleed levels right now.

It's very much taken a back seat, mainly because Mr. Trump just turns it on and turns it off. Everyone's gotten numb to that. People are focusing now on price and earnings. You can't really trade or invest based on tariffs or negotiations, but you can trade on valuations.

Investors know that a lot of capex is being spent on AI, but they don't see people actually buying it. AI is truly transforming the whole modern defense landscape. Enables smarter, faster, and more autonomous military capabilities. 

His bullseye chart has 3 layers. Bullseye is all about AI-powered defense platforms and systems. Includes autonomous drones, robotic vehicles, smart weapons, and so on. 

Second circle includes PLTR, LMT, and LHX. It's all about decision-intelligence and command platforms. AI augments battlefield awareness. 

Outer circle is more about dual use of cyber AI and defense infrastructure. PLTR is in this circle as well. Supports secure communications and AI-driven cybersecurity. The old-school players are in here -- RTX, LMT, and NOC. But there are spaces, especially when it comes to the drone side.

His team has been highlighting 4 developing technical negatives that suggest equity markets are a bit stretched.

At the start of the year they were very cautious, looking for the bigger correction that happens every 3-5 years. Thinks we got that from Feb-April. They recognized that it was a tradeable low, but didn't realize it was going to be the low. The recovery was really quick. At the end of May/early June, they were telling clients there was a medium-term rally with upside into August and also that a new 3-5 year cyclical bull market was underway.

What they've been noticing over the last couple of weeks is that investor sentiment is starting to get a bit too bullish. We've had a 35% move off the lows. The other thing is that seasonality is telling them that August and September are typically the weakest months of the year. So that's looming.

Short-term price momentum has been stalling on a variety of indices. Underneath the surface, seeing a lot of the leadership names that were leading this rally are showing signs of giving up the ghost.

All these things together tell him there's going to be an air pocket of 5-8%. But he'd be using that air pocket to add exposure, because his team thinks we're in a new bull cycle that has upside into the second half of 2027 and first half of 2028. This will be a common  theme of today's show -- most names mentioned could benefit from investors waiting to add exposure during the potential upcoming correction.

Because the tech sector has been so bloated, that space could see a correction beyond the typical 5-8% that you'd see in other sectors. Based on the beta of a stock.

There have been a variety of names in the US specifically. Names like AAXN, HWM, and RCL. They'd broken out to new highs, which is very bullish. That was telling him they were the leaders of this new bull cycle. However, over the last couple of weeks they've started to break down. Not just in relative terms, but also in absolute breakdowns. 

The leaders breaking down typically suggests that a bigger correction is likely to follow soon. 

His team looks globally. While they look at a variety of stocks in Europe and Asia, but their focus is NA and where 90% of their research is targeted. So it's in the NA market where they're seeing a lot of the early signs of market breakdown.

There are stocks that continue to power higher, and the market's very attractive at the start of a new bull trend. But in the intermediate term, things are priced to perfection. Expects some kind of weakness, and he'd be looking to add exposure then.

A short-term pullback typically lasts 1-3 weeks. That's what we've seen over the last couple of weeks. Looks as though markets are starting to grind higher, and that advance phase is typically 2-4 weeks. If he's correct on the bigger call of an intermediate-term correction, it will usually last 1-3 months. 

There are 2 ways you can correct. One way is in price, which is how most people think of it. The other way is in time, and a glance at the chart for gold demonstrates this. After gold moved up, it's been consolidating in a sideways trend for the last couple of months.

Could be legislation, tariff-related, geopolitical crisis that affects prices of commodities, or a financially related event. Any of those could shock markets and see them come under pressure. August tends to be high volatility, but with low trading volumes, so there's low liquidity. If there's low liquidity, then moves can get exaggerated.

He likes to be the one making the decision, rather than being forced to make a decision. So he's more proactive with his portfolio.