Stocks have moved into a bit of a risk-off mode lately as gloom and doom, talk of bubbles (which everyone sees this time around!), and of course, impending economic calamity appears to be the order of the day.

Believe it or not, the glass-is-half-empty crowd is once again telling anyone who will listen that a recession is right around the corner - just you wait! Never mind the fact that the Atlanta Fed's GDPNow model says the economy is currently growing at a rate of 4.1% annually. Never mind that corporate earnings have once again surprised to the upside in a big way. Never mind that the naysayers have been dead wrong for more than two years. Nope, forget the facts as it's time to fret. And worry. And, well, you get the idea.

For those willing to listen to reason, the good news is that many big names - you know, the companies that are most important to the market these days - delivered another round of very strong earnings.

The bad news is that we're seeing some strange behavior in the market here as earnings "beats" - especially in the tech sector - have not been rewarded this quarter. No, just the opposite. Instead of movin' on up when a company reported impressive results, traders have been hitting the sell button early and often.

Take Palantir (PLTR) for example. The leader in AI implementation put up one of the best earnings and growth reports perhaps ever seen by a software company. They beat on the top and bottom line - by a mile. They raised guidance. And their "Rule of 40" ratio (a measure combining revenue growth and profit margins) was off the charts (as in nearly double the level of their nearest competitor).

In response, traders immediately starting selling... to the tune of -17% off the top. Hmmm...

Granted, as I type, the stock is still up more than +120% on the year and has risen more than ten-fold since the beginning of 2024. So, anyone who has been holding the stock for a while doesn't have much to complain about. After all, stocks that move like this do indeed need a rest every now and again - especially when the valuations are sky-high.

However, this was not an isolated incident. It was not a company-specific situation. You see, it turns out that the hedge fund community has been selling tech lately - in a very big way.

According to BofA, the hedgie crowd - which I will opine often moves in in unison (imagine that!) - have been big net sellers of equities recently. In fact, hedge funds did more selling of technology shares in the first week of November than at any time in the last two years. My guess is that this trend is continuing through today.

One famous hedge funder went so far as to publicly announce via social media that he was shorting both Nvidia (NVDA) and Palantir (PLTR). Having successfully shorted housing during the financial crisis, this particular manager's view got a fair amount of press in the last week or so.

The punch line here is this is the same guy that was forced to shut down his fund because of... wait for it... very poor returns for the past several years! Apparently shorting stocks that have been 20-baggers since 2022 and losing money when the S&P is up big isn't a great way to manage money. So, my question is, why is anyone still listening to this guy?

It is also worth noting that generally speaking, hedge funds have dramatically underperformed recently. Investors would have been much better off investing in the major indices than putting money with many of these fast money, masters of the universe.

Stepping down from my soapbox, the real question of the day is why are hedge funds busy selling/shorting the biggest players in tech?

Before I attempt to answer, I need to make it clear that I'm a big-picture bull on the revolution in computing that is occurring. I believe there have been and will continue to be wonderful investing opportunities in this space. Yes, it will be a bumpy ride at times. Sure, the names will change over time. Today's leaders may not be tomorrow's leaders. Such is the way of Ms. Market's game. But the key is I don't believe this is the time to be thinking that the biggest companies on the planet are all making a huge mistake - all at the same time.

Some will argue that the "AI Trade" has gotten ahead of itself. That anything and everything related to data centers and/or a revolution in computing has become a trade that is "too crowded" and overdone.

On that score, it is worth noting that one of the most important lessons I've learned in this game is that Wall Street ALWAYS overdoes everything - in both directions!

It can be argued that this is what is happening to the AI Trade leaders. The bears tell me that Nvidia becoming the first company to breach the $5 trillion mark is a perfect example of this. That the vast sums the likes of Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN) and Meta (META) are pouring into the development of data centers is another. And that valuations are entirely too high.

Our furry friends are also quick to argue that Peter Theil and SoftBank selling their entire stakes of NVDA is a sign that "it's over." That it's time to pull back from this theme. Time to get out while the getting is good. That peak growth is nigh. As such, it's time to forget about what "is" happening with current earnings and look ahead to a day when the data centers are built, when quantum computers and generative AI are commonplace, and when there is plenty of electricity available for all of the above.

My take here is yes, the AI trade may have gotten ahead of itself in the near-term. Yes, there was indeed massive speculation in some areas such as quantum, crypto, and the new nuclear power producers. Yes, valuations are extremely high at the present time in some of the leaders (but so is growth - be sure to check out your PEG ratios before making decisions on individual stocks and their valuations). And because of this, pullbacks are to be expected.

Another way to look at these bouts of selling is they represent bumps in the road to the future - or arguments between market players. One side says, "it's overdone" and time to "get out of Dodge," while the other suggests their opponents aren't seeing the big picture growth opportunity.

It is times like these when investors need to understand their big-picture goals and have a game plan. Are you a trader, making bets for the next month (good luck!) or an "investor" looking to the next few years? Are you fully invested or do you have some capital that can be deployed? Do you see pullbacks as threats to your financial wellbeing or opportunities?

I, for one, am in the latter camp on the questions above. I look ahead to the future. I try to have some cash available to put to work during times of duress. And as I hope I have displayed here, I try to have an open mind. I try to listen to the other teams' arguments. I may not agree with them. But isn't this what the game is all about?

Thought for the Day:

If you follow the crowd, you run the risk of getting lost in it...

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research, a Registered Investment Advisor

Disclosures

At the time of publication, Mr. Moenning held long positions in the following securities mentioned: NVDA, PLTR, MSFT, GOOGL, AMZN, META - Note that positions may change at any time.

NOT INDIVIDUAL INVESTMENT ADVICE. IMPORTANT FURTHER DISCLOSURES