VIDEO: Here's Our Game Plan as the S&P 500 Touches a 5% Pullback

In today’s Pro Portfolio video, Chris Versace discusses several factors that have fueled the market’s current retrenchment and what we’re watching following the S&P 500 hitting a 5% pullback earlier today.

Chris notes that several Pro Portfolio holdings have entered an oversold condition, and why we’ll want to see a successful test of the S&P 500’s pullback before making any moves.

We also discuss some simple questions that help us keep our sanity amid trying times like this in the market, and why Nvidia (NVDA) may not need to deliver as big of an upside surprise this time around to get the market back on its feet.

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Transcript

CHRIS VERSACE: Hey, everyone. Chris Versace here. It is Tuesday, November 18th. And as you've probably noticed, the last few days have been rather busy ones for us here at the portfolio. But at the same time, we, and by that I mean you, as well as myself, we've had to contend with the market sell-off that has pushed some of our holdings into oversold territory.

I'm talking about Axon. I'm talking about Meta, something we discussed at the end of last week in the Weekly Roundup. But the continued move layer in the market has now pushed the shares of ServiceNow into an oversold condition, and knocking on that door shares of Arista Networks and Eaton Corp. Now, again, I know this can be very frustrating. But let's be clear. We have seen and been in times like this before.

Probably the underlying issue is that market expectations are being reset. Remember, we kind of talked about this a few weeks ago, yes, with our good friend Jay Woods from Freedom Capital on the Stocks and Markets podcast, but also in our writings to you, that the further the market pushed higher with valuations stretched, there was likely going to be some rethinking, especially given the lack of economic data and the increasing signs that inflation was either remaining sticky and persistent or ticking higher, culminating in a rethink of what the Fed is likely to deliver in December.

Now we have seen those expectations for a Fed rate cut dial back, less than 50% last I looked, quite a different picture than it was a few weeks ago. There's also, as we know, questions about AI and AI adoption. And we have tackled them. Our view is that we are continuing to see enterprise, consumers, and other institutions continue to adopt AI. And all indications are that that adoption rate and greater usage are poised to rise in the coming quarters.

So while the pullback has been, let's call it painful, no question about it, it's also likely been kind of a knee jerk reaction in some Cases-- Understandable during periods of resetting expectations. We can see this. But here's the thing. We've already discussed that the S&P 500 has been pulled below its 50-day moving average. And earlier today at around 11:00 AM Eastern time, the S&P 500 kissed the 6,574 level.

Why is that level important? Well, for the very simple reason, and it's something that we touched on in yesterday's Office Hours, that that 6,574 level marks a 5% pullback from the mark from the S&P 500's recent high. Now remember, the thinking is that 2%, 3%, 5% pullbacks tend to be healthy. They flush out the froth, as it were. And they reset some expectations.

To this I would say also that last night, Doug Kass did mention on X that the short range oscillator moved into oversold for the S&P 500. And given today's move, it's fair to say that that oscillator has declined even further into that condition. Now here's the hopeful news. In the last few hours, the S&P 500 has bounced off that 6,574 level. But as optimistic and potentially bringing good news as that might be, we do need to see it sustain that move and rebound.

Could we see a retest of that level, something that if it happens, that would build confidence in the market, that the 5% pullback is likely behind us and the worst is behind us? I have to say that, while that might be a painful thought for some, the reality is that we would welcome it. It would also likely bring in buyers that have been on the sidelines, potentially even folks that have done some tax loss selling over the last several weeks and are looking to position, or I should say reposition themselves for the next several quarters.

So the other aspect to this is that, yes, it does appear that the S&P 500 hit that 5% pullback level. But it also may not be an all clear across the board. Why do we say that? Well, let's just think about what we heard from Home Depot this morning. Clearly some other expectations still need to be reset. There will be pockets of that.

But for us, if we do successfully test and retest the 5% level pullback in the S&P 500, that's going to allow us to refocus on where capital is being put to work by companies, consumers, and other institutions. That's really what we want to do, as I like to say, follow the money. Now, again, I know that there are those of you that are frustrated. And some of you are chomping at the bit to do something, given what we've seen with the pullback in the market, but also with a number of the positions we have in the portfolio.

Remember, we have been here more than a few times over the last few years. And we've seen that it's times like this that we can pick up well-positioned companies that are benefiting from nice to powerful tailwinds at depressed levels. We saw that last year. We saw that earlier this year. And as we know, it can make all the difference.

So we are mindful of this. We are keeping a close watch on things. I will say that at times like this, some helpful questions that we like to ask ourselves are the following. Is demand for a company's products and services rising and poised to continue to do so in the next several quarters? And with that in mind, does that mean the company's shares are likely to be higher in the coming quarters than they are now? Simple questions, I know.

But they are ones that could help us keep our emotions in check from creeping into our thinking, especially at times like this. So we are going to continue to monitor the market. And I think that one of the big tells about whether or not we've moved past this 5% pullback is going to be the market's reaction to earnings from NVIDIA out tomorrow night.

We've talked about how important these are for a variety of reasons, whether it is the composition that NVIDIA has in the S&P 500 or the NASDAQ composite or the NASDAQ 100. But I will also share this thought, that in the past we have seen NVIDIA's earnings really run up into the earnings report. We haven't seen that this time. If anything, the shares are down. Call it low double digits as of I'm taping this conversation to you.

That suggests that the degree of upside that NVIDIA needs to deliver relative to the market expectation may not be as great. The reality is that I think the market is looking for NVIDIA and Jensen Huang to deliver a soothing message that we will see AI adoption and usage continue to grow in the coming quarters.

That, in turn, will drive demand for AI and data center capacity, NVIDIA's chips, and for the larger digital infrastructure ecosystem. We have several companies tied to that, Arista Networks, obviously, Marvell, and others. So we do think that there is the potential for NVIDIA's earnings to be a bit of an inflection point for the market. So that's really the next big thing that we will be focused on.

But I will say this with you, share this with you, sorry, that as you know, we continue to follow the data. We don't simply bury our heads in the sand. If we did do that, we wouldn't share all the data points and the signals that we collect each and every week with you. You also know that we are not afraid to make the hard decisions, no matter how unpopular they may be.

Our commitment is to managing the portfolio for the long term. And what that means is that as the landscape changes, we will update our thinking. And if we have to make tough choices, we are willing to do so. Do I think that that's going to be what happens this time around? I do not.

When I look at the portfolio and how we are positioned, I think that when we look at our consumer exposure, when we look at this ongoing spending and adoption of AI to drive productivity in public safety, we're well-positioned, and so forth. Again, those questions that I mentioned a moment ago, we cycle through them all the time for the portfolio's positions.

Now could we have some opportunities ahead of us to pick up some shares at better prices? I think we will. We'll be calling out those opportunities for portfolio members. And where we have room in the portfolio to make some additional moves, we will do so.

And if we have to make a tough choice or two so that we can properly position ourselves further for what's ahead, we will do so. A lot to come, my friends. Stay tuned. And rest assured, we will be with you through it all.