VIDEO: When to Get Greedy as AI Fear Drives Move Lower

In today’s Portfolio video, Chris Versace examines what’s behind Thursday's latest move lower in the market as investor anxiety climbs further.

In keeping with a famous quote from Warren Buffett, we’ll want to be greedy when others are fearful. But, based on the Volatility Index (VIX) and other indicators, their level of fear has yet to reach extreme levels.

Chris also discussed the indicators that the Portfolio will be tracking to identify when a more suitable risk-to-reward environment to put capital to work has arrived.

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Transcript

CHRIS VERSACE: Hey, everyone, Chris Versace, Thursday, February 12. Another tough day in the market, folks. That's right, the S&P 500, the NASDAQ they are back under pressure. I would say that there's a lot of things going on that are really amping up uncertainty in the market. A lot of knee-jerk reactions once again, are back in the market.

We talked about some of them in our opening comments this morning. Questions over a DHS shutdown. The market's still kind of in limbo when it comes to US Iran. Trump saying he's in favor of a deal. He's shrugging off some concerns that Netanyahu was in DC yesterday. But at the same time, he said, hey, a carrier, it may be going to the Middle East.

At the same time, we are seeing AI continue to ripple through a number of sectors in the market. Of late, we saw it with software, then we saw it earlier this week with financial advising firms and related companies like FactSet, for example, thank you, Anthropic. And then now we're starting to see it really ripple through some other areas on trucking and even media companies as we're seeing some new potential on that front.

It's a lot of shoot first, ask questions later knee-jerk reactions. But when we look at it, when we step back and look at all of this that's going on, what do we find? Well, the volatility index back over 20, and the fear-and-greed index back in fear.

Now, that's today. But if we take a look further back, what do we see? Well, let's for example, take a look at the S&P 500, not over the last few days, not over the last few weeks, but over the last few months. It is back below the 50-day moving average, and yes, the next level of support is around 6811, better known to you and me as the 100-day moving average.

But here's the thing with this longer-term view going back several months. Since November, we have seen the S&P 500 move below the 50-day moving average four previous times. And when we include this latest round, that brings the total to five. Now, in each of those cases, four, what has happened? Well, the S&P 500 has recovered either rather quickly, or it has ceded ground to the 100-day moving average, bouncing off the 100-day moving average.

At the same time, when the S&P 500 has recovered, especially the last few times, it has kind of hit that 7,000 level, punched its way through, but nothing on a sustained basis. And I think when we put all of that together, it tells us that the market is moving like this. The victim of not having concrete direction and as a result, uncertainty for a variety of factors, which, as we know, is not a friend of the market. Arguably, the market abhors uncertainty. And I think that helps explain some of these knee-jerk reactions. Shoot first, ask questions later, as they say.

So yeah, these knee-jerk reactions, they are becoming increasingly common. And more stocks landing in oversold conditions. Candidly good news, be it solid revenue, earnings growth, rising backlogs, RPOs, contract wins, contract extensions it's giving way to spear speculation. And that is kind of weighing on stock prices, not necessarily the fundamentals.

A great example in the portfolio. Take a look at Palantir. Over the last month, what did we see? It expanded its commercial business with HD Hyundai. That was almost about a month ago. It put up very solid total contract values, especially for its commercial AI business. And it said, yes, AI adoption, overall, is expanding, poised to accelerate further. In the last 24 hours, it announced an expanded relationship with Airbus. And today, something similar with the Defense Information Systems Agency.

Now, those last two announcements, we actually saw Palantir shares up modestly this morning. But then famed investor, famed short-investor Michael Burry, wrote a note that he's working on something about Palantir. And then all of a sudden, the stock goes from being flat to up slightly, to being down 4%, 5%, after already falling significantly over the last month.

And while Burry, yeah, he was made famous by the Big Short. I would just say let's remember, like most investors, he's had some really good calls, and he's also been on the wrong side of a fair number of them, especially with NVIDIA, Palantir in the past and others. But here's the thing. If it was just Palantir, that would be one thing, but it's not. We can take a look around. And as I mentioned, we're seeing a lot of stocks come under pressure, and a lot of stocks, despite good news, falling into oversold conditions.

So is it frustrating? Yeah. Are you frustrated? I bet you are. I'm certainly frustrated, very, very, very frustrated. But have we been here before? We have. And when we have, the thing to do, slow things down, take a beat, take a breath, double-check the fundamentals, double-check the thematics, double-check the technicals and carefully, carefully pick our spots.

Sometimes we'll get them right, More often than not. I think our recent moves with Microsoft and Axon and even SuRo Capital all speak to that. Could we be better at times? Yes, we can.

And I think a great example of that is about a month ago when we picked up some shares of ServiceNow considerably higher than where they are now. But the reason we did that spoke to the fundamentals of rising contract values, greater programs with customers, and the pickup in the RPOs, and good prospects for further margin improvement as AI adoption continues to accelerate.

Stock caught in the crossfire of AI adoption, even though it is poised to integrate OpenAI and Anthropic into its tools, delivering better services to help the enterprise adopt AI in a more constructive fashion. We'll have to be patient with that. But like I said, we will pick our spots.

Well, what does that mean? It means that near-term, yeah, we're going to tread carefully. In addition to watching the fundamentals, we're also going to watch what's going on with the fear-and-greed index to see if it moves into extreme fear. Same thing goes for the volatility index. We're going to continue to watch that. Like I said, it's above 20.

But if we trace back over the last 12 to 18 months, when it gets over 22.5 and even realistically closer to 27, and the S&P 500 is close to bouncing off its 100-day moving average near, in this case, 6811, when we see those three things come together, that's going to be a sign, along with watching the market oscillators, that the market is oversold, potentially deeply oversold.

That will tell us that a lot of the bad news is priced into the market. A lot of the uncertainty is priced into the market. And that, from a risk-reward perspective, will be a better time to put some capital to work.

What will we be doing? We will continue to focus on earnings growth, structural tailwinds, and the thematic signals that we have, while also being mindful of oversold conditions, not just with positions in the portfolio but potentially, ones that were eyeing as well. And of course, and you knew I was going to say it, we will follow the data. The goal will be to capitalize on mispriced stocks and overdone reactions that simply don't reflect what's really going on.

As we do that, and this is kind of speaking to what I'm talking about, but as we do that, we are going to keep in mind one of the more famous quotes by Warren Buffett about being fearful when others are greedy and greedy when others are fearful.

So based on where those metrics that I just mentioned land in the next couple of days, could be next week, could be the week, after we will see we will look to put capital to work. We're not going to rush. We're going to take our time. That old adage about a carpenter, measure twice, cut once. We are going to be measuring many times, watching many things, before we put a demonstrative amount of capital to work. Odds are when we do it, it'll be in small bites. It could be a sequence of small bites. But that's what we'll do so that we can get the best bite at the apples from a risk-reward perspective for folks.

Now, what do we have coming up later today? Yes, we will have some comments from Welltower following their quarterly results last night. I will hint that we are taking our time as we look to revise our price target, and that price target will be revised higher. After the close today, we also have quarterly results from Dutch Bros. And from Arista Networks.

And if you missed the opening comments this morning, I will say that even though Cisco shares are down today, what we saw in the company's networking business from an order perspective, and even comments on the earnings call last night about the prospects for continued strength in the networking business, it all speaks to rising AI and data center capital spending.

But also, as we think about the continual, arguably accelerating pace of content consumption and creation, as we have more people streaming more things, music, video, what have you tapping into AI and a wider array of connected devices as well, all pushing data into the pipe, driving network capacity to hit constrained levels, fostering incremental spending. We've talked about this with regard to Marvell. The same is true for Broadcom and obviously Arista Networks.

So we'll have a lot more to say after we review the quarterly results tonight from Dutch Bros. and Arista Networks, means we're going to have a busy day to close out the end of the week, but we're up for it. More to come.