The Tech Rotation: Why We’re Selling a 238% Winner to Buy the AI Underdog
Weekly Update - Week 21
“Bull markets narrow before they end.”
Bob Farrell
The market’s rebound over the past two months has been extraordinary.
But what may be even more extraordinary is just how concentrated it has become. Take a look at the sector charts above. Out of all eleven major S&P 500 sectors, only one has managed to break out to new highs:
Technology.
Not industrials.
Not financials.
Not consumer discretionary.
Not communication services.
Just tech.
Tech is doing almost all the heavy lifting behind the major U.S. equity indexes now trading at all-time highs.
And the concentration becomes even narrower once we look beneath the surface. Because it is not “technology” broadly speaking that is driving this move.
It is semiconductors.
More specifically, it is the small group of companies at the epicenter of the historic AI capex boom currently underway.
The market has become obsessed with the picks-and-shovels layer of the AI trade: GPUs, memory, foundries, networking infrastructure, and hyperscaler capex.
That is precisely why we have spent so much time discussing the AI theme across our entire product roster.
But importantly, we have not approached it through the obvious consensus trades. We have been much more contrarian.
Take our latest addition to the Model Portfolio: IGV 0.00%↑ , the software ETF.
We added it almost precisely when sentiment around software had collapsed and the group was being labeled an “AI loser” trade.
Meanwhile, capital was crowding aggressively into the already obvious semiconductor winners. But markets evolve. And increasingly, we believe we are beginning to witness an important rotation within technology itself: from the infrastructure layer of the AI boom toward the application layer.
From semiconductors… to software. You can already observe that shift emerging in IGV’s relative strength and price action. Interestingly, even elite investors are beginning to move in that direction. Bill Ackman just disclosed a position in Microsoft (MSFT 0.00%↑ ) with a thesis that strongly rhymes with what we have been publishing for months:
That the real monetization opportunity in AI may increasingly accrue to dominant software ecosystems rather than only to the hardware suppliers enabling the compute buildout.
But if there is a new opportunity emerging inside technology, we must also pay attention to the other side of the trade.
Beat the old playbook.
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Because some of the obvious AI winners are now becoming extremely extended. And nowhere is that more visible than in our South Korea position through EWI 0.00%↑ - one of the best-performing trades of this cycle.
The move has been extraordinary.
Our initial recommendation is now up approximately 238%. But sentiment has also become extraordinarily euphoric, particularly among South Korean retail investors.
At the same time, major bearish divergences are beginning to develop across momentum indicators, even as price continues to press higher. That combination tends to appear late in powerful advances.
So, for risk management purposes:
• let’s close the remaining EWY position at $178.86 for a 238% total return.
This does not mean the long-term AI story is over. Far from it. But even the strongest trends need to breathe. And after such a historic move, discipline matters just as much as conviction.
Good investing!
Vasco Marques de Freitas, CFA, CMT
A quick note on accountability.
We don’t publish these theses to be right on paper. We publish them to express edge in the real economy. Our Leaderboard shows the exact scorecard since inception, tracking every position, our compounding outperformance against the market, and the triple-digit winners we’ve captured along the way.
Disclaimer
The information provided herein is for general informational purposes only and does not constitute financial advice or a recommendation to buy, sell, or hold any investment. It is not tailored to any specific individual or investor profile. All investments involve risks, and past performance is not indicative of future results. Before making any investment decisions, it is important to consider your own financial situation and risk tolerance. We do not guarantee the accuracy, completeness, or reliability of any information provided, and we disclaim any liability for any loss or damage arising from reliance on the information herein. Readers are advised to consult with an authorized financial intermediary before making any investment decisions.