Stock Market in "Collapsing" AI Trade? Gareth Soloway on Memory Rotation, "Topping" Yields

SPEAKER_1 (0:00)

I do want to shift gears here, though, bring Sam back into the conversation, and welcome in our next guest to take a look at the broader market. Joining us, Gareth Soloway, the Chief Market Strategist at Verified Investing. Gareth, thanks for being with us today. I had a guest earlier on my earlier show, Trading 360, call a top in yields, and I saw in the notes that you sent over that you are also seeing some technical signals telling you that we could also potentially be near a near-term peak. So I'd love to get your breakdown there to start.

Gareth Soloway (0:25)

Yeah, absolutely. And so I would agree with that in that you had a topping tail on the daily chart of the 10-year yield last Wednesday. And then the weekly candle also formed a topping tail. And so topping tails that occur, so number one, that's a bearish reversal signal when you talk technical analysis. But when you get a daily that occurs in the same week as a weekly topping tail, it tends to be more dramatic and more true, meaning higher probability that we'll see downside. So while long term, I still think rates will be problematic with the US debt, near term, I think we pull back now to basically 5% or just below.

SPEAKER_3 (1:02)

So then would 5% or just below Gareth be the new lower end of a higher range that we should be getting used to if you're still worried about the debt? Because some people are drawing a correlation between the 10-year and crack spreads. You've got refiners going through the roof more than AI. You've obviously got the resilience of this economy, which continues to drive yields higher as well.

Gareth Soloway (1:25)

Yeah, and I think it's a little bit of everything here. So absolutely, the Valeros, the Phillips 99s, they've gone parabolic here based on diesel and the crack spread.

And so I think that that's part of it. But I do think we're entering this new normal, right? Where we're going to get these pullbacks, especially if the economy weakens. And I think to some extent that's already beginning, right? We're starting to see some of the economic data, like the last jobs report, come in just a little bit more shy. And if you look at Jamie Dimon's comments today, after their earnings or on their earnings call, he also warned about the underbelly of the economy. And so when you have yields where they are, when you have gas prices and diesel prices, where they are in inflation, continuing to stay stubbornly north of 3%, there's going to be a point where it weakens that overall economy. And I think that's the one caveat that could take yields back below 5% is if we start to see that weakening. Now again, like we talked about, there's this new normal. We're not going back to COVID-style yields. There's probably going to be a floor at 4% or above for the longer term and eventually higher highs on yields as well.

SPEAKER_1 (2:31)

Before our break, I teased that you suggested the AI trade is collapsing here. So I want to dive into the specifics on that. What are you seeing in the fundamentals or in price action that is telling you that the market's biggest growth engine is starting to break down?

Gareth Soloway (2:48)

Yeah, and it's really been amazing because just in the last couple of days, we've seen this rotation out of names like Micron and SanDisk. Those stocks have been coming down very, very sharply into some of these old school plays like Clorox and Nike. Nike, after those horrendous earnings, has gone up almost every single day since then and is now higher than it was when it reported earnings just a week or so ago. And so the money rotation is beginning. But I think you look at some of the fundamental stories like what CXMT reported out of China, where they're coming up with new advanced chips that can hold more data and those type of things, it's just the beginning, right? You have more plants coming online in late 2027 into 2028, even Micron building new plants. And what we have to remember is the market tends to price things in six to twelve months in advance. And so if we know that that's coming in late 2027, early 2028, that will ultimately discount the price of these AI stocks now.

SPEAKER_3 (3:44)

So put simply, is China a threat to your US tech portfolio right now?

Gareth Soloway (3:52)

It is. It is to some extent. And believe it or not, it's one of my growing investment opportunities. So I've started putting some money in Baidu and Alibaba down at these levels. I love buying things when everyone else hates them, right? And right now we have this flush of money that has just flooded into the AI trade in the US markets. And I think it's leaving other areas under-invested, which will just see that money flow eventually, even a portion of it, rotate into those names. And that will ultimately give those names a big boost. And so again, I do think the China trade is undervalued right now. And I do think that's one of the next pops that we're going to see.