What a rout! Japan’s main index plummeted as it suffered its worst day in 37 years. The Yen carry trade began to unwind, which impacted US tech stocks, and Warren Buffett sold down half Berkshire Hathaway’s stake in Apple (US:AAPL). The company’s cash position is now a record $277mn (£218mn) and he’s now started to buy Treasury Bills.
Fears of a recession were stoked when the Nonfarm Payroll Report (NFP) rose more than expected. A spike in unemployment is never good news and is known as the Sahm Rule (after former Federal Reserve economist Claudia Sahn) – it’s one of the key reports people look at when surveying the health of the economy.
And finally, the narrative for artificial intelligence (AI) has shifted. Narratives drive markets, and while the narrative was that AI was the best thing ever, questions are now being asked over whether AI is actually as good as everyone thinks. It needs to bec because the amount of money being sunk into it is huge. For example, Microsoft (US:MSFT) invested $19bn in the last quarter on both cloud and AI expenses. The company has made it clear it’s going to spend more than ever before on a technology. To get an idea of this huge number, Microsoft made $22.04bn in profits in Q2 2024. AI spend is “nearly all of our total capital expenditures” according to a previous Microsoft earnings call.
Oh, and one more thing. Nvidia (US:NVDA) reportedly told Microsoft that its next-generation Blackwell chips will be delayed by three months due to unspecified flaws. These chips were designed primarily for speeding up AI tasks. Semiconductor issues are extremely technical and so the market is now worried that a three-month delay could easily become even longer.
Elliott Management, which has $70bn of assets under management, told investors that AI was “overhyped” and Nvidia a “bubble”.
Right now, the honeymoon period for AI seems to be over. That’s the new narrative. But what does this mean for traders? Well, it’s business as usual.
There is likely to be plenty of short-term trades based on the market sentiment and news, and it’s always worth watching the stocks that hold up when all others fall. That’s a huge sign of relative strength, and if stocks are flat or barely down when many are getting whacked, then when the market is back to risk-on, these stocks should see outsized gains compared with sector and index compatriots.
Lots of traders will think because their positions are stopped out and many charts have taken a whack they’ll take their foot off the gas. This is wrong. When stocks fall, amateurs freeze and the professionals go to work. Some of the next best set-ups will already be in the making for the next rally, and only through consistency will we find them.
It’s deflating seeing a lot of positions knocked out – especially when the market then rallies. But consider the alternative: what if you didn’t have stops, the market tanked, and suddenly your account was in a real significant drawdown? I’m convinced that traders who use stops and have effective risk management have longevity. It’s the only proven way to avoid blowing your account and staying in business.
Recently, I was invited to Harwood Capital for a talk with its chief executive, Christopher Mills. Mills reviewed the holdings of the North Atlantic Smaller Companies Investment Trust (NAS), along with some of Harwood’s own investments.
Hargreaves Services (HSP) was on my watchlist due to its chart, but I hadn’t delved any deeper, although my colleague Simon Thompson has.
Mills says that the market has completely missed the fact that the Carbon Border Adjustment Mechanism (CBAM) will come into effect in January 2026, imposing carbon tax credits on any carbon-intensive materials imported into Europe.
Hargreaves Services produces pig iron, a commodity whose price surged following the Russo-Ukrainian war, and although the price has since stabilised, the company still produces 250,000 tonnes annually. Given that each tonne of imported goods will carry half a credit to two credits, and with the current carbon credit price around €66 (£57), this translates to an additional profit of €8.25mn when multiplied by 250,000 tonnes.
Chart 1 shows the rise and fall of Hargreaves Services over the years.
SharePad’s forecasts tab shows a post-tax profit of £12.8mn for the company, so the CBAM effect represents a significant increase. Additionally, there’s the possibility of a Russian embargo. Russia exports 1.6mn tonnes of pig iron and has been offloading it to Turkey, which then sells it into Europe. The European Commission is currently scrutinising this practice.
Harwood also estimates the existing asset-backed value of the shares to be 800p, compared with the current market price of 570p. This valuation doesn’t account for CBAM or any incremental growth.
While I appreciate the value of fundamental analysis and potential catalysts, my primary focus remains on the chart.
And looking at Chart 2, 600p is a major resistance level, but on closer inspection, 590p seems to be the critical breakout point.
Although CBAM is over a year away and asset realisations tend to be slow, this could be a promising breakout trade.