Advertisement

Cisco shares fall, 'but for every Cisco, you have a semiconductor stock that's breaking out to the upside': Analyst

Ari Wald, Oppenheimer Senior Analyst, joins Yahoo Finance’s The First Trade with Alexis Christoforous and Brian Sozzi to discuss what’s moving the markets on Thursday morning.

Video Transcript

BRIAN SOZZI: All right, let's bring in Ari Wald, Senior Analyst at Oppenheimer. Ari, always good to-- always good to talk with you. Any other time, any other normal time when you have a Cisco come out here and report the quarter they did, telling you they're going to cut $1 billion in costs, you would think the market would be down. Why isn't the market down?

ARI WALD: Well, I guess, you know, for-- the easy answer would be that there's a lot more companies in the S&P 500 than Cisco alone. Of course, you're going to get these one-offs. But for every Cisco, you have a semiconductor stock that's breaking out to the upside. And it's-- it does kind of represent this kind of internals that are a bit still mixed here that have a little bit more work to be-- to do on the upside. But I think with the market, S&P 500 pushing at that February high, our view is that it's only a matter of time till we break out to the upside.

ADVERTISEMENT

BRIAN SOZZI: Alexis, I think you're muted. Ari, you mentioned that the market could break out to a-- to an all-time high. What would be the trigger point just to have things cool off a bit?

ARI WALD: Well, I think as it stands, it's difficult to make the case that conditions are tactical here. So you have the S&P 500 overbought, really hasn't paused in a number of weeks, into resistance at that February peak and up against seasonal headwinds as well. August, September typically a poor performing time of the year. So this-- this is the point, I guess, of the calendar year where our-- we think it's reasonable for the market to cool off.

But you know, again, it's the take that it's going to be a pause ahead of the breakout. You know, as we talk about this-- what has been this concentrated market performance that-- that we've seen, and it's been this lingering concern, you know, we think internals are consistent with where they should be just five months after a major market bottom like we had in March 2020. So we think internals are basing, not topping. I think one by one some of these recovery areas are going to start to break to the upside, and you're going to see the-- the market overall continue to move higher through the balance of the year.

ALEXIS CHRISTOFOROUS: Ari, what-- what's the thing that's going to help us do that? Because right now we have lawmakers, you know, at a stalemate over this stimulus deal. We do have this rotation we're seeing out of growth and into more value at the moment. Is that what's going to take us over the top and get that S&P 500 to a new record high?

ARI WALD: We-- we definitely need more cyclical participation in this market. I think a lot of this rotation, it's been our view it's been more about beta and less about value. I think the overall value index, in our view, still has too much defensive exposure and not enough technology.

Historically, technology has been the most early cycle sector, looking at all the major market lows since 1932. So I think technology continues to do well in that environment. It's probably more the defensive high-dividend bond proxies that are going to get left behind. So our view is that you're going to continue to see these swings between cyclicals and safety around what is still a long-term underlying bid for high-growth companies in this low rate and low commodity world, you know, if you really look at the sector dispersion that we're seeing.

So kind of one point that we're making is that market conditions overall far from a bubble. But we are seeing a bubble emerging in sector dispersion. Measured by the spread between the best and worst-performing S&P sector, you're seeing that gap widen to the point we haven't seen really since the TMT bubble.

Right now as it stands over a two-year period, tech's up about 50%. Energy's down about 50%. But if you were to kind of dig into those sectors, it's not tech. It's not tech strength. The rate of change in the tech sector really consistent with history.

It's-- it's far from extreme, nowhere close to where-- what we've seen in the late '90s. The extreme that we're seeing is happening in the weakness in value, that this-- this bubble and dispersion is being inflated by weakness in value. And that really represents this difficult two-year period we've been in in the equity market, really since 2018 when most global equities peaked, small caps peaked, value peaked.

It's been a tough two-year period. We think the contrarian case is for long-term upside in the market if those beaten-up value areas start to participate and act better. We think it's just a matter of time, but indeed more is needed for those groups.

BRIAN SOZZI: Ari, what are your friends in Wall Street saying-- on Wall Street saying about Joe Biden's pick of Kamala Harris?

ARI WALD: You know, I'll be honest with you. I'm far from a political analyst. And you know, I'll just go off of what the action of the market has been, and there's really hasn't been much of a of a response. So I think it's too early to really-- to make that. There's still a lot of time ahead of the election.

Typically, markets do act well ahead of an election, especially when an incumbent is up for re-election, is a candidate. If the market does tend to drift lower in the 90-day period into the election, typically suggests that Wall Street is expecting the opposing opposition party to win. If it trades higher, typically the incumbent has better odds.

And then that type of action carries forward into the post-election year as well. When the incumbent wins, again, you'll typically see less disruption in the equity market. But when the opposition wins, then you'll-- you'll tend to see a little bit more volatility and jerky action.

ALEXIS CHRISTOFOROUS: Hey, Ari, I know that you are big on small caps right now. Make the case for them. And any-- any companies, in particular, that we should be looking at?

ARI WALD: Yeah, for small caps, this is one of those recovery areas that we'd like to see start to act better. They've been in decline since 2018. They've been negative since the start of 2018, and again, represents the difficulty for the average stock, especially these smaller-cap stocks.

So the Russell 2000 has worked its way above its 200-day average. That's an incremental positive. That does suggest that participation is starting to broaden underneath the surface and why kind of confirms our positive view on overall market action. Of course, we're momentum investors, which is, you know, we're looking for relative strength and leadership. And the leadership in the Russell 2000 right now is in technology and health care, more or less the same sectors that it's-- where it is in large caps as well.

So we like small-cap health care. We like small-cap tech. I think the broad-based strength of those sectors is underappreciated, where you're seeing it really across capitalizations, across industries. And I think those two sectors within health care continue to outperform.

BRIAN SOZZI: All right, no pressure here. In 15 seconds, give us a good trade that might work well into the end of the month.

ARI WALD: I think you want to bridge the gap between beta and growth. I think if we get that swing towards cyclicals, you want to own some of that-- some beta names, and semiconductors really fits that bill. Semiconductor stocks breaking out across the board, whether it's Nvidia, Monolithic Power, Marvell Technology. Two more recent breakouts, Qorvo and Semtech Corp, both rated outperform at Oppenheimer by our fundamental research, breaking out technically. Good industry. Those are names you want to own, Brian.

BRIAN SOZZI: See, I knew you could handle that pressure. That's why I always ask you these questions. Ari Wald, Senior Analyst at Oppenheimer. Good to see you.

ARI WALD: Take care. Thank you.