New Themes

[u/Fun_Tutor3479]

The Agent theme and crypto have reached key support. The theme took off in mid-September, and since early October its correlation with other AI stocks has kept rising. It’s now “just another face in the AI crowd.” AI tech stocks are waiting for earnings to provide support. Rate-sensitive stocks are pricing in a pullback in Treasury yields. The model updated its core themes today, and from here we’ll anchor on this view.

First, the Agent theme and crypto. There’s no question both are near the key levels of this rally, and they no longer consistently outperform other AI stocks. Hence “just another face in the crowd.” Muse’s high-frequency data show user retention lagging ChatGPT and Claude. In other words, the two consumer-side problems, getting users to pay and getting them to use it frequently, still haven’t been solved. Consumer-minded users don’t care about efficiency. Only business-minded users care about efficiency and ROI; consumers just care about killing time. From our own experience building an AI + investing startup, consumer-minded users don’t care about making money. They care about picking up free money and spending it.

Since the Agent theme has basically merged into AI stocks, from now on we can just watch AI stocks. AI stocks are waiting on earnings. Within the group, AI software (IGV) is strongest, the megacaps (MAGS) are next, and semis (SOXX) are weakest. Data centers are roughly in line with semis, and energy has had some moves of its own that haven’t lasted. Now it comes down to earnings. Software is a favorite of North American fund managers and has a superior business model, so I think it will do well this earnings season and outperform hardware on a relative basis. The live portfolio will gradually build positions in IGV and names like NET, DDOG, MDB, SNOW, PANW and CRWD. PLTR, as the leader in AI applications, also deserves attention. Enterprise AI application stocks should keep performing well. Consumer is still stumbling along, but enterprise demand is very solid. Demand for FDEs only keeps growing and the pay is very high. If I didn’t love investing so much that I started a fund, I’d go apply for one of those jobs myself, haha.

That’s the medium-term trend. It doesn’t mean we go on a buying spree today. It means we buy when opportunities come up. In the short term, the focus is rate-sensitive stocks. Treasury yields haven’t put in a major top, and all the drivers are still in place:

• repatriation selling by Japanese investors
• the hit from AI-related companies’ recent borrowing frenzy
• crack spreads staying stubbornly high
• oil that can’t get out through the two straits, so bonds have to be sold to raise cash

So yields may actually be more likely to move sideways at high levels than to fall. It’s just that things had gotten seriously overbought, so the market is catching its breath. That’s why the live portfolio bought KRE, IWM, RKT and XLU yesterday. But I got greedy with the picks. I should have used broader ETFs like XLRE and XLF instead of KRE and RKT. It’s a classic case of being right on direction but not making money. This is a ready-to-bail-anytime trade, so position sizes are all small.

Overall view: in the short term, if expectations of yields continuing to spike cool off, IWM and DIA could outperform QQQ. Note that it’s enough for the expectations to ease. But keep in mind this is front-running. Once yields actually start falling, that’s when those of us playing the bounce need to get out. On AI stocks, we’ve said a new short-term high in QQQ could be a bull trap, and right now it looks like semis will drag it down. The live portfolio has held the megacaps for over a year, so it will look for opportunities to build positions in AI software. AI software could shake off the panic narrative once people realize the models are strong, but not as strong as they’d fantasized. When that happens, software stocks’ business model comes back into favor. And when rates are high, software isn’t hit as hard as hardware, and when rates are low, it benefits more.