Mag 7 is 'over-owned', trade on strength instead: Strategist

Video Transcript

SEANA SMITH: We have a long busy road ahead of us. So is tech truly the sector to watch this season? For more on corporate earnings, we want to bring in Chris Watling. He is Longview Economics CEO and chief market strategist to talk to us just about where things stand right now, right? We're coming off what was an extremely tumultuous week year for the markets. You had the NASDAQ off more than 5%. That's selling action that we've seen, is that over or is more likely to happen here going forward?

CHRIS WATLING: I think we're probably going to get more. I mean, interestingly, most sell-offs, most sort of corrections, most of them are pretty healthy. They're good things for the market. So we shouldn't be too dismayed as long as it's not driven by a big macro shock. But most markets sell-offs, you get a wave flush down, then you get a bounce, and then you tend to get a bit more selling.

So I think that's probably the playbook we're going to get. I think tech earnings this week could probably support the market a bit. And it's a bit oversold short term, all that kind of stuff. So yeah, I wouldn't be surprised if we got a little bit more off. There's some real challenges on liquidity. And the Fed's keeps pushing back on cuts, and that's an issue for the market.

MADISSON MILLS: So is the word of the week diversification?

CHRIS WATLING: Is the word of the week diversification? That's a great word. I think the word of the week is play the bounce. Not that that's one word, but there you go.

MADISSON MILLS: I like it.

CHRIS WATLING: But yeah, I think diversification is good if you're looking out 6 to 12 months. This market's been very narrow, as we know, in the last couple of years. Well, year or so depending on what time you take in terms of the Magnificent Seven. But I think there'll be a much broader stock market going forwards into next year and beyond.

SEANA SMITH: So Chris, how do you play that balance, given the fact that you're expecting the broader market participation here, at least in the longer term? But where should people be putting their money today?

CHRIS WATLING: Well, if you're a short term trader and you want to pay a one week bounce, fine. Just buy futures and buy call options on the futures or try playing some of these tech stocks on earnings. But beyond that, really, I think you want to think about selling into strength if you're thinking on a one or two-month time frame because there's more challenges near-term. But as I said, beyond that, if one really over complicates things, I think we're looking for rotation as you get into the second half of this year and a change of sector leadership globally.

MADISSON MILLS: Well, talk to us about what that will look like.

CHRIS WATLING: Yeah. I mean, I think what we'll see is as rate cuts start coming through from the major central banks of the world, first in Europe and probably the Bank of-- the ECB and the Bank of England and then eventually in the Fed over here in the states, that'll start supporting growth cyclically.

So you want to buy cyclicals when central banks are cutting rates. When growth is a bit soft and central bank cut rates, you buy cyclical, old economy, value, also keep buying energy. And you don't tend to buy the big cap tech. They've had a great run. They've been terrific stocks. We've all enjoyed it.

But there's too much concentration in those stocks. I mean, I travel around the world talking to people all over the place. Every man and his dog owns the Magnificent Seven. It's over-owned. We need to rotate into something else, and there's some incredibly cheap stocks in the US and globally actually that will benefit from rate cuts.

SEANA SMITH: Chris, how much of the catalyst at least in the near term, when you take a look at earnings those expectations there, when you take a look at-- there's still this expectation that the Fed is going to cut before the end of the year. How much of that has already been priced into the market?

CHRIS WATLING: Well, in terms of pricing and rate cuts, we've been pricing them out, of course. We've been pricing them out in the last few months. We've been pricing the amount out in next year.

SEANA SMITH: But I guess I just mean in terms of the optimism, right? That run up that we had seen prior to that recent action that we've seen over the last week or two here. But how much of that optimism do you think is already reflected in these current valuations?

CHRIS WATLING: I think there's plenty of upside in a lot of stocks I'd be. I'd be more cautious on the Magnificent Seven. But there's plenty of upside and a lot of stocks because we're entering a rate cutting cycle. You can't really judge a market by the level of the PE ratio.

You can only really judge it by the flow of money and the flow of rate cuts and that sort of stuff. And actually if we're going into a mid-cycle slowdown, which I think we probably are, then the rate cuts are terrific for the stock market globally. And you want to pick your sectors. But yeah, I think there's lots more to price in that sense.

MADISSON MILLS: So you're making me think about like the difference between a tech company and a staple and all of these things. When does Apple become a staple as compared to a tech company?

CHRIS WATLING: Yeah, great question. I think it's a defensive cash modest grower. It's sort of in its own bucket, isn't it? It's kind of weird. In the last 12 months, you want you don't want to buy cyclicals because they be they were hiking rates. So you want to hide somewhere. You don't want to buy defensives because rates are going up as well generally.

So you hide in big cap defensive stocks, and Apple is a classic example of that. You're comfortable. You can park money there. I think when we start cutting rates, people will be like, well, I don't want Apple. In fact, to be honest, they've already concluded that, haven't they? It peaked last year in July. So it's a great stock. It was a great one. Buy something else.