Let the TACO Trade Run? | With Jeff Hirsch

Episode Overview

• This episode of "The Market House" features an interview with Jeffrey Hirsch, editor of the "Stock Trader's Almanac."
• The discussion centers on the current stock market environment, particularly the massive rally in the tech sector driven by the AI boom, and addresses concerns about a potential bubble.
• Hirsch explains his approach to market analysis, which combines historical seasonal cycles with fundamental, technical, monetary, and sentiment indicators to provide a framework for investment decisions.
• The conversation also covers the relevance of traditional valuation metrics, the impact of political cycles like the "Trump Seasonal Cycle," and the potential for a rotation from large-cap tech to small-cap stocks.

Key Concepts

• The Tech Boom is Grounded in Reality: While the rapid rise of tech stocks, especially in the AI sector, may seem "bubble-licious" to some, Hirsch argues it represents a genuine, long-term super boom. He compares it to the microchip-to-software transition of the 1980s and 1990s, suggesting that despite potential setbacks, the underlying trend is driven by real earnings, revenue, and productivity gains.
• Valuation Metrics Need Updating: Hirsch suggests that traditional valuation models, such as the CAPE Shiller PE ratio or standard Fed models, may be outdated and require updating to accurately reflect the modern, technology-driven economy, much like how metrics had to adapt from the railroad era to the 21st century.
• The Value of Historical Cycles: The "Stock Trader's Almanac" relies on the principle that human and institutional behaviors are repetitive. By tracking historical patterns, such as the four-year presidential election cycle or the "Best Six Months" strategy (buying in October, selling in May), investors can establish a baseline framework for understanding market movements.
• The "Trump Seasonal Cycle": Hirsch identifies a pattern associated with Donald Trump's presidency, where the first quarter often sees a market shock or shake-up due to his policy initiatives or negotiation tactics, followed by a subsequent rally. This cycle, he notes, seems to override other typical seasonal patterns, highlighting the impact of specific political leadership styles on the market.
• A Multi-Disciplinary Approach: Hirsch emphasizes a five-discipline approach to market analysis: seasonal cycles, fundamentals, technicals, monetary policy, and sentiment. This comprehensive view helps avoid relying solely on one indicator, allowing for a more nuanced and adaptable investment strategy.

Quotes

• At 1:17 - "It's a new world. I mean, this is, this is the boom that I, that I projected, that I forecasted back in 2010... this is the internet to the AI. We got quantum, we got DeFi... this is, this is real." - Hirsch explaining why he believes the current tech rally is part of a long-term, fundamental shift rather than just a speculative bubble.
• At 2:18 - "It's kind of bubble-licious to me, maybe... but yeah, there's a lot of the valuations that people are throwing out around there... but if you go back and you look at the, the, the lows... the old '08 lows were a lot higher than the 1929 and 1980 lows." - Hirsch contextualizing current high valuations by pointing out that market lows are also consistently higher, suggesting a need to recalibrate historical comparisons.
• At 7:25 - "People are creatures of habit... and so are institutions. And there's a whole quarterly, uh, rhythm and, and beat to the stock market and economics and corporate America." - Hirsch explaining the foundational premise of the "Stock Trader's Almanac," which is that repetitive human and institutional behavior drives predictable market cycles.
• At 9:01 - "Perhaps, uh, the president is as well. And he likes to shake things up in Q1 and then, you know, work the deal and, um, navigate and massage the, the, the policy initiatives." - Hirsch describing the "Trump Seasonal Cycle," noting how the former president's specific behavioral patterns influenced market movements during his term.
• At 15:13 - "We start looking for a MACD crossover to better time the entry and exit in and out of that, uh, best and worst six months." - Hirsch illustrating how he combines seasonal patterns with technical indicators (like MACD) to refine market entry and exit points, demonstrating his multi-disciplinary approach.

Takeaways

• Consider updating your framework for evaluating technology stocks, recognizing that traditional valuation metrics may not fully capture the productivity gains and revenue potential of modern AI and tech companies.
• Incorporate historical seasonal patterns into your market analysis to establish a baseline expectation for market behavior, recognizing that institutional habits often drive predictable cycles.
• Use a multi-disciplinary approach to investing by combining seasonal trends with technical indicators (like MACD), fundamental analysis, monetary policy considerations, and market sentiment to make more informed decisions and avoid "fighting the tape."