Listen to the Music

In a world fixated on AI, it’s time to tune into a different market rhythm. Let’s step away from the AI frenzy and explore the undercurrents shaping the investment landscape. Are there hidden opportunities amidst the noise? Read on as we decipher the market’s melody, uncovering potential paths to success beyond the AI hype.

In the ’70’s, Michael McDonald and The Doobie Brothers released a number of great hits. One of those hits was “Listen to the Music” which was released in ’72 on the Toulouse Street album. This ties in with our theme for this newsletter where we are suggesting that you listen to the Markets.

Don't you feel it growing, day by day

People getting ready for the news

Some are happy, some are sad

Oh, we got to let the music play

What the people need

Is a way to make 'em smile

It ain't so hard to do if you know how

Gotta get a message

Get it on through

Oh now mama, don't you ask me why

Whoa, listen to the music

Whoa, listen to the music

Whoa, listen to the music

All the time

Well I know, you know better

Everything I say

Meet me in the country for a day

We'll be happy

And we'll dance

Oh, we're gonna dance our blues away

While it may appear to be February 2nd (Movie reference: Groundhog Day), every day as the AI (Artificial Intelligence) craze continues to dominate the US Equity markets, the markets are speaking – who is listening?

2024 continues to have a narrow group of stocks that are taking the indexes higher, and that group continues to get smaller. Nvidia has been the most talked about stock over the past 3 years. It has been up well over 30% in just the 2 weeks following a stock split according to The Motley Fool on June 16, 2024. There are a couple more names as well. There are a few reasons for this type of market activity, and some are less obvious:

• AI is All the Craze at the moment and taking the investment oxygen out of the air.
• Portfolio managers are fearful of a recession and hiding in the larger, more liquid names.
• Introduction and activity in the One Day Expiring Option market.

Let’s expand upon that last point. First: What is an option and how do they work? The concept of options has been around for a very long time. Investopedia credits the Greeks who use options to speculate on the Olive harvest.

So, an option is a contract between two parties giving the option holder the Right to Buy or Sell a set number of shares (stocks) at a predetermined price in the future. In the 90’s, the 3rd Friday of the month was Option Expiration Day. Options trade similar to a stock, but they have a limited time to exist. Often farmers use commodity options to hedge their crops.

Why would anyone trade options? Some trade them as a way to hedge risk. Some trade them as a way to speculate. For the speculator, they can control a large value of stock by putting up a small amount of money compared to the overall value of the security.