Market reversal

The markets experienced a significant reversal of recent trends since July 11th. Going into July, the Nasdaq was up ~17%, while the smaller company-focused Russell 2000 was roughly flat for the year. Additionally, much of the Nasdaq’s gains were due to a few companies, notably NVDA and other large tech companies. Since July 1st, the Nasdaq is slightly down, while the Russell 2000 is up ~7%, a clear reversal of the prior trend. This began around July 11th, when we got a soft CPI print, and has continued throughout this week.

• We have discussed the unhealthy rise in the market being led by a handful of stocks
• For the market to continue higher, it would be important for the broader market to catch up
• What we witnessed over the last week is definitively a trend reversal
• This began on the CPI print
• It is possibly also helped by Trump's lead growing in the polls; Trumps policies marginally favor smaller companies
• Hedge funds have been positioned long tech and short small caps, and they could be de-grossing
• We had triple witching options expiration on Friday which also added to volatility
• Too soon to tell if this is going to result in a continued broader rally or the beginning of a bigger pullback, but definitively a trend reversal

Massive tech outage and centralization risk

Friday morning brought a wide technology outage, with hundreds of large companies experiencing their devices operating on the Microsoft operating system going through a permanent reset. This was due to a software update done by Crowdstrike, a leading endpoint cybersecurity company. Crowdstrike’s software is designed to protect from known and unknown threats on the devices that company employees use. The outage canceled over 3000 flights and caused many business disruptions throughout the country.

• This reminded us of the risk of centralized systems
• Given the widespread use of Crowdstrike, a glitch in the software had a very broad reach
• Another centralized system risk is semiconductors manufactured in Taiwan
• Over 90% of all advanced chips are manufactured by Taiwan Semi
• China has made its intentions of “re-unifying” the territory clear
• Trump this week said he would do nothing to stop China if he were elected
• A disruption of chips from Taiwan would wreak havoc on the supply chain and the economy
• We experienced temporary issues during Covid, causing shortages in various consumer products and price spikes
• China invading Taiwan would create a significantly worse disruption to the supply chain and inflation
• This risk is not, in our opinion, currently being priced into the market

Small models

OpenAI released ChatGPT4omni mini this week, a smaller version of its latest model. The model supposedly costs 60% less than its larger peer. It is, however, more accurate than the 3.5 Turbo predecessor. This is a significant development and builds on the speed of the momentum of this industry.

• We have been working with these new LLMs for the past 18 months
• The focus has been on larger and larger models
• Large models are extremely expensive and cost-prohibitive for many uses
• It has become clear that many use cases do not require very large models
• Smaller and cheaper models can be used effectively for various use cases
• It is interesting to see OpenAI prioritizing releasing a smaller model
• We are excited to see how this is adopted by the market

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