Mega Cap Tech Sell Off Means Money is Going Somewhere...
Level 2 - Value Investor
Welcome Avatar! In shocking news to the majority (not paid subs though!), we’re witnessing an AI/Semiconductor sell off and general concerns about peak pricing. While everyone is focused on the headlines: 1) suggestions that peak earnings quarter is somewhere in 2026, 2) Chinese memory stock CXMT IPO’ing and being the largest market cap and 3) hyperscalers ramping up debt load to pay for more negative AI spend… we’re looking at where the money is going.
If you think about it, it’s actually smarter to see what is outperforming right now. The smart money sold their AI/Semi stocks in June or so and they need to put that to work now and through year end. Isn’t it better to figure out where they are going instead of obsessing with headlines? That’s simply how we think over here.
Part 1: The Money Has to Go Somewhere
We have no idea what it means when people say “cash on the sidelines”. If someone sells $1,000,000 worth of any stock in June, they would receive $1,000,000. However the $1,000,000 would come out of the account with the $1,000,000 in it.
Simplistically, if you sold $1M of stock to Bob, at the end of the day, your account would read $1M cash and his would read $1M worth of stock. No cash “left the sidelines”.
With that explained we can move to actual liquidation of “cash on the sidelines”.
When SpaceX went public, this actually took cash off the sidelines. Investable money went from $1M in a brokerage to $1M of new stock. The stock did not exist before. Instead of you sending $1M to Bob, you’re sending $1M to SPCX balance sheet to go spend money on rockets, satellites and other Musk ideas. (we’re not going to walk through all the costs of going public with banker fees etc, this simple explainer is more than enough)
This is the Money Ready for New Issuance of Stock (not stock currently trading)
An easy way to remember this.
If you’re giving money to a company that is cash leaving the general brokerage account ecosystem. If you’re simply buying or selling a stock that is already trading, it just moves cash from one person to another and the stock/bond amount from one account to another.
Simple as that.
Upcoming Events to Take Cash
OpenAI/Anthropic: The main reason these companies want to get out before end of year is because of the potential risk for interest rate hikes. If rates go up significantly (or markets believe they will), the ability to attract this money simply goes down.
These are huge IPOs expected to be in the trillions of dollars. The raise alone would bring in tens/hundreds of billions out of cash accounts into brand new equity.
If you want a good example of risk appetite, these are the two to watch.
Other Potential ones are: Jersey Mikes, Shein, Discord and Strava. We’re sure we missed others but we’re really only focused on tech and the ones that matter are OpenAI and Anthropic.
If any of these major household names fail to raise, it means that institutional investors do not believe in the valuations of the sector. After SpaceX initial bump and fast decline to below IPO price, it’ll be incredibly clear where everyone stands (assuming either AI company can get out by end of year).
Summary
New issuance or stock offerings are where you actually see movement of cash on the sidelines. The rest of the standard trades you do on your brokerage account is just transferring cash from you to someone else and their stock to you (and vice versa).
Since we know some people were selling in June, we’d argue that watching the outperforming names from here is what will matter. After clicking the sell button, they have to look around and find something compelling to rebuy. Signal is currently firing but everyone is looking at the headline (per usual).
Part 2: Where the Money is Going
It isn’t really possible to follow every single individual stock movement. IE. You can’t figure out if the smart money sold Micron and rotated specifically to Coca-Cola or something like that. However, the indexes do tell you what happened directionally.
We know that 99% of people do not care about our comments on indexes. Just survive the next couple paragraphs and it should make sense.
Roughly Speaking NASDAQ topped out in June or so
However the Russell 2000 index is actually up since June
Now We Have a Decent Clue
If the NASDAQ started under performing in June due to weakness in mega cap, AI and Semis, that money had to rotate somewhere. We know that the Russell 2000 has a much broader index weight and is more representative of the “everything” index. Its weights are roughly as follows:
Use some elimination:
Financials? No chance, a tech seller is not buying bank stocks and they have underperformed vs market anyway
Energy? Definitely a good year for it, that said, a tech investor can’t really buy it due to tech mandate
Healthcare and Industrials? Ding ding! These are the two potential sectors driving better performance. What you see from this is healthcare didn’t outperform but… drum roll… industrials sure did by a wide margin and are oddly in-line with the rough performance of the Russell 2000
Click over and you’ll see the sector generally did better since June
Checks the Boxes: Oil explains part of the outperformance but the real rotation from Tech went into industrials. It also lines up with the mandate. You can argue that industrials are “technology in heavy machinery form”. Much easier spin vs. saying you invested into natural gas and oil.
Major holdings here are: Caterpillar, GE Vernova, GE Aerospace, RTX, Eaton and Boeing. In fact, we’d argue that the Space related sell off probably went a bit into here.
This means? The same people who sold in June (the tech stuff) believe Industrials are the best place to park money.
Autist Note: None of this is a guarantee. We’re not saying it’s guaranteed industrials go up. We’re not saying every dollar sold from SMH went in here, it’s just showcasing what actually happened in terms of sector rotation from a big picture perspective.
Part 3: Time to Follow the Fast Money
Now that the index concept is understood, we can now move out the risk curve and apply the same logic to Tech specifically. We know the following:
SpaceX unlocks in Early August. People will sell to buy homes/other stocks. They will not sell every single share but there will be new sellers
Anthropic and OpenAI intend to go public. They will watch what happens to the stock and the same dynamic plays out for 90 days
This means you should care deeply about what SpaceX holders purchase after they exit. You cannot express that in a random home purchase but you can see the stock/crypto/bond/commodity preference from August to October
Ideal Set Up: In a perfect world (which doesn’t exist), you’ll see some tech pressure. You’ll see rate hike fears. You’ll get some SpaceX selling for employees and you’ll see sectors and individual stocks outperform on a relative basis. Once this happens, you have an extremely clear picture of what the Athropic/OpenAI employees will buy.
While it is never perfect, the type of stocks a SpaceX employee will buy is going to be quite similar to one that Anthropic/OpenAI employee would buy. They all work in tech, they all like to be on the edge, they are also pretty obsessed about net worth. This means their general preference will be similar or at minimum a high correlation well above 0.75.
From the above you can see that about half the shares will be out by end of September. This means by October end they should show you a clear picture of what they are buying/rotating into. That’s the likely signal and the remaining 50% is probably going to follow the similar structure/pattern (outside of Musk/Board shares that unlikely waver much).
Also. The preference is going to showcase what Anthropic/OpenAI employees would likely rotate into as well. We’ll let you guys figure out if that’s important or not!
On that note, hope this was informative/useful. Follow the smart money, don’t get caught looking at whatever the main headline is. Profit and move on.
We’ll be following the money quite closely. Since it is by far the most entertaining game available to us at this time!
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Stay Toon’d
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