Jul 10, 20233 min read

The "Magnificent 7": A Look at the Top Stocks of 2023

"The stock market is filled with individuals who know the price of everything, but the value of nothing." - Philip Fisher

Why the Top 7 Stocks?

The S&P 500 is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The top 7 stocks in this index account for a staggering 30% of the total S&P 500 market cap. Thus, by understanding the behavior and performance of these stocks, we get a bird's eye view of the overall market.

Index funds, which are a popular investment vehicle for both individual and institutional investors, tend to be heavily weighted towards these top 7 stocks. But what does the InvestWize model tell us about these stocks?

Decoding the InvestWize Model

The InvestWize AI model is designed to simplify the stock-picking process and provide our subscribers with insightful market perspectives. This system utilizes an immense amount of data, which can often be overwhelming, and distills it into actionable insights. The current AI model provides two primary outputs:

AI Fundamental Analysis: This system reviews over 150 data points, such as Earnings Per Share (EPS), Dividend Yield, and Price-to-Earnings (P/E) Ratio, among others. These datapoints are related to the company and its stock, and the model rates its potential out of 100%. The score determined by this analysis identifies whether a stock is a SELL (<30%), a HOLD (30-70%), or a BUY (>70%). This rating is achieved using AI to analyse the data, apply the InvestWize financial model, and thereby providing an easily understood output from an extensive dataset.
AI Chart Analysis: This part of the model reviews key chart indicators to determine if a stock is overbought or oversold. Essential indicators include the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Bollinger Band analysis. The output is broken down into increments of 20%, indicating STRONG SELL (0-20%), DCA SELL (20-40%), HOLD (40-60%), DCA BUY (60-80%), and STRONG BUY (80-100%). Please note, DCA stands for dollar-cost averaging, a strategy for spreading out investments over time.

Interestingly, the InvestWize model output above indicates that all of these stocks are currently in overbought territory, meaning that they are not within the buy zone. This calls for caution and patience among investors who are waiting for the opportune moment to make their move.

When we delve deeper into the fundamental analysis, Nvidia emerges as a clear winner. With an impressive 81% score in the AI Fundamental Analysis, it demonstrates strong performance in areas such as EBITDA, gross profit, and 52-week high. Despite underperforming in certain metrics like the P/E ratio and EV to EBITDA ratio, its exceptional dividend consistency stands out. This implies that while its stock is currently overpriced, it's worth monitoring closely, and investors should consider accumulating shares once it retreats back to the buy zone.

Liquidity Divergence - A Warning Sign

Liquidity has been a key driver of stock performance since the 2008 recession. A close examination reveals a worrying trend - a divergence between the current liquidity trend and the stock prices, particularly in relation to our top 7 stocks.

Divergence between SPX & Global Liquidity

The prediction is clear: over the next few weeks, we expect to see these stocks start to decline in line with the liquidity trend. This is likely to be further amplified if we face any inflationary data shocks.

But every cloud has a silver lining. We expect the upcoming Q3/4 period providing excellent buying opportunities. For those interested in trading the downside, we recommend looking at ProShares UltraPro Short Nasdaq SQQQ or for those in Australia, Global X Ultra Short Nasdaq 100 Hedge Fund SNAS as a short opportunity, given its current overextension.

A Special Note on Meta Platforms

One of the stocks we specifically want to call out from our list is Meta Platforms. Our model doesn't reflect kindly on this stock, particularly when reviewing its quarterly earnings trend. With poor results in both AI Fundamental and Chart Analysis, this social media giant's investment appeal seems to be waning which will accelerate once the hype cycle around its Twitter clone Threads dies off…

In summary, it's time to hold tight, consider shorting if that aligns with your investment strategy, and wait for the next buying opportunity.

Thanks for reading, and as always, remember to invest wisely.

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