Here's what Druckenmiller did as he sold Nvidia - it's a risky bet on an unloved asset

By Barbara Kollmeyer

Critical information for the U.S. trading day

The market wanted a reason to rally and got it on Wednesday after data showed slowing inflation and an economy that's also ratcheting down.

That data combination, in theory, may make it easier for the Fed to justify an interest-rate cut, and the market hopes soonish.

But lower rates could also help another group of stocks, which have a tough run this year - small caps. And one big investor seems ready for this bunch of equities to take off. Our call of the day focuses on billionaire investor Stanley Druckenmiller, who just revealed a big bet on the Russell 2000 RUT in a newly released 13-F regulatory filing.

Through his Duquesne Family Office, Druckenmiller invested a 15% chunk of his portfolio in call options on the iShares Russell 2000 ETF IWM in the first quarter. The filing also confirmed the firm reduced holdings in tech names Nvidia (NVDA), which Druckenmiller discussed earlier this month, and Seagate Technology (STX).

Note, the 13F filings are backward looking and Druckenmiller's family fund may have divested or altered those holdings since the first quarter. However, on its face, the Russell 2000 bet would indicate that his firm smells opportunity for struggling small caps, which investors have struggled to love or even like in recent years.

Investor wariness is understandable. The index is up 4% so far this year, lagging a roughly 11% gain for the S&P 500. And underperformance has dragged on - the Russell 2000 has yet to top its record close of 2442.74 from early November 2021, while other major indexes repeatedly notched new closing highs this year.

Small-cap stocks are seen as more sensitive to rate hikes as those companies often need to borrow money at times, more so than their larger compatriots. The Fed's longer-for-higher rate strategy obviously hasn't helped.

As Bloomberg recently reported, Russell 2000 companies hold $832 billion in debt, of which 75%, or $620 billion worth, must be refinanced through 2029, versus just 50% for the S&P 500.

The index closed up 1.1% on Wednesday, its biggest one-day gain since early May, thanks to that data, which has renewed expectations for near-term Fed rate cuts.

Why listen to Druckenmiller? The former George Soros lieutenant is viewed as one of the best investors in the world, widely reported as producing a 30-year return in excess of 30% a year without any down years while running his now-closed hedged fund.

The markets

Stocks DJIA SPX COMP are steady with 40,000 for the Dow in sight, with Treasury bonds BX:TMUBMUSD10Y BX:TMUBMUSD02Y steady. Oil prices (CL.1) are up and gold (GC00) is weaker.

The buzz

Walmart stock is (WMT) headed towards a two-month high after a triple beat - profit, revenue and same-store sales. Deere & Co (DE) stock offered disappointing guidance and shares are tumbling.

Stock of Baidu (BIDU) are up after the China internet search engine reported forecast-beating earnings.

Canada Goose stock (GOOS) is up 14%, after the upscale outerwear maker's better-than-expected earnings.

Cisco (CSCO) shares are up after the networking and software group reported stabilizing customer demand and gave an upbeat outlook.

Applied Materials (AMAT) and Take-Two Interactive (TTWO) report after the close.

Chubb shares (CB) are up after quarterly 13F filings showed Berkshire Hathaway (BRK.A) (BRK.B) bought the stock in recent quarters.

Other 13F stocks of note: Daniel Loeb's Third Point upped its Amazon (AMZN) and Meta (META) stakes; Scion's Michael Burry dumped positions in Alphabet (GOOGL) and Amazon (AMZN) and bought an ETF PHYS that invests in physical gold; David Tepper's Appaloosa hedge fund took fresh stakes in Boeing (BA) and Lyft (LYFT), and sold off General Motors (GM); Bill Ackman's Pershing Square dumped Lowe's (LOW) and kept Alphabet (GOOGL). Soros Fund Management exited New York Community Bank (NYCB).

Shares of meme favorites GameStop (GME) and AMC Entertainment (AMC) are sliding for a second day.

Athletic apparel group Under Armour (UAA) is sliding on a profit warning.

Netflix (NFLX) said its cheaper streaming with ads plan now has 40 million active users, versus 5 million a year ago.

Data showed weekly jobless claims eased off an 8-month high from last week. Elsewhere, business inventories dropped, housing starts rebounded and the Philly Fed cooled in May, and the cost of imported goods rose a fourth month in a row. Industrial output was flat for April.

New York Fed Pres. John Wiliams welcomed April's inflation data but said more needs to happen before it can cut rates.

Richmond Fed Pres. Tom Barkin will appear in an interview at 10 a.m., with Fed Vice Chair for Supervision Michael Barr will testify before a U.S. Senate committee at the same time. Then Cleveland Pres. Loretta Mester appears at noon and Atlanta Pres. Raphael Bostic at 3:50 p.m.

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Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   GME     GameStop 
   AMC     AMC Entertainment 
   NVDA    Nvidia 
   TSLA    Tesla 
   FFIE    Faraday Future Intelligent Electric 
   NIO     Nio 
   AAPL    Apple 
   SMCI    Super Micro Computer 
   TSM     Taiwan Semiconductor Manufacturing 
   AMZN    Amazon 

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-Barbara Kollmeyer

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05-16-24 0932ET

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