Parents these days all want their children to be able to cope with life’s challenges, but they’re trying to prevent the very setbacks necessary to create those adaptive traits. The same goes for investors, who in theory want to make sure their investments can withstand life’s inevitable stressful events, but resent what downside testing reveals. A turbulent November for the market, with stocks unable to draw strength from Nvidia’s strong performance, unable to break free from Bitcoin price volatility, and displeasure with a non-committal Federal Reserve, is (so far) at basic levels, just a standard recovery phase after an unusually long and modest rally. The S&P 500 rose nearly 40% in six months without a 3% change, but has since been hit by a wave of turbulence that has eroded the months-long upward trend, reflecting the momentum of AI, the fundamentals of economic growth, and a prudent reassessment of the policy mix going forward. .SPX 6M Mountain S&P 500, 6 Months The way “routine” declines end is when enough market participants begin to entertain the possibility that conditions are worse than everyday and begin selling more aggressively and at lower prices than real world conditions seem to warrant. Have you arrived yet? Is the market in the process of building a better, more balanced bull market while humbling arrogant momentum traders? The unusual streak of positives resulting from this S&P 500 index cutback has ended. The index’s performance above its 50-day moving average, Monday’s consecutive positive returns, and a long period without a 5% decline. The good news is that the first break in a period of sustained strength like this is not usually how a bull market ends. The S&P 500 probably found support at its 100-day average late last week, and while it receives less attention than the 50 and 200 indexes, it is often beneficial. Still, Friday’s rally, aided by a dovish message from New York Fed President John Williams, failed to even lift the S&P to its highs from Thursday morning in the face of a troubling air pocket after the Nvidia earnings. John Kolobos, chief technical strategist at Macro Risk Advisors, concludes his weekly review with the following: “This is an inflection point. While the broader trends remain constructive, the internal damage is clear, leadership is shaken, and we are sitting at the most significant level of support since the April bottom.” More broadly, “Bottom-up and top-down trend work remains positive, with the majority of indicators flashing oversold readings, and sentiment work shows people are overly bearish here, which will lead to a number of future issues.” “Last week’s weakness was just above the S&P 500’s October low near 6,550, a level seen as a key lower end of the range for the fourth quarter, but by Friday’s close the benchmark had moved above it again. It’s surprising that many of the “crazy fringe” assets that soared post-Labor Day have fallen toward late-summer levels: Robinhood stock, Palantir stock, Nvidia stock, IPO-filled ETF First Trust U.S. Equity Opportunities (FPX), etc. Bitcoin cannot be separated from these movements. Cryptocurrencies have proven to be agents of disruption across asset classes, driven almost entirely by crowd sentiment, flows and leverage in the absence of real fundamentals. BTC.CM= 6 Million Mountains Bitcoin, 6 Months Crypto advocates continue to refer to the Oct. 10 Bitcoin crash as a “liquidation event,” as if it were a natural coincidence rather than the inevitable result of too many leveraged accounts quickly being submerged and forced to sell in a relatively gradual price decline. Portfolio impairments mean that adjacent holdings, the size of the holdings held by the types of people who are all-in on cryptocurrencies, are being hurt. As a result, stock traders are holding off on intraday Bitcoin movements as a sign of further portfolio stress, liquidity congestion, and risk aversion. While this is a difficult decision for long-term investors, it is certainly a good thing that this dynamic is more widely recognized. In fact, this is now more broadly the case. The imbalances that have built up over the years are now considered as part of the daily debate over a possible future between buyers and sellers called financial markets. This is better than balance being ignored, but it’s not the same as the problem being solved. Market discussions are currently saturated with topics such as the bifurcated “K-shaped” economy, the dominance of AI infrastructure spending in the GDP growth mix, the resulting hyperconcentration of stock market capitalization in Big Tech, and the aggressiveness of retail traders in contrast to the generally more conservative risk attitude of investors. Alphabet takes over AI trading The topic of AI is one where investors are frequently sifting through potential winners and losers, with the Street applying greater scrutiny to business models and capital structures. A true runaway bubble would be more indiscriminately generous than, say, cutting Metaplatform’s market cap by 25% in a few months. Meta 6 Million Mountains Meta, 6 Months Still, this leaves a wide range of perceived potential outcomes measured in trillions of dollars. Alphabet’s rise is a stark reflection of this process, as once seen as the leader with the most to lose in the AI world, it is now recognized for its superiority in building and deploying AI models while attracting investor capital as a haven from the capital-hungry OpenAI network. Google’s parent company’s stock has outperformed Meta’s by more than 50 percent this year, and last week Alphabet’s market capitalization slightly exceeded Microsoft’s. A world in which Alphabet is thought to hold pole position is unpleasant for the rest of the AI food chain. By allowing bootstrapped incumbents to maintain their position and make AI services appear like a continuous evolution rather than a sudden revolution, startups and AI maximalists are less likely to succeed. But as the dramatic shift in mood in favor of Alphabet itself shows, such assessments can and will be challenged and reconsidered with little notice. Meanwhile, as those debates intensify and stocks come out of the boil, the Nasdaq 100’s price-to-earnings ratio has fallen by two points this month, to 26.4 times forecasts for the next 12 months, due to higher tech earnings and an earlier forecast frame. It’s not cheap, but it’s not even one point above the current three-year AI bull market cycle average. Feed the help? The rethinking of the AI issue coincides with an unusually sharp public debate over whether or not the Federal Reserve will and should cut short-term interest rates again in December. The growing unrest with recent hawkish messages from multiple Fed voices brought back memories of late 2018. At the time, markets decided the Fed was too tight in the face of tariff pressures and slowing job growth, and stocks fell nearly 20% until Chairman Jay Powell signaled a dovish turn. Staying in suspense over the Fed’s next action with less than three weeks until a decision is not ideal for Wall Street, and this week is the only time there could be more rhetoric before the pre-meeting speech embargo begins. Still, unlike at the end of 2018, the Fed’s last action was a rate cut, and the next one will almost certainly be, regardless of the timing. In the meantime, the clock is ticking towards a new, dovish chairman definitely taking office in the spring, although markets may postpone expectations for a rate cut to January. For now, the market is staggered but stable, with the median S&P 500 stock down 16% from its all-time high, and tactical trading signals are paramount in a lack of catalysts and holiday-interrupted tape. Credit markets have noted concerns about data center bond issuance, but undue stress has not been widely indicated. The S&P 500 Volatility Index’s close near 24:00 Friday indicates traders are in a state of moderate to maximum alert and need Bitcoin to gain traction until the tape settles. Health care and other more stable groups are stepping in to try to compensate for weakness in sectors that are gaining momentum, but as we often see here, the “broader” market is not always the safer or more valuable market. The onus now rests on the bulls to demonstrate some resilience against an imperfect and ambiguous fundamental backdrop, but at least there is now widespread recognition of the ever-present and sometimes ignored imperfections and ambiguities.
