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The difference between restorative rest and unhealthy stagnation is time. It’s not always easy to distinguish between resilience and fatigue.
of S&P500 The index has been flat for months, falling last week to levels first reached on June 1. The index has spent almost all of the past three months within the range it was in during its active two-day rally on August 3-4.
In the process, the one-time leaders in AI trading included in the iShares AI Innovation ETF lost 35 percentage points compared to the similarly weighted S&P 500, then recouped half of its losses and then gave up most of its rebound.
This process of constantly changing, testing and positioning shocks, as well as giving us all plenty of time and room to think deeply about it, has had some effect in a tactical sense.
That created a short-term washout in semiconductors and other once-booming AI hardware movements. Meanwhile, the cyclical parts of the market, from consumer to industrial to banks, are experiencing double-digit declines as rising bond yields and rising oil prices dampen growth expectations.
Equity investors are showing a clear preference for quality and protection as bond markets begin to allocate growth capital more tightly, raising hurdle rates for more marginal AI data center borrowers.
In the process, some well-known intermarket relationships are thrown into disarray. U.S. Treasury yields are no longer closely tied to oil, and yields have retreated significantly from their highs as oil prices hover above $100 a barrel. And the once inverse correlation between the S&P 500 index and U.S. Treasury yields has eased as bond market bidding appears more tied to the problems of building AI that have held back big tech companies.
Over the weekend, Goldman Sachs’ equity desk cited “trader fatigue” as the momentum factor stock basket moved at least 5% or more 30 times a day in 2026, more often than in any other full year, including during crashes like 2000, 2009 and 2020, and said it was “unsure if it can handle further reversals in thematic script.”
Of course, confusion and stress can eventually reset positioning and attitudes for the better. The sentiment and positioning complex that Macro Risk Advisors’ John Kolobos operates on here weekly is approaching a “fat pitch” for a tactical rebound, he says. By most measures, hedge funds have significantly reduced their leverage and technology exposure. Deutsche Bank said the tech industry’s broader financial institution positioning was not significantly above its Iran war lows, adding that “the past two reversals in tech have coincided with strong earnings releases.”
This arrangement will take shape this week as supersized cloud platforms Alphabet, Amazon, and Microsoft report their results. What’s more, Anthropic’s IPO filing showed positive operating metrics, with $100 billion in cash on hand before IPO proceeds are collected, and Blackstone funding SpaceX’s capital investment and Broadcom lining up $63 billion in chip funding for Anthropic should likely allay fears about AI funding.
For AI trade, it is uncertain whether now is the time to save the day, but it won’t be long.
If there’s one persistent outlier that proves investors’ downsizing and declining risk appetite, it’s the persistent buying by individual traders, even on the worst-looking tech charts.
“Despite comments from some sell-side banks suggesting retail capitulation, our platform data showed the opposite,” Scott Rabner, head of equity and equity derivatives strategy at Citadel Securities, wrote on Friday after Thursday’s abysmal 3% drop in tech stocks. In other words, as a top market maker, Citadel’s retail order flow reveals extreme buy-in into leveraged semi-ETFs, Micron, Meta, and other hard-hit stocks. This is consistent with Robinhood data. Bloom Energy’s traders sent the stock plummeting in unison as its stock fell 11% on Friday, the second-highest net buy in history, according to the company’s Sherwood Media.
While impressive on some level and admirable to some, this aggressive buying on severe weakness typically does not coincide with significant market lows. The market bottoms in late March and late July occurred when retail traders panicked and were short for one to two weeks, according to Citadel data.
While retailers’ stubborn push-buying won’t preclude some relief for the hard-hit parts of the market, it will likely limit the strength and sustainability of the rally.
market thermometer
John Kolobos of Macro Risk Advisors wrote in his latest opinion: “Sentiment and breadth are finally starting to favor us and a big pitch may be on the way, but macro needs to cooperate. Our research shows that increased momentum in the face of tight financial conditions has historically produced disappointing returns, leaving the market dangerously vulnerable to left-tail outcomes and market corrections.”
around the street
– Assessing the weight of evidence may require waiting a long time until all evidence is available. We acknowledge that the worrying customer churn and compressed valuations of recent months have created the conditions for an unexpected rally and a rise in bailout deals.
However, from a broader perspective, we always want to pay attention to changes in atmospheric conditions.
As I’ve noted in the weeks since the launch of this newsletter, I think we’re feeling the late-cycle tremors of narrowing market leadership, investors’ reluctance to pay for rapid earnings growth, a flattening yield curve, and stinginess in credit markets.
I suggested that the market was saying that companies were “making too much money” by front-loading capital investment recycling. Perhaps the Iran war and its massive upheaval prevented the AI theme from going into full bubble mode, limiting the enthusiasm to Cicada and related groups. But that doesn’t mean we can reliably rebuild towards a broader bubble this cycle.
And I have argued that even if stocks do well, bonds now provide a useful yield cushion against concentrated equity risk.
This time last year, cyclical sector outperformance, approaching fiscal tailwinds, and favorable credit conditions told us there was no need to worry about economic growth through 2026. So what are the recent defensive stock drives, waning fiscal impulses, and volatile corporate credit whispering in investors’ ears?
I also believe in the law of mean reversion, even if it is only sporadically enforced. A post by Ritholtz Wealth Management’s Ben Carlson on his blog, A Wealth of Common Sense, details how impressive the S&P 500’s returns have been over the past 15 years and what this means for the future.
-By Dario Perkins of TS Lombard This article has been in heavy rotation over the past few days, and for good reason. This is a well-expressed and sobering thought experiment about how the AI boom is currently causing its own nasty undoing.
market is closed
The movement of money into pure traditional defensive stocks is a little too mechanical to infer that it is a complete macro telltale, given that the clockwork factor rotations seem almost too scripted to be trusted.
Still, the result is a convergence of valuations between consumer staples and technology. This may seem perverse to the current generation of investors, but there was a time when tech companies were seen as cyclical and fickle, while staples commanded a premium for their stability and enduring brands.
Procter & Gamble has long been a part of the consumer products industry, responsible for the quality of diapers such as Pampers. And it’s kind of like Google looking up something on the internet.
A measure of the type of investor you are is whether you perceive this P/E crossover as a return to normalcy in the world or a screaming buy signal for Alphabet stock.
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