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When there is a strong undertow near the beach, swim sideways, parallel to the shore, and reach a point beyond the gravitational pull of the narrow rip current.
The stock market appears to have implemented such a cautious and patient strategy. After months of continuous work without bending or breaking, S&P500 That undertow has pulled into some of the markets most exposed to higher oil prices, higher interest rates, and a battered household sector: consumer cyclicals, industrial stocks, and, most recently, banks.
Meanwhile, semiconductor stocks and most large-cap tech platforms were on the rebound as concerns about AI overspending eroded investor confidence and compressed valuations.
Was Monday’s strong rally focused on Big Tech AI implementation companies a sign that the market is revving out of its summer doldrums? Is it possible that both “spenders” (hyperscalers) and vendors (AI hardware providers) will come together for more than a few days?
Last week, I described here an ambiguous setup where trends were maintained while a wall of anxiety was erected.
“The S&P 500’s multi-month sideways movement reflects a tape that continues to save itself with sharp rotations. S&P The 500 hasn’t fallen anywhere since June 1st, but it hasn’t fallen more than 3% from its all-time high in that period.It has spent almost all of its time since August 4th within the range of gains to that day’s highs.The market breadth is eroding, but that also means an internal oversold situation.”While seasonal trends are strengthening, we all know this is easing by most measures. ”
2% jumped on Monday. Nasdaq Composite John Flood, head of Americas execution services at Goldman Sachs, told us on “Closing Bell Overtime” on Friday that it appears to lend credence to the argument that light expert positioning, rising short interest on Nasdaq stocks, and sustained earnings momentum pushed the market’s risk reward higher heading into the year.
Meta Platforms’ release of its Muse AI agent app and Nebius’ move to increase rental fees for AI computing access appear to have sparked a surge in buying in AI stocks.
There’s a neat first-in, first-out dynamic at work here. Semiconductor stocks peaked in late June, long before the broader tape peaked. After overcoming a brutal 30% decline and two months of volatility, the Philadelphia Semiconductor Index finally broke its downtrend and surpassed its 50-day moving average in recent days.
The Pace of the Frontier scare in recent weeks has been filled with talk of model-driven human extinction, and perhaps the tech tape may have been stress-tested enough for further backlash. This would be similar to February’s “software is doomed” panic, fueled by Citrini Research’s sensational scenario analysis. This scenario analysis dealt a blow to an already volatile sector, and actually resulted in software stocks announcing closer to their previous lows than their previous highs.
While this is encouraging on the surface, we are not yet making a clear case that upward momentum has returned. Monday follows the expiration of quarterly options on Friday, with tactical traders clearly not exposed to the bull market from meta and high-beta semiconductors, leading to a rush for quick exposure to call options that could disappear just as quickly. The sub-index is still 15% off its peak. Meta stock hasn’t hit a new all-time high in the past 13 months. On the New York Stock Exchange on Monday, the S&P 500 rose 1.5%, with 160 stocks setting new 52-week lows and 29 posting new highs.
It exhibits consistent resilience through rotation, but remains a patchy hot and cold tape.
The reflex selling after Wednesday’s Federal Reserve rate hike, which caused the S&P 500 index to briefly test 7,500, proved to be a timely shake-out. But the Fed chairman nevertheless made it clear that financial conditions remain too accommodative and suggested that another round or two of “easing” may need to be lifted. Financial conditions have further eased, with the Nasdaq hitting new highs, bond yields falling and the VIX index falling below 15.
BCA Research explains the impact as its strategists see it. “Either there will be a short[tightening]cycle where yields peak within a few months, or the economy will overheat and the bond market will only calm down after stock prices fall.Either way, the equity cushion is thin and the market now has to make money through earnings, not multiples.”
I said a few weeks ago that it would be prudent to think that absolute stock valuations reached their near-term peak 11 months ago, when the S&P 500 was trading at 23 times forward earnings.
The market is trying to reconcile given the extent to which the second quarter reflected the culmination of the bullish atmosphere. Bank of America and Goldman Sachs last week said they expected trading and investment banking to slow this quarter. Retail risk-taking culminated in the SpaceX IPO in late June. The momentum, influence, and crowding of AI-built trades is unlikely to return to the extreme conditions seen in June, prior to the dramatic liquidation of a situational hedge fund.
The mature bull market, which is entering its fifth year, may simply be reloading its reliance on bigoted, familiar leadership and preparing for another earnings season marked by gaudy earnings growth and a group of investors who already expect less.
market thermometer
This index from John Kolovos of Macro Risk Advisors uses several data points to reflect both what investors say and what they do.
“While we haven’t seen a proper capitulation from correlated selling, bullish sentiment continues to ease since the speculative peak this summer and headwinds have lessened. Anecdotally, there remains a lot of skepticism about this bull market,” Kolobos said of the latest outlook.
around the street
Colossus magazine’s profile of Meta Platforms founder and CEO Mark Zuckerberg last week certainly lived up to the publication’s name. There are approximately 15,000 words, and the content is deep and dense. Much of the film merely flaunts access (detailed descriptions of scenes in which writer Jeremy Stern waits to talk to Mark, his parents, and his wife) and clears his throat.
But it’s worth reading for this neat encapsulation of Meta’s history, his hero-to-villain role in technology, Zuckerberg’s series of strategic shifts, and the bullish case for Meta’s approach to AI, which the author says is extracted from the canvas of Meta’s outside scientists.
“In fact, AI is not God. Instead, it does calculations and solves limited problems that humans face, and is otherwise just useful and cool. Humane, and to a lesser extent OpenAI, has a hard time accepting this fact. Zuckerberg is not like that. He goes out of his way to compare his company to the Manhattan Project. He plans to use AI to reduce the cost of his services and use the cash he earns from his advertising business, as well as Anthropic and OpenAI, to reduce the number of users to zero and increase his income by improving advertising. With ownership of data centers, chips, and other infrastructure for which it has to pay rental fees, its AI has a potential installed base of 3.6 billion people, regardless of whether a particular model is six months behind the frontier. ”
market is closed
Gen
Our baby boomer (and older) parents enjoyed watching TV, but they never accumulated an archive of old shows in syndication that Gen Xers watched unsupervised after school and all weekend long. Rock and roll was created and developed in their youth, before later waves of imitation and repetition.
We quickly recognized “WKRP in Cincinnati” as the origin of “The Mary Tyler Moore Show” and the ancestor of “News Radio.” A show about the high-stakes success of a widower and his children? “Full House” was just the latest in a series that continued from “My Three Sons” and, by extension, “Bonanza.” Nirvana were innovators, but they were also evocative of 70s punk and 60s Kinks.
This layering of content over generations has made us hyper-susceptible to threads of influence and imitation, resulting in an obsession with finding what qualifies as truly original.
This small, despised generation of investors, now between the ages of 45 and 61, watches the market unfold on their screens, constantly watching how it plays out against past cycles. It is a foregone conclusion for some that the AI bull market will be a repeat of the internet boom and bust of the 90s. Alternatively, the rush to borrow to build AI is an early outbreak of the kind of credit contagion that broke containment in 2008. How many times will we see the double wave of inflation surges from the 1970s plotted against the post-2020 curve?
Of course, investors have always tried to map historical economic and market patterns. I covered Wall Street in the 1990s, and compared it to the Nifty-Fifty era, when growth stocks were in charge, and the high-tech speculative frenzy of the late 1960s, it was quite worrying. But it was more esoteric and less pervasive.
I am just as guilty as anyone of calling up past cycles to inform the present. I called back my 1999 Hi-Tech/FRB Echo just last week. But a trap occurs when you place too much faith in how the script of previous episodes repeats itself.
The fact that tech stock valuations have never approached their 1999-2000 highs is encouraging because the underlying earnings are growing so fast.
Credit markets often provide early warning of internal economic corruption, but do they always have to?
A simultaneous wave of inflation looks scary. But today’s policymakers have the advantage of knowing the patterns of 50 years ago that did not apply to policymakers 50 years ago.
But don’t think we’re not “yet” at the end of the extreme business cycles of the past. Maybe never. Therefore, a market peak may occur before reaching a climax that reminds everyone of the big peak a quarter of a century ago. On the other hand, some extreme actions in the ’90s have proven to be no barrier for today’s bulls.
Looking at this chart of stock market concentration reminds me of this dynamic.
In the pandemic momentum market of 2020, charts were all over the place when the aggregate weight of the top 10 stocks began to rise toward their 2000 peak. This warning was implicit. In a sense, we are in a top-heavy situation, and there is a strong possibility that bad events will continue for stock prices.
The bear market didn’t exist until 2022 and did little to reverse the mega-cap dominance, but now here we are, the tape is once again relying on the giants.
Sure, there may be a payoff at some point. But until then, it’s worth remembering that the “Happy Days” episode in which Fonzie “jumped the shark” on water skis (a term that now defines the absurdly over-the-top phenomenon) happened in season 5 of 11 total seasons.
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