The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Did the bubble just pop?
Amazon and Intel disappointed last night and S&P futures traded down about 75 points overnight. Things only worsened as we opened. Crude traded higher over the day, adding to the bearish pressure in stocks. The yield curve was surprisingly unchanged in the morning and yields ended up dropping small by the afternoon. Treasuries did not react as much as one would have expected considering the large stock losses today. Bitcoin, often an indicator of risk-on and risk-off appetites, fell over 2%. This was mostly due to a huge cryptocurrency theft ($6.3 billion), attributed to North Korea. It certainly seems to be the case that when it rains, it pours. Capital flow was expectably heavy at 136%.
There were many stories and details flying through the markets today. Rather than cherry pick them, we should ask the big question:
Did the bubble just pop?
Whether I answer yes or no, let’s agree that anyone’s answer today is a speculation. That said, it doesn’t look good for the longs.
The AI investment story, and stock beneficiaries, has been under the microscope for a while. The eye-popping gains are well behind us at this point and narratives about when the party will end have been circulating for weeks. As other market factors swung negatively for the market, the longs emphasized incredible earnings expectations in the megacap tech and AI spheres. The justification for existing levels was that *those* earnings results would carry everything higher. The most recent megacap results break that assertion. The point is that the market has been skeptical about AI/megacap continuation and the final rationale is now damaged.
From a chart standpoint, the S&P has been treading water since early August. Today is the first clear technical break since then. I’ve been waiting for a fundamental catalyst to send the market into a direction for a while. I’ve anticipated a few prior events as being candidates, but they didn’t trigger a material market movement. Today it happened. Not only is the S&P below the 50-day moving average (7696) but it broke below the 100-day (7615) for the first time since early March. For chart-based momentum players, their signal just became a clearly bearish one.
Crude continues to climb. Other stories today pushed crude into the background but it still matters. The US/Iran situation is expected to return to military actions after the US midterms. We don’t know what that will accomplish until the dust settles but what is likely? What is the probability that the US and Iran subsequently stop all attacks and oil falls precipitously? Isn’t a continuation of the existing situation, or some periodic exchanges of attacks, the most probable outcome? WTI above $100 per barrel is only priced in the futures market until January. If the US/Iran situation continues as-is, for say 6 more months, do we really think oil will drop meaningfully below $100 and stay there?
Lorie Logan, Federal Reserve Bank of Dallas President, said today that she sees the need for at least two more hikes. She also said “the end goal should be to make policy modestly restrictive so we can sustainably deliver both maximum employment and stable prices.” This story was also pushed into the background but we should note it ourselves. The path of the Fed is not likely to change dovishly. We are at the start of a hiking cycle that the market *thinks* will be small but the number of actual hikes may be greater than expected.
I am left looking at the overall investment landscape *as it pertains to stocks.* The landscape looks poor. The market has been concentrating value in the megacap tech names and those horses are looking tired. Rolling over has been an *anticipated* event. The common question was *when,* not if, the tech leaders will give out? It looks like we are here.
If we assume that this is the beginning of a correction, we do not have to anticipate a crash as well. Maybe the repricing is slow and choppy? The dip-buying community will no-doubt make pushes here and there. The overall repricing may be shallow, perhaps only be 5-10%.
I do not know. That said, I think the downside is much more likely than the upside and I see this situation persisting for at least the near future but probably also into year-end.
Have a great weekend, see you Monday.
-Mike
Visdom Market Commentary
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