The Morning Call
5/11/26
The
Market
Technical
There
is just no quit in this Market. The S&P was up for the week, making a
fourth gap up open on Friday. The technicals remain ‘full steam ahead’ with the
S&P (1) making another new all-time high, (2) above all three DMAs and (3)
in uptrends across all timeframes. The technical question in my mind is how long
can this sprint higher last without a correction?
Clearly, the stock market is brushing off any
worries related to the destruction of the Middle East oil infrastructure and
the accompanying surge in oil prices as well as the problems in the private
credit market. I am not sure if (1) this is a buy-the rumor-sell-the-news situation,
(2) investors correctly believe that earnings growth will continue at its
current pace irrespective of the damage being done by the destruction of the Middle
East oil infrastructure and I am wrong to be worried or (3) investors incorrectly
believe earnings growth will continue at its current pace irrespective of the
damage being done by the destruction of the Middle East oil infrastructure I am
right to be worried.
Color me clueless.
But the longer that the economy continues to perform and the Market smokes, the
more likely the answer is behind door (2).
As an aside, this
weekend the number of ads by trading apps popping up on my iPad outnumbered those
for chair tai chi. Historically, when the trading frenzy reaches the point
where Wall Street (?) is chasing $20 brokerage accounts, the end is not far away.
As you know, I
approached this upside move cautiously---which couldn’t have been more wrong.
Nonetheless, I am loath to chase this upswing, especially with (now) four gap up opens
sitting below. The only good news in this trading error is that a number of
stocks on my Buy List have remained within buying parameters. So with any
retreat, I can make a delayed entry.
Upside panic.
https://www.zerohedge.com/the-market-ear/spot-vol-upside-panic
Summary:
This no longer feels like a normal bull market. It increasingly feels like a
reflexive momentum event driven by upside panic, call chasing, and fear of
missing the melt-up. Vols have remained rather well bid over the past few
weeks. NDX volatility has actually risen alongside the rally in May, with the
VXN catching strong bids even into Friday, effectively an “inverse” weekend effect.
Investors are increasingly entering must-show tech exposure mode, and the
easiest way to express that is through upside call chasing. That’s very
late-stage behavior.
The
Market’s feedback loop will self-destruct.
(3)
The Market’s Feedback Loop Will Self-Destruct
TLT rallied modestly
last week, bouncing off the lower boundary of its very short term trading
range. However, it remains below all DMAs and in downtrends across all major
timeframes. With stagflation the likely result of the destruction wrought on
the oil infrastructure and a spendthrift government, I am hard pressed to think
that bond prices are going to improve markedly.
Gold remains in a
very short term downtrend marked by the top and now two lower highs. I am watching
to see if it makes a second higher low or continues its downward momentum. The
good news is that it remains in uptrends across all time frames. Confusing the
issue is that it now has a gap down open overhead and a gap up open below.
Technicals signal
that the gold, silver, miners rally is over.
https://talkmarkets.com/article/gold-silver-and-miners-amid-new-levels-of-absurd-1778263058
The dollar tried to rally,
failed and could not challenge its 50 and 200 DMAs (both remain resistance) and
now challenging its 100 DMA to the downside. The good news is that it now has three
gap down opens overhead that need to be filled. That said, I continue to
believe that the macroeconomic backdrop of the US economy (rising inflation)
suggests a low to lower dollar.
Friday in the charts.
https://www.zerohedge.com/markets/peace-hope-ai-hype-sink-crude-dollar-lift-gold-stocks-week
Summary:
An incessant stream of AI/Chip-deal headlines
(combined with strong/hyped earnings/outlooks), and increasing hopes of a US-Iran
peace-deal (ceasefire stability / product shortages?) pushed stocks
higher as oil sank this week. Bonds were caught in the middle -
going nowhere (even with today's firm jobs data). Gold gained ground as
the dollar dipped (more Yentervention) and bitcoin ended up for
the 6th week (major ETF inflows). The simple passage of time will cause
dealers to start to sell even if the market remains up here (charm).
And likewise, if tensions in
the Middle East don’t pick up and implied vol falls, dealers will have to sell
down their hedges (vanna).The core idea here is that implied volatility is
set to have continued contraction as we approach OPEX and as traders wait for
NVDA on 5/20. NVDA 5/20 also lines up with VIX expiration on 5/19 making
that a great mark for volatility to expand. Until then, peace deals, even if
just alleged, should continue to keep traders' minds off of tail risks. These
are the mechanics, but the takeaway is: intense speculation in a very
narrow part of the market rarely ends well.
Last week in the
charts.
https://bilello.blog/2026/the-week-in-charts-5-7-26
Friday in the technical stats.
https://www.barchart.com/stocks/momentum
https://www.barchart.com/stocks/market-performance
https://www.barchart.com/stocks/sectors/rankings
https://www.barchart.com/stocks/signals/new-recommendations
Monday morning
setup: US equity futures are off a touch as the US/Iran failed to consummate a
deal, which is boosting Energy commodities and bond yields. Still, stocks have
withstood the resulting increase in oil prices and higher bond yields as the
market remains focused on the memory/semi stock bubble. As of 8:00am ET, S&P
and Nasdaq 100 futures are down fractionally as Trump and
Iran rejected each other’s latest peace proposals to end the 10-week
conflict as the two sides struggle to maintain a fragile ceasefire. In
premarket trading, semis are bid again after surging to a record high on
Friday, Mag7 are mostly lower as early action points to Defensive positioning
with Energy plays acting as a long hedge. European stocks are lower, reversing
earlier gains in Asia, there driven by the AI Theme / Memory as Korean indices
added 4-5%, and were briefly halted at the +5% trigger. Bond yields higher
across the world on fears of an oil-driven inflation shock and expectations of
central banks tightening monetary policy. The 10-year Treasury rate rose four
basis points to 4.39%. The dollar edged 0.1% higher, while gold dipped below
$4,700 an ounce. In commodities, the Energy complex is leading but WTI remains
below $100/bbl, and off session highs, silver is outpacing gold as base metals
are bid, and Ags are mixed. Today’s macro data focus is on existing home sales
(10am ET) before kicking off a data-heavy week highlights by CPI, PPI, and
Retail Sales. Fed speaker slate empty for the session.
Fundamental
Headlines
The
Economy
The
US stats tilted to the positive side last week with the primary indicators also
upbeat (two plus, one neutral, none negative) and no inflation measures.
Overseas, the data was slightly positive with no inflation readings.
We
still aren’t seeing any significant economic effects of the Iran war and the
turmoil in the private credit market in the US numbers. The only explanation I have
is that the enormous AI spend is offsetting these negatives; and there appears
no end is sight for that factor.
There
were a couple of new (negative) developments in private credit market. So after
a couple of weeks of seeming calm, it appears that this problem is not going
quietly into the night. Still, most of the analysis (which I have linked to)
suggests that while there will almost surely be some negative fallout, it is unlikely
to reach the order of magnitude of the great financial crisis.
Bottom
line: the economy is performing above my prior expectations (‘muddling through’)
and will likely continue to do so given (1) US energy independence, and (2) the
level of AI spend. So I am stepping up my economic growth forecast. On the
other hand, the lack of price data last week notwithstanding, I remain firmly
convinced that above average inflation is part of our near/intermediate term future.
US
The May consumer
sentiment index came in at 48.2 versus consensus of 49.5.
International
April Chinese CPI was up
0.3% versus expectations of -0.1%.
Other
A deep dive into last Friday’s jobs report.
https://bonddad.blogspot.com/2026/05/april-jobs-report-reversals-in-2025.html
China rebalancing the
oil market.
Summary:
China has slashed its oil imports by about a quarter from prewar levels, making
more crude available to the wider market and reining in oil benchmarks.
The
country's state-owned oil companies have been reselling some of their oil
cargoes to European and Asian rivals, suggesting surpluses, and tanker-tracking
data estimates China is buying just 8.2 million barrels a day of crude from
overseas.
The
import drop is not fully explained, with possible factors including weaker
economic activity, increased use of coal-to-chemicals, and running down
hard-to-track inventories of semi-finished plastics and other chemicals.
Iran
Overnight news.
Fiscal
Policy
Government debt crosses above 100% of GDP.
Inflation
Inflation
is the real story.
Tariffs
Rule of law 2, Trump 0
Gold
Deutsche Bank on gold, the dollar and the
monetary future.
https://www.zerohedge.com/markets/return-history-deutsche-gold-dollar-monetary-future
Investing
How not to invest in times of uncertainty.
https://behaviouralinvestment.com/2026/05/05/how-not-to-invest-during-times-of-uncertainty/
Earnings revisions are very (too?) optimistic.
https://www.zerohedge.com/markets/earnings-estimate-revisions-are-very-optimistic
Junk bonds outperforming.
The shift in savings is good for stocks.
https://giftarticle.ft.com/giftarticle/actions/redeem/78df9824-fa7c-44e3-810f-cdf106655db5
Wall Street’s
wisest man.
https://jasonzweig.com/wall-streets-wisest-man/
The latest from
BofA.
https://www.zerohedge.com/markets/michael-hartnetts-new-favorite-market-sector
Summary:
Hartnett then adds that "materials also are the candidate to pair
in an optimal bubble barbell strategy of long “hubris” (AI
& chips today) & long “humiliation” (out-of-favor,
distressed cyclical plays lifted by final bubble surge in nominal GDP, e.g. EM
in ’99 internet mania, oil in ‘07/’08 subprime/China bubble).: The
BofA strategist concludes that materials, consumer, China, UK are all unloved
potential pairs with chip mania; but humiliated bonds won’t work... As for AI
Big 10, we are now at peak bubble levels, accounting for 40% of S&P
500 market cap, close to peak concentration levels for Nifty Fifty in ‘70s,
Japan in 80s, internet in ’90 (but not railroads in 1880s).
News on Stocks in Our Portfolios
What
I am reading today
America’s
future: a conversation with Ray Dalio.
https://www.nytimes.com/2026/05/07/opinion/american-empire-future-ray-dalio.html
Ancient
settlement discovered; re-writes North American history.
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