The Morning Call
10/19/26
The
Market
Technical
I don’t need to
tell you that the S&P had a lousy week. It (1) fail to break above its all-time
high, (2) broke below a very short term uptrend, (3) reset its 50 DMA to resistance
and (4) appears ready to challenge its 100 DMA. Further (1) there remains a
minor gap up open at the ~7684 level, (2) breadth remains horrible (3)
investors have started to question the viability of some aspects of the AI trade. On the other hand, (1) earnings and the economy remain quite strong, (2)
while tech has been whacked, other sectors are starting to perform better and
(3) seasonally, this has historically been a Market positive time of the year. Bottom
line, I think it too soon to get beared up although I think it would pay to
examine one’s tech holdings carefully if you are overweight this sector. On the
other hand, I think prudence is the watchword on any purchases. Fiscal policy,
monetary policy, war, oil, tariffs and the upcoming election make me very nervous.
Nine charts on the
effect of the mid-term elections.
https://www.carsongroup.com/insights/blog/nine-charts-on-midterm-elections/
The bond market continued
its rally last week. That suggests to me that the bonds boys are starting to
worry about the credit health of the AI sector (retreat to safety). On the
other hand, the longer term pin action remains pretty dismal. TLT continues to
trade down across all timeframes and is below all three DMAs. So, I need to see
some break in longer term downward momentum before attributing the recent price
action to anything other than noise.
Despite all the excitement
in the stock and bond markets last week, GLD offered no reaction. It remains
below all three DMAs and has now reset its short term uptrend to a trading
range. There are a number of conflicting forces playing on the price of gold; and
until it can break the current string of lower highs and lower lows, I am on
the sideline.
While the dollar performed poorly last week, it
remains on a pretty steep upward trajectory---likely reflecting the US as the
cleanest shirt in a dirty laundry. While it has made a nice series of higher
lows and higher highs, it remains in about the middle of a wide short term trading
range,
Friday in the charts.
https://www.zerohedge.com/markets/pain-trade-was-long-ai-short-bonds-how-neocloud-burst-turned-hottest-inflation-week-year?gift=eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJuaWQiOiIxMTI4NjgwIiwic2VuZGVyVWlkIjoiUUhnc3BaZVVFS2E3RHhXM216eFlKbjhaWEFoMiIsImlhdCI6MTc5MjI0NDg5NiwiZXhwIjoxNzk0ODM2ODk2LCJhdWQiOiJ6aC1naWZ0In0.eNwd_vpwauC_L8Ws3DbcJBz5mYRrLnL1IPJFk91YFAI
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
Everyone is dumping
AI.
Monday morning
setup: US futures are higher - but well off session highs hit before the
European open - as dip buyers storm back into chipmakers after the Nasdaq's
worst week since the April 2025 tariff turmoil, while oil slides after
President Trump waived Russian sanctions to seal a diesel deal and Energy
Secretary Chris Wright said Persian Gulf flows have recovered to about 80% of
pre-conflict levels; as a result Nasdaq futures are up more than 1% and the
Philly semis index is set to snap its longest losing streak in 18 years,
even as Europe slides on a weekend of riots in France. As of 8:00am ET, S&P
futures were 0.4% higher at 7,741.75 while Nasdaq futures rose 1.1% to
29,705.50 and Dow futures are down 0.2%. That follows a Friday session in which
the S&P fell 1.09% to 7,659 (sliding from flat just before the European
close), the Nasdaq 100 sank 2.5% and the SOX tumbled 3.8% for an eighth
straight loss, capping a week in which the SOX lost 11.4%, the Nasdaq 4.5% and
CoreWeave a quarter of its value. In premarket trading, semis lead with Intel
up 4.2% on a JPMorgan upgrade and Nvidia up 1.4%, neoclouds and optical names
are bid (CoreWeave +6% after a Goldman upgrade from Neutral ($139PT) to Buy
($106PT?!) week in which it became "the
market's beta barometer"), Disc Medicine soars 35% ahead of Phase
3 data and Cleveland-Cliffs jumps 13% after an earnings beat. The day's
driver is Washington's Russia pivot: Trump signed an executive order
waiving Graham Act sanctions, restrictions and duties on Russian energy
revenues (Russia will initially supply over 300k tonnes of diesel), Putin
proposed a summit with Trump and Xi to negotiate an end to the war, and
Zelenskyy accused Trump of pressuring Kyiv to surrender, which has sent Brent
down 1.2% to $108.59. Treasuries dip slightly with shorter-dated yields edging
higher in a bear flattener as traders keep a muted bid for an October hike,
leaving the 10Y at 5.08% after last week's 16.5bp plunge (its biggest weekly
drop since August 2025), while French
bonds tumble after the riots, with the OAT-Bund spread widening to 146bps.
The dollar index is up 0.1% to 101.93, with the euro the G10 laggard below
$1.12 and the Aussie leading after strong Chinese data. In commodities, WTI is
little changed near $101.30, European gas (Dutch TTF) hit its highest since
2022, gold is up 0.1% at $4,169 and silver adds 0.9% to $57.49. Bitcoin rises
2.5% to about $82,850 after briefly topping $83,000. US economic data slate
includes the October NAHB housing market index (10am). The Fed is in its
external communications blackout through Oct. 29, so there are no Fed speakers.
The Treasury sells $95 billion of 13-week and $82 billion of 26-week bills at
11:30am.
Fundamental
Headlines
The
Economy
Last
week was another slow one for the volume of US stats. In total, they were
balanced. However, they did reflect a growing consensus among economists/investors---an
expanding economy (three positive primary indicators, no negatives) and hotter
inflation (two negative price measures, no positives). Overseas, the data was more
plentiful and also balanced with two positive, two neutral and two negative
inflation points.
These
reports directionally support both my forecasts for growth (muddle through) and
inflation (good as it is going to get but not any worse). But they hint at growth
being stronger and inflation perhaps being higher than I thought. Of course, this
is only a single week worth of data. So it is too soon to alter my forecast. But
as I noted above, it is a theme that gained momentum last week.
The
economic issues that I continue to fret over are:
(1)
Fed policy. If inflationary pressures are
accelerating, how much weight should the Fed give to the fact that some of that
pressure is the result of supply shortages [primarily oil] versus demand pull?
On
its face, it suggests a Fed reticent to raise rates because the problem
[inflation] will cure itself as supply shortages are reconciled. But, as I pointed
out last week, there are a number of problems with that notion.
[a]
the conflicts in Ukraine and Iran are destroying infrastructure [production
facilities, refining capacity, pipelines] and depleting global oil reserves to
such an extent that supply shortages are not going to be alleviated when, as
and if those conflicts end. Indeed, depending on the ultimate disposition of
tanker transit out of the Persian Gulf and the Red Sea, a new permanent cost
[transit fees] could be added to the price of oil.
[b]
the longer inflation remains elevated, the more likely the mind set of
consumers and businesses will view it as more permanent, increasing the need
for Fed action.
[c]
not all inflationary pressures are the result of supply shortages. The
egregious national deficit and the enormous AI buildout spend are juicing
economic growth with the former clearly an unnecessary accelerant. Plus,
Trump’s tariffs flow directly into the price of goods.
https://cafehayek.com/2026/10/inescapable-tariffs-raise-prices.html
[d]
the risks from poor monetary policy and the level of interest rates are not
confined to the US. Europe and Japan are also having their issues which could
potentially compound our own.
In
short, I think that the Fed has a very narrow window in which to tighten policy
enough to curb inflationary forces without stymying economic growth. Indeed, it
may already be too late. Even if it is not, the Fed’s historical record of
instituting the wrong policy at virtually every critical junction is spotless. So, it would be remiss not to factor in the likelihood of another
policy mistake. And again if history repeats itself, the Fed will err on the
side of policy weakness. Meaning economic growth with higher inflation in the short term; followed by an overtightening that leads to lower inflation
but lower growth {recession?}
https://www.axios.com/2026/10/15/fed-inflation-ppi-warsh
The case for another rate hike is growing.
https://www.capitalspectator.com/the-case-for-another-rate-hike-is-growing-stronger/
Lance Roberts disagrees.
https://talkmarkets.com/article/bad-inflation-cures-itself-good-inflation-doesnt
(2)
the health of the AI buildout. Last week, we
potentially got the first signs that all the problems I have been concerned
about---[a] the accounting of the buildout---enormous off balance sheet
financing, [b] as well as the sheer magnitude of the financings [c] the level
of future revenue needed to provide a sufficient return on investment and [d] the
lack of any evidence showing increased productivity of the AI providers---were manifesting
themselves: [a] Goldman and Morgan’s unwillingness to underwrite the Volta
offering, [b]the CoreWeave revenue short fall, [c] the OpenAI revenue shortfall
and [d] hints that investors will lower Anthropic’s
valuation in its upcoming offering. It
is too soon to know the impact on AI valuations, but it is clearly a warning.
I want to emphasize two things.
[a] if the boom in the railroads, the electricity infrastructure,
radio, and the internet are any guide, then this technology will almost surely
prove its economic value but only after initial excessive overbuilding and the
failure of multiple companies. Who those winners are, I haven’t a clue and
likely neither does anyone else. As I have noted before, I
continue to hold positions in both the chip manufacturers and the
hyperscalers---although their performances has been such that I have Sold Half
of virtually every stock. That said, I have my finger on the trigger for
several holdings. And should the negative case appear the more likely outcome,
I will take some more money off the table. Friday, I sold my entire position in Oracle.
[b] I continue to be focused on the economics of the
AI buildout not the doomsday ‘we will all be dead in ten years’ variety. I made
clear …. that I am quite cynical about the motivations of the doomsayers
whether they are from the industry (who want the government to impose
regulations that would squash potential competition) or government (who never
lets a crisis go to waste in order to impose further on our collective liberties)
My
bottom line remains unchanged: my doubts on the trajectory of the
economy/inflation/AI buildout are increasing. Enough so that I have taken steps
toward a (1) stronger growth, higher inflation, (2) AI consolidation scenario by
nibbling at both a dividend growth and a TIPS ETF as well as reducing my exposure
to the AI tech sector.
https://doubleline.com/wp-content/uploads/DoubleLine_Diversifying-Equity-Exposure_October-2026.pdf
Treasuries rally against
turbulence in AI.
https://giftarticle.ft.com/giftarticle/actions/redeem/9be4ddc8-7d9d-4d0b-ac46-733e7043c93a
US
From late Friday:
September industrial production rose 0.7% versus
consensus of +0.4%.
https://bonddad.blogspot.com/2026/10/insutrial-production-primarily-powered.html
International
Q3 YoY Chinese GDP
grew 4.5% versus forecasts of +4.4%; September YoY industrial production was
up 5.5% versus +5.4%; September YoY retail sales were up 1.1% versus +0.5%; the September
unemployment rate was 5.2% versus 5.3%.
Other
Why rates keep rising.
Inflation
The cost of living and wages.
https://econbrowser.com/archives/2026/10/the-cost-of-living-and-wages
AI
The incomplete story about data center electricity
use.
The potential AI air pocket.
Memory meltdown.
The AI unwind has entered phase two.
Neocloud nightmare.
Goldman upgrades
CoreWeave.
Investing
Boring
is starting to look good.
Have rates tipped the scales toward value
investing?
https://www.advisorperspectives.com/commentaries/2026/10/16/rate-hikes-tipped-scales-value-equities
Why bad news for the bond market may be good news
for investors.
The latest from BofA.
News (but not a Buy recommendation) on Stocks
in Our Portfolios
Hershey.
https://www.zerohedge.com/markets/cocoa-grindings-crush-estimates-chocolate-stocks-rise-hershey-buy
What
I am reading today
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