The Morning Call
10/26/26
The
Market
Technical
The S&P had an
up (early) and down (later) week. It reset its 50 DMA to support, then
immediately reversed itself and appears ready to challenge its 100 DMA. Most of
the decline was on the back of (1) a growing number of concerns over the
economic viability of the AI buildout and (2) the fear of a renewal of armed
conflict in the Middle East. On a longer term basis, (1) while the index has
been stuck in an elevated trading range [its upper boundary is marked by its
all-time high], (2) it remains in uptrends across all timeframes and is above
its 100 and 200 DMAs, (3) earnings and the economy remained strong and (4) historically,
we are in the most positive time of the year and election cycle for stocks. Plus
another factor has come into play---beneath the surface, a battle has developed
over investor preference for the Mag 7 versus the rest of the Market with each
one highlighting a single day’s pin action only to be reversed the following day.
For me, this combination of conflicting trends only increases my level of
uncertainty. Bottom line, while I think it too soon to get beared up, 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.
The latest from
Goldman.
The bond market continued
its rally last week, managing to reset its 50 DMA to support. That suggests to
me a retreat to safety with the bonds boys worried about the credit health of
the AI sector as well as the odds a ramp up in kinetic warfare. On the other hand,
TLT continues to trade down across all timeframes and is below its 100 and 200 DMAs.
While the foregoing is not a huge endorsement for owning bonds, I am nervous
enough that a opened a small position in a TIPS ETF.
GLD resumed its downward
journey and appears ready to challenge the lower boundary of its short term
trading range. It remains below all three DMAs. In light of all the turmoil
last week, I am a bit confused as to why gold didn’t perform better. So until there
is some clarity and/or it can break the current string of lower highs and lower
lows, I am on the sideline.
While the dollar sort of marched in place last week,
it remains on a pretty steep upward trajectory. 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
Monday morning
setup: US futures are higher as oil slides on hopes that a regional delegation
in Tehran can breathe some life into US-Iran peace talks, and as Meta jumps
after finally unveiling how it plans to pay for its AI capex binge, offsetting
a stunning comeback win by Lula in Brazil's runoff which has sent Brazilian
ADRs crashing as much as 30-50% premarket, while traders brace for a week
packed with megacap earnings and central bank decisions; as a result 10Y yields
are flat at 4.99% and the dollar is barely changed. As of 8:15am ET, S&P
futures are 0.4% higher at 7,665.75 while Nasdaq futures are up 0.7% and Dow
futures rise 0.4% (+186 points) to 52,580. On Friday, the S&P slipped 0.5%
to cap a second weekly drop and close below its 50DMA, as the AI funding angst
which has hammered tech names spread to credit. Premarket, Mag 7 names are
mostly higher led by Meta (+2.4%), which is seeking up to $95 billion in equity:
a $35 billion offering ($22.5 billion of Class A common stock plus $12.5
billion of mandatory convertible preferred) launched this morning, followed by
an at-the-market program to sell up to $60 billion of new non-voting Class C
shares starting in 2027, with Nvidia, AMD and Broadcom indicating interest
in buying up to $5 billion of the offering (some circular AI financing never
hurts). That the stock is rising on a potential $95 billion equity raise
tells you how much the market feared the alternative was even more debt. The
day's driver is Brazil: Lula's 51.8%-48.2% victory over market favorite
Flávio Bolsonaro, who is now calling for the vote to be annulled, has sent the
Brazil ETF (EWZ) down 27% premarket, with names like XP (-48%), StoneCo (-35%),
PicPay (-34%) and Nubank (-23%) all crashing. In rates, Treasuries are narrowly
mixed with the long end outperforming and the curve flattening by about 2bp,
while French bonds rally after Moody's unexpectedly kept France at Aa3,
narrowing the OAT-bund spread to around 158bps. The Bloomberg dollar index is
up 0.1% with the yen the weakest G-10 currency, while the Brazilian real is
expected to gap 5-7% lower at the open. In commodities, WTI is down about 2.1%
near $101 and Brent drops toward $114 as Saudi, Turkish and Pakistani officials
travel to Iran; European natgas is up 3% near a post-2022 high, while gold
rises 0.5% back above $4,000 and Bitcoin hovers around $80,400. US economic
data slate includes September Chicago Fed national activity index (8:30am) and
October Dallas Fed manufacturing activity (10:30am); the Fed is in its blackout
period ahead of Wednesday's FOMC, and the Treasury sells $69 billion in 2-year
notes at 1pm.
Fundamental
Headlines
The
Economy
Last
week was another slow one for the volume of US stats. In total, they were negative
with the primary indicators balanced (one plus, one minus). Overseas, the data was
much more plentiful and tilted to the positive side with two positive 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). They did not confirm a
growing consensus notion of stronger growth and higher inflation---which were
apparent in the prior week’s numbers, and which seems to have reversed itself
last week as worries about the AI buildout and its effect on economic growth gained
some traction. I will stay neutral on either proposition pending more data.
I
continue to fret over Fed policy. The FOMC meets this week and consensus, at
the moment, is for no rate hike. Still the odds of an increase bounced around
last week---the result of alternating fears about higher oil prices and a
slowdown in the AI buildout---the latter having won the day on Friday.
As
you know, I have continuously dwelled on the issue of whether a rate hike is a
necessity when a [significant?] portion of inflationary pressures are the
result of supply shortages [primarily oil] versus demand pull---because supply
shortages cure themselves as the shortages are reconciled.
Part
of the problem is determining just how significant supply shortages are as a
force behind inflationary pressures. Clearly other factors are in play: [a] the
destruction of oil production and refining infrastructure as well as the
ultimate disposition of tanker transit fees out of the Persian Gulf and the Red
Sea, [b] irresponsible global fiscal policies and easy monetary policies, [c]
the AI buildout stimulating demand and [d] tariffs.
Two
of those elements were front and center last week. {i} the war in the Middle
East heated up, in particular the rhetoric regarding the potential for a
resumption of US bombing Iran.---which clearly had an impact on oil prices and future
oil supplies and {ii} rising doubts about the growth of the AI spending and,
hence, the overall rate of US economic growth. The problem being that these two
forces are pulling inflationary pressures in opposite directions.
https://www.capitalspectator.com/bond-market-tests-the-inflation-narrative-as-yields-tumble/
In
short, the dynamics playing on inflation have made the problem of determining
the proper monetary policy more difficult. And given that the Fed’s virtually
spotless record of instituting the wrong policy at every critical economic junction,
I can’t really be positive about the potential outcome. My guess is, again
based on the Fed’s historical record, it will err on the side of policy
weakness, meaning higher inflation in the short term; followed by an overtightening
that leads to lower inflation but lower growth {recession?}
Lance
Roberts thinks that monetary policy is already too tight. Could that be the Fed
error this time?
https://talkmarkets.com/article/fed-over-tightening-how-much-runway-is-left-before-it-bites
My
bottom line remains unchanged: my doubts on the trajectory of the
economy/inflation/AI buildout are increasing. As a result, I have reduced my
exposure to the AI tech sector, reinvested the proceeds in a dividend growth ETF
and bought a TIPS ETF.
US
From late Friday:
The October consumer sentiment index came in
at 48.0 versus estimates of 46.3.
The
September Chicago Fed national activity index was +0.07 versus predictions of -0.1.
International
The August Japanese
leading economic indicators were reported at 118.0, in line.
The October German
business climate index was 90.2 versus consensus of 90.0; the October current
conditions index was 88.8 versus 89.9.
Other
No reason to worry about the recent lower
weekly real earnings report.
https://bonddad.blogspot.com/2026/10/no-we-are-not-dooomed-real-usual-weekly.html
Inflation
What inflation means.
AI
What needs to happen to turn the AI wobble
into a bust.
Investing
The
latest from BofA.
Bond
derangement syndrome.
5
Signs You May Be Suffering From Bond Derangement Syndrome - Wealth Management -
Carson Group
The economics are abysmal.
“The
Economics Are Abysmal”: Harris Kupperman Warns The Crash Is Here
What
higher inflation means for stocks, bonds and your portfolio.
Forward P/E ratios.
https://econbrowser.com/archives/2026/10/forward-price-earnings-ratios
A simple way to benefit from rising rates.
Market signals are
a tax on bad information. Hopefully, this has relevance to the upcoming mid-terms.
Polling is indicating a Dem sweep---which, in spite of all the reasons I am critical
of Trump’s policies, would likely be worse for the economy. Yet the Market has
been yoyoing in a narrow range since early August. With any luck, it indicates
a benign outcome to the elections.
News (but not a Buy recommendation) on Stocks
in Our Portfolios
What
I am reading today
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