Can The Stock Market Stay Green Today?

One thing with investing is that you have these periods where it’s just the same basic problem over and over again. In this case, we have the AI trade suffering and causing a lot of angst. I’ve spent a lot of time talking about this and why I don’t yet view it as a long-term problem. On the other hand, I also haven’t added to anything in the AI space for quite some time. What would get me to pick a bottom on AI?

The honest answer for our long-term oriented portfolio is that it would likely take quite a bit to get us to buy more AI. The problem is that we’re long-term oriented to an extent that’s unusual for most investors. From that perspective, while we’re fine with our current AI holdings, it’s hard to get overly aggressive due to our expectation that the pace of AI spend is expected to slow next year. Given that, there are just easier places for long-term investing, right now.

However, what if you’re like most people and looking for daily or weekly buys? I actually recently started an experimental, aggressive portfolio that’s actively on the prowl for buys in the AI space. Thus far, it’s bought nothing, but it’s easy for me to imagine it will try some buys, this week. To be clear, even my aggressive system does hope to hold for decent amounts of time, but it’s far more active that what we traditionally do.

What would make that system buy? Mostly positioning. Right now, we continue to see de-risking in a negative gamma environment, which is basically a fancy way of saying market makers are pushing stocks in the same direction as investors, so moves are more extreme. Goldman Sachs says hedge funds have been getting pounded, which is causing their longs to go down for non-fundamental reasons. Once that relaxes, the system is likely to start buying.

Why are we getting this sell? I think you can fairly point to a number of reasons, but I focus on positioning over fundamentals. The AI trade quickly became gigantic and loved, with Bloomberg saying roughly $33T in market gains since 2022 are largely tied to AI. That’s involved a lot of people on the same side of the boat.

When enough of those people get scared, the selling has the potential to get intense, though it can be hard to know ahead of time just how bad it will be. This is the theory of self-organized criticality. Maybe adding a grain of sand to a big sandpile does nothing, maybe it causes a little landslide, or maybe it causes a bit avalanche. All we know is that as the pile gets bigger, risk increases.

In the case of AI, we’ve had several things come together to cause concern, such as spending intentions, questions of payoff, and a crowding of desire to access credit. Why am I not worried in the short-term? Because we keep hearing that the limiting factor is the supply of AI, not the demand, and it doesn’t appear to be close.

Ideally, we’d get a big, cathartic sell to clear out positioning. We got an echo of that on Thursday, which was enough for me to speculate on Friday morning’s substack that we may have seen the bottom for the AI trade. That statement is being made harder by continuing problems in Iran, which is raising oil, which in turn is helping pressure rates and credit.

I don’t really believe in one-factor systems, but I think the easiest way to look at this is credit-spread stress. As you can see in the chart above, we had a surge in credit stress from the Iran war. Now, we have a lot of little stresses, from Iran to AI fears to election worries. As those fears abate, credit stress should lessen, allowing stocks to improve.

For now, though, credit stress is still getting worse. Can we get back to April levels of stress? Maybe, but I think some of these problems are already looking more constructive, such as yields coming down. We also have big earnings coming up in the middle of this week, which should be great. With fear relatively high and positioning bearish, it wouldn’t take much to rally. I was very close to adding risk on Friday with my shorter-term test system, and there’s a good chance it will add risk soon, either based on deeply oversold readings or a lessening of stress. Short-term, my guess is that this week finally sees improvement in stresses, but as usual, we’ll see what happens.

The PMI Composite was 57.6, as expected, with Manufacturing PMI 56 vs. exp 55.5 and Services PMI 57.9 vs. exp. 58. Not bad, though a slowdown from last month’s 58.4.

Oil is down -2% to $101 after there were no major attacks over the weekend, and talks continued.

Brazil stocks (EWZ) are getting pounded -27% after current President Lula pulled ahead of Bolsonaro in the election. Bolsonaro said he will seek to annul the results, citing the sudden extension of voting hours, which doesn’t seem at all suspicious, right?

Neocloud stocks like CRWV, NBIS, and IREN all fell about -3% after Musk warned of failures and consolidation in the space due to tightening credit markets, calling for “guppy-level death.” I’d point out he’s hardly a neutral observer, as SPCX is basically a competitor.

EQT is buying Range Resources (RRC), creating the biggest US natural gas company.

Chicago Fed National Activity Index and Dallas Manufacturing today.

Bottom Line: Can markets stay green?

Click here to schedule a meeting — I’m here to help you take the next step toward financial freedom.

Disclosures/Regulation:

This content is intended to provide general information about Lloyd Financial. It is not intended to offer or deliver investment advice in any way. Information regarding investment services are provided solely to gain an understanding of our investment philosophy, our strategies and to be able to contact us for further information.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Past performance is no guarantee of future returns.

Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable

Want a clearer view of where you stand? Schedule a free portfolio analysis.