Alpha Bet

Investment professionals often use the Greek alphabet to describe market analytics. Risk is quantified by the term Beta, which any hapless meme trader can buy with the click of a keypad - at least until last week blew them all up. Options traders use Delta, Gamma, Theta, Vega, and Rho because the mathematics of derivative market analysis is exceedingly complex. It also makes them seem smarter to their clients. However, the holy grail of active management is still Alpha. It quantifies the excess return from investment skill rather than luck. And good luck with that.

Imagine how lucky one feels this morning if you are long Alphabet stock. The stock is soaring towards $2 trillion market cap after reports of a deal to supply Meta with some of their AI chips. Not many saw that coming - especially Nvidia! The dealmaking in the artificial intelligence arms race is just getting started.

Alphabet vs Nvidia

In the bull market run since the Independence Day lows in April, there have been two phases. The first one was the rise of the Magnificent 7 tech-related stocks. They benefited from investor fascination with the transformative AI revolution and an aversion to anything tariff-adjacent. Then came the secondary plays in a rush to finance the Hyperscaler's buildout. Thus, the arms dealers, utilities, and software plays like Coreweave took up the baton and raced headlong into the summer rally.

But the sudden correction in the AI space this month has shaken out a few key stocks that were chasing the AI dream. Coreweave crashed, and Nvidia is fading badly as the competition heats up. Correlations have begun to drop in tech land. No longer can you throw your portfolio at the wall and expect everything to stick. It will take more skill now to outperform the market. Now comes a new phase that relies more on stockpicking skills than herd-following. Now comes the real alpha generation.

But where does alpha come from, and how do I get it? Ahh, patience, young grasshopper.

Stock selection is sometimes more art than science. Since my working hypothesis for outperforming markets is based on correctly predicting others' expectations, it is indeed an arcane science. And there it was again last week - the market pivoted nicely after the short, sharp corrective phase that I had been expecting. So the broadening of performance, I also hope, is just getting started.

So where else to look? Well. Fed easing is a clue. What typically happens when the economy receives enough monetary accommodation is an expansion of participation in economically sensitive stocks. They have been left behind and appear cheap in comparison to the leadership group. But the turn in performance is being held back by two things: the news flow and the calendar.

The fourth quarter for investors includes predictable seasonal factors, such as tax-loss selling and portfolio window dressing. Many weak stocks rebound in the January effect after being purged from portfolios by portfolio managers seeking to "high grade" their funds. This narrow diffusion year is especially susceptible.

Also holding the laggards back is the news flow on economic data ( what little of it exists, thanks to Congress), which is still showing a tilt toward the negative. Jobs data are weak, and retail sales, aside from a few standouts like Apple and TJX, are also struggling. But I'm in the mood to bottom fish for the alpha candidates of 2026. Last week I featured Decker's Outdoor. This week, Home Depot stock looks sick amid the renovation slump. But this highly cyclical company is oversold and hitting the long-term uptrend. Contrarian alert!!

Home Depot

So what gives me confidence in catching these falling knives? Simple, it's experience. I know this is a risky move, but betting a modest amount on left-behind stocks is in my DNA. I have told many of you the story of how, in 2012, I accumulated an 8% ownership position for my clients in Air Canada at an average cost of $1. How'd that work out?

Air Canada

I expect investor/consumer expectations to improve as we enter 2026. Time to tilt the portfolio away from the AI trade. I know it's not a popular position, but that's how alpha generation is supposed to work. This risky strategy doesn't always work out as well as AC at a buck, but call me crazy, but I am willing to make a few alpha bets here.

Risk Model: 1/5 - Risk Off

Not surprisingly, the volatility and negative sentiment are weighing heavily on the Model. The correction, which began with talk of an AI bubble unwind and was exacerbated by the weakening labour market, has investors worried. Perhaps it is fitting that the market is shrugging off the doom-and-gloom that has pervaded this year. It all depends on the Fed now. That's why the soothing commentary from some fed officials last week helped right the ship.

As for sentiment, the University of Michigan Consumer Sentiment survey is at rock bottom - below the GFC levels! How's that for a contrarian argument in favour of the consumer cyclicals?

University of Michigan Consumer Survey