Beachball Under Water

I've never met a metaphor I didn't like.

I was reminded of this after hearing from an old Bay St. friend this week - (sorry, DM, but you are old now). The Goldman Sachs market note he sent used the term 'beachball underwater' to describe the current state of the stock market. I was cited by my pal as the originator of the term, despite the lack of any confirming evidence. I probably heard it from somebody else back in the early part of my career. It was perhaps an ex-floor trader during a boozy Bardi's lunch in the '80s. I admit to having done far too much 'research' there.

Not to dwell on the topic, but using the collective wisdom of the past is how I got along so well with the stock market in the first place. Managing money is like writing a song from scratch. Nobody ever came up with a song without having heard lots of them already. You just need to change a few notes here or there to claim it as original. Just ask George Harrison, who didn't even bother to change any on "My Sweet Lord" as he inadvertently plagiarized the Chiffons' "He's So Fine".

I'm sure my affinity to both music and stocks comes from the same place deep within my brain. Hell, they both use charts, don't they? But the pattern recognition skills necessary for both playing music and playing the stock market have similarities. Perhaps this explains why I like metaphors so much. They act as 'triggers' to recognize market patterns with similarities.

Other metaphorical quips I have used to compare market conditions (with varying degrees of success), include: "Tanks at the Border," "Two Drunks Holding Each Other Up", and "Razorblade Bannister," - the last one a particular fav of mine given how it always generates a squirmy reaction from my ex-partner Greg.

And so it is time to trot out the 'Beachball Under Water' trope as the stock market reflexively bounced off a mildly oversold condition this past week, making new highs despite all arguments to the contrary. The negatives —inflationary tariffs, U.S. Government shutdowns, and nosebleed valuations—have been ignored. But as I said last week, with the Fed about to lower the financial pressure, Bernoulli's principle also applies to stocks that were held back, however briefly, by these fears.

This will surely end in tears at some point as the mob's voting machine ultimately gives way to Buffet's weighing machine. But don't forget, the Federal Reserve is still driving the bus here, using its favourite device - the rearview mirror. Until they create a policy error that needs correcting, they will likely continue to support the current asset bubble. Any rate reversal is likely a 2026 event, and so a melt-up 'rally of everything' is about to unfold, especially since the China trade threat is about to fizzle out as a worry.

And once the Big Tech hyperscalers announce earnings this week, which are already fully priced in, the markets can start doing their seasonal thing by chasing underperforming laggards. FOMO was in full display ahead of the numbers due out this week, as Meta, Apple, Google, and Amazon all hit highs. But like all investment gold rushes, unless you find lots of metal, it's hard to justify buying expensive shovels. I can't believe all of them can simultaneously spend so many billions on Nvidia chips and each make back their investments.

U.S. banks are also poking their heads out of their shells after last week's concerns about the credit bubble. The corollary of one of my other bon mots - "No banks, no thanks" is at work. Now I say,"Banks, Thanks!" Suppose the '26 economy responds to recent monetary easing and any potential tariff stasis. In that case, it will engender a broader participation by the more economically sensitive cyclicals that are now in the left-for-dead basket. The financial sector is leading that rotation as we speak. If you thought we had seen FOMO at work this week, just wait until the end of Q4! That 'crowding-in' of investors will give rise to a performance chase that should carry us into December.

Metaphorically speaking, of course!

Risk Model: 4/5 - Risk On

You heard it last week: any relaxation of market tensions would quickly flip the Model. The VXV decline and Copper/Gold indicators bounced hard into the risk-on thinking that prevailed last week. Although the AAII bounce was muted, it was sufficient to generate a positive reading. With RSI recovering but still below 70, it is the 200 DMA's longer-term overbought condition that gives me any negative vibes. The market has been more than 10% above the 200-day line for over two months now (see chart below). But as I believe we are in the throes of the aforementioned 'rally-of-everything', being this overbought for so long actually supports the 'rotation-to-laggards' case.

XIU ETF