Heads or Tails

So much for my hopes for a countertrend rally from the Anthropic IPO release early last week; the AI financial bubble has really burst now. What happens next is, for many market participants, a coin toss.

But coin tossing is a 50/50 fair game. Stocks aren't.

The average stock was up last week. Let that sink in. Investors are waking up to the bifurcated market structure since the AI bubble peaked in June. Momentum factor stocks (primarily AI-related) have gotten killed relative to the average stock, and a nasty trendline break has appeared (chart). The entire AI sector _ hyperscalers, semis, and modellers _ is choking on the massive supply of debt and equity and share prices have cratered. Neocloud stocks, the johnny-come-latelys to the AI party, are the "Pets. com" of this cycle. Meanwhile, the economy has chugged along, and consumers keep spending.

Momentum vs Equal Weighted

The physical AI buildout is far from done. Although the financing chill may slow capital spending, that slowing will actually help perpetuate the bull market. The frenetic 'rush to raise' has looked like a Black Friday Walmart store opening. No wonder financial conditions are suddenly tighter. But don't confuse the race to access the capital markets with a bear market. This AI-supported bull is a long way from being done.

Today's midterms are another coin toss that should produce a stalemated Congress. But that doesn't change the economic order much despite the hopes of those still suffering from TDS. This election is not the clearing event that many are hoping for _ it will just muddy the waters. The race for '28 will start tomorrow. The focus will now shift to the post-Trump era, and what that means for the economy is unclear.

Lately, the market's safety valve has been the drop in the U.S. Treasury 10-year yield. The crowded short that resulted from rising inflation expectations has suddenly been unwound. Lower oil prices this week and a seemingly confused Fed, neutered this month by midterms, are helping to cement the positive vibes with mixed messaging. But the festering U.S. budget deficit and an increasingly crowded corporate bond calendar should soon halt the rally. December is a 'live' meeting for Warsh and Co., so take profits on bonds. That is, if you took my advice at 5.3% to buy the dip.

Markets are just coming to grips with the fact that the backlash against the AI data centers his a threat to economic growth. But, perversely, the AI NIMBYs are actually helping the economy by keeping demand-driven inflation in check. And if oil stays at $90 -100 for the next four months, headline inflation will axiomatically drop too. These factors bode well for a steady interest rate backdrop, improved economic breadth, and a quiet Fed. So, let's hope Trump, Putin and Xi can sit down and hammer out a couple of ceasefires next month.

Remember, I'm also hoping for a Leaf Cup this season too! But that's more coin tossing than anyone really needs.

Risk Model: 3/5 - Risk On

The model still holds a positive signal despite the fear and loathing that permeates financial social media. Sentiment and Volatility are negative, but the CU/AU and price variables keep the faith.

The rotation underpinning the S&P 500 is a fascinating and unusual occurrence. Rarely has a market completely 'corrected' without dropping more than 5% in aggregate, but this one has.

The chart below shows the S&P 500 index, the Percent of stocks above their 50-day moving average and the relative performance of Momentum Factor vs. the Unweighted S&P (RSP ETF) in the bottom panel. It's been a huge correctional rotation while the market went sideways!

S&P 500, Stocks Above 5oDMA, MTUM vs RSP

Lately, I have been featuring a few stock picks even though my street cred is mostly from the macro side. I usually align them with the big picture, as I don't have any proprietary granular intel. Take me up on them if you like, but I'm not in the advisory business. I'm a closet 'chartist' at heart, so at least you have been warned! My recent touts - AC, ZRE and NFLX have had mixed results so far, but we need a market breakout for them to really work.

At the risk of sounding like a broken record, I'm looking at copper stocks now. Teck Corp., now that it has jettisoned its oil and coal divisions, is a copper/zinc pure play that fits the bill nicely. The recent AI-related bearishness has hurt the copper sector but looks played out. Volume (CMF) has stayed positive. Seasonality from here to next spring is also favourable. Catch the falling knife here.