AI and tech surge lifts markets, but divergences and overbought signals flash caution

Ok – another week comes and goes and stocks are higher. The FED made it clear on Wednesday that the next cycle is down – with two more cuts ‘almost’ certain this year and one more likely in January – and investors couldn’t get enough. Stevey Miran – the new guy on the block – told CNBC he dissented and wanted a bigger move (50 bps), making the case that tariffs have had NO material impact on inflation. His dot plot? He has five cuts penciled in. And not to be outdone – Minneapolis Fed President Neel Kashkari (not a voter right now and someone who hates it when the focus is not on him) chimed in saying that he was one of the members looking for two more cuts this year.

Now layer on the latest wave of tech news and AI tie-ups (it’s almost a daily thing) – think ORCL/META, NVDA/INTC, AAPL iPhones and that massive tech agreement Trump and UK PM Starmer signed on Tuesday. Then add the frenzy around Quantum Tech… did you see what those names did? IONQ +65%, QBTS +68%, RGTI +74% and that’s in just two weeks! And don’t discount the old guard either, names you probably forgot about! STX (Seagate) is up 165% YTD, WDC (Western Digital) +137% YTD, and MU (Micron) +93% YTD. And all this says is the market is hot……. The question now is where it is going and when it will end…..?

By the end of the day – stocks put in a mixed result, the Dow gained 172 pts, the S&P up 32, the Nasdaq rose 160 pts, the Russell along with the Transports and Equal Weight S&P all lost ground – down 19 pts, 31 pts and 15 pts respectively. Mag 7 Tech well, that was the clear winner on the day – up 400 pts or 1.25%.

Now again – look at what happened between the S&P and the Equal Weight S&P: one finished higher, the other lower. That divergence tells you something. Tech – thanks to its outsized weighting in the mkt cap-weighted index – is pulling the S&P up, while the broader market is digesting and backing off.

It is just something to watch – recall on Friday we discussed valuations and how they are stretched…and how the RSI’s are suggesting ‘overbought’ as well.

On Friday morning – the S&P was only kissing it, by Friday’s close it has pierced it. The Nasdaq and Mag 7, which were already in overbought territory, only pushed further into the abyss….. And while that alone is not a reason to sell, it is a reason to ‘proceed with caution’. YTD – the Nasdaq is up 17% while the Mag 7 is up 20% - again, not saying they can’t go higher, I’m just waving the warning flag….If you are properly invested – then you are in already, you are participating – there is no reason to have a FOMO moment with new money.

If you’re just starting out, you’ve got to jump in at some point — so start slowly. No need to go crazy. Remember what I said Friday: the Dow, the Russell, and the Transports aren’t in overbought territory, and their RSI’s aren’t flashing “buyer beware.”

Of the 11 S&P sectors, only Tech and Communications are stretched on the RSI scale (XLK at 72.5, XLC at 78.6). The other nine? Nowhere close. That tells you there’s opportunity in other corners of the market. In fact, Consumer Staples (XLP) — boring, yes — are drifting closer to “oversold” territory. Reminding us that sometimes boring is beautiful.

Now what isn’t boring (besides Tech)? Nuclear! It has quietly become a hot space…… OKLO – the latest name to explode higher….is stealing the headlines….. The stock is up 536% ytd. NLR – the Van Eck Nuclear Energy ETF is up 69% ytd…individual names – SMR + 160%, LTBR + 286%, GEV + 89%.

Now eco data this week is full of potential surprises…. we will get both S&P Manufacturing and Services PMI’s…. both expected to still be in the expansion zone at 51.9 and 53.9 respectively. (50 is the dividing line). New Home Sales expected to be down 0.3%.

On Friday- LEN (Lennar Homes) fell nearly 6% (taking that stock into negative territory ytd) after reporting that their forecast for new homes in the 4th qtr. fell short of estimates – citing a tough housing market - and that caused the XHB (Homebuilders ETF) to fall by 1.4%. Every name in the sector came under pressure. Prices are starting to fall (which is not a bad thing because they too are stretched) – something we have been discussing for months now….But don’t forget – homebuilders can lower prices and sweeten deals by offering all kinds of ‘extras’ to attract buyers, Existing home sellers can only cut prices to attract buyers – so let’s see where this goes. Existing Home Sales due out on Wednesday are expected to be down 1.4%.

Building permits, Retail inventories and the 2nd qtr. final revision to GDP which is expected to remain at +3.3%. Personal Income and Spending expected to be +0.3% and +0.5%. But the biggie will be Friday’s PCE Price Index m/m and y/y and that is expected to be +0.3% and +2.7% respectively. Should that number come in ‘hotter’ you can expect all kinds of commentary around what’s next? Does that change the plot?

And then it will be month end and qtr. end, and the start of the 4th qtr. 3rd qtr. earnings season is the next big event and that begins in earnest on October 14th.

Bonds did nothing and yields were unchanged… The 10 yr is at 4.12% and the 30 yr is 4.74%. But after lasts week’s rate change – my Fidelity Gov’t mm fund has now slipped below 4% and is currently paying a 7 day yield of 3.96%...as rates go lower, this will too and that will cause money that has been sitting in these funds, getting paid 4.25% + to find ‘another home’. Capisce?

Oil is down 14 cts at $62.50 and is now below trendline support at $63.06. This once again puts $61.50 in the bullseye (the August lows).

Gold continues to bounce around – it was up $41 on Friday and is up $40 this morning at $3726. Analysts are saying there is still room to run as gold bugs await this week’s PCE report and what that might reveal about the future path of rates. In addition – you have massive global central bank buying as well as concerns over the dollar as the reserve currency. And while all that’s true – it still feels a bit ‘toppy’ to me.

US futures this morning are taking a break…. Dow futures are down 124 pts, the S&P down 15, the Nasdaq down 65 and the Russell is down 2.

European markets are also lower. Spain down 1% while France is only down 0.3%. On Friday – Trump signed an order to raise the H-1b visa application fee to $100k (up from ~$2000). This visa allows employers to temporarily hire foreign workers in “specialty occupations” (where they can’t seem to find American workers) — jobs that typically require a bachelor’s degree or higher in a specific field, to fill roles where highly skilled workers are needed — common fields include technology, engineering, finance, medicine, and academia. That is causing a bit of angst today, but tomorrow it will become old news.

S&P closed at 6,664, up 32 points – once again making a new high. Tik Tok is apparently now in American control (think ORCL, Silver Lake and Andreessen Horowitz) – 7 seats on the board, 6 will be American, 1 will be Byte dance. The algo will be licensed by China but controlled by us (supposedly) and will be ‘retrained’ under US supervision. Ok – let’s move on.

Remember – Investing is exciting and frustrating at the same time. It’s about ‘the plan’ – make sure you have one. It’s about time in the markets, discipline, and risk management.

Chicken piccata - Delish

For this you need: Thin sliced chicken cutlets, capers (rinsed), 1 large lemon cut in half, fresh parsley minced, 4 cloves garlic sliced, 2 shallots, diced, ½ yellow onion – diced, 1 cup flour, chicken stock, 1/4 cup dry white wine, butter, olive oil, s&p.

Mix the flour with the s&p in an aluminum dish. Dredge chicken cutlets in the flour and set aside on wax paper.

Heat a large sauté pan to medium heat for 2-3 minutes, then add a splash of olive oil and a ¼ stick of butter. When hot, sear the cutlets in the pan until just done (approximately 2-3 minutes total) then set aside on a plate. Repeat until you have cooked all the chicken - using more olive oil and butter as required for each batch.

After all the chicken pieces are cooked turn heat to low and add the garlic and shallots into pan. Sauté for 1 minute then add the capers and cook for 1 minute more.

Next – add the wine, allow it to steam away the alcohol, then add chicken stock, and lemon juice to the pan and turn heat to high. With a wooden spoon scrape the bottom of the pan – bring to a boil and then turn heat down to medium.

Add ½ stick of butter and melt. Now add a tsp of the flour to the sauce. Using a whisk, stir the sauce to emulsify. Taste test and adjust salt, pepper, add more lemon juice IF required.

When satisfied with the taste of the sauce, Put the chicken back in the pan and gently coat all pieces. Cook for 2-3 minutes to warm through. Turn off heat and add the parsley. Serve immediately on warmed dishes with roasted potatoes and a large mixed salad.