I feel the earth move’ (under the AI trade!), Bonds surge, Gold falls

And that is what happened yesterday…. at least if you were standing in the middle of the AI trade. The Nasdaq shook, the chips crumbled, and traders and algos scrambled to find firmer ground.

And yes, what a difference a day makes…. On Wednesday, traders and algos piled back into technology, encouraged by SpaceX’s results and betting that the next round of earnings would reinforce the AI growth story. After the recent selling, they saw an opportunity to buy the dip—and the Nasdaq rallied 1.05%.

But then yesterday happened…..the enthusiasm went ‘POOF’! META’s earnings beat initially encouraged buyers, but after everyone had a chance to digest it all…. they all asked the same question…. When will the investment produce enough profits to justify the prices we were willing to pay?

TSLA’s reduced spending plans raised a different concern - Why slow the pace of spending (if demand is so strong) and what will that mean for demand across the AI supply chain? Add disappointing reactions to Lam Research and IBM, then throw in another spike in oil, and suddenly Wednesday’s rebound not only looked vulnerable – it was vulnerable – and before you know it…. There was blood in the water.

By the end of the day – the Dow gained 11 pts – essentially unchanged – which was a win…the S&P lost 1.3%, the Nasdaq got smushed – losing 2.6%, the Russell ended flat – again that’s a win, the Transports added 371 pts or 1.9%, the Equal Weight S&P gained 0.6% while the Mag 7 lost a whopping 1270 pts or 3.4%.

And who was driving that bus? The speed and ‘violence’ of the move points to short-term traders, leveraged traders/leveraged ETF’s and momo algos going all in one day and then going all out the next in a swift and rapid unwinding of a very crowded trade.

Tech lost 3.3%, Chipmakers (SOXX) plunged nearly 7% - every member in that ETF ended the day down, Disruptive Tech fell 4.2%, the Memory names lost 7.1%, Quantum names down 3.5%, Communications down 1.4%. The Nasdaq saw 342 new LOWS vs. 82 new HIGHS.

But guess what? It was not a total disaster at all (unless of course your portfolio is nothing but tech) Financials gained 1.1%, Utilities gained 2.1%, Consumer Staples surged by 3.3%, Healthcare up 1.3%, Basic Materials added 0.7% while Real Estate added 1.1%. Homebuilders up 3.7%, Retailers up 2.9%, & mortgage names like RKT + 5.6%, COMP + 2.7%, & ZG +8.4%. And if you bet against TECH – you won! The PSQ (Nasdaq short) rose 2.9% while the SPXS (S&P short) rose by 3.6%.

In the end – the breadth of the market was significantly better than what you may think…. At 1 pm more than half of the S&P names were HIGHER, even as the index was suggesting otherwise (and that is a direct result of the tech weighting in the index). There were 40 new 52-week HIGHS vs. 4 new LOWS….

And the SMIDS (Russell small and mid-caps) found safety in lower bond yields while the Transports were the standout – up 1.9% - and you can thank the railroads.. Union Pacific kicked it off with a strong quarter: adjusted EPS of $3.53 vs. the expected $3.47, carloads up 6%, UNP jumped 3.5%, CSX was up nearly 7% and NSC added 2.5%.

The irony here is that higher oil prices that are causing all kinds of problems for the truckers, are a tailwind for the railroads. With diesel at a record $6.53 a gallon in September and trucking capacity shrinking, shippers are moving freight off the highways and onto the rails. UNP’s CEO Jim Vena laid it out…. when fuel prices go up, “it’s naturally an advantage.”

Add in the fact that the Transports are price-weighted, (just like the Dow) so high-priced names like UNP have an outsized impact on the index, plus the rotation out of tech (at least yesterday) caused investors to find opportunities in the transports. In the end – while traders and algos are in panic mode over the AI payoff (which I think is ridiculous), the rails gave long term investors something to celebrate.

Now, did you see what happened to bonds? They caught a HUGE bid…. the TLT up 1.9% while the TLH gained 1.7%.....the 10-yr yield plunged by 19 bps to end the day yielding 4.95% - yes 4.95% (not 5.95%) …the 30 yr fell 15 bps to end the day at 5.29% - these moves were the biggest daily drop since August 2025.

Why you ask? A RUSH to safety…. As the AI and chip names got hammered, - money also found comfort in treasuries. Concerns about France’s finances, and fears that $110 oil slows growth more than it fuels inflation was just another piece of the puzzle.

The Fed narrative shifted too. Futures now price the odds of an October hike at about 9%, down from 37% next week, and a December hike went from 87% to 77%. The FOMC rate decision is next Wednesday. While lower yields are good for stocks – be careful here…. Yields didn’t fall because the inflation picture suddenly improved; they fell because investors got scared and that is a distinction that matters. Remember – we are in blackout mode – so do not expect to hear much from the team. Watch the WSJ or our friends at GS for any updates to the thinking.

And here is the twist – OIL rose yesterday….and that would normally put pressure on bonds sending yields higher…..but that argument got turned on its head as investors demanded protection…. (remember - US treasuries are the ultimate safety trade). WTI was up 2% yesterday and is up another 1.7% today and is trading at $101.20. I pointed this out yesterday…. fresh Houthi attacks on Saudi Arabia and reports of possible renewed US-Israeli strikes on Iran continue to send oil higher all while traders (and the markets) are adding a bigger geopolitical risk premium to crude.

Gold which has trending lower but still stuck in the $4,000/$4,250 range – finally broke today…. piercing $4,000 to trade as low as $3,986 as gold bugs continued to sell gold – which is also contra to econ 101…..Lower bond yields would normally cause gold to rise – but that is not what happened. My sense is that investors are repositioning…. raising cash as the tech rout continues…. going from a non-paying asset to the safety of treasuries that are paying you 4.95% to own them. Remember – gold is nice and shiny, but it does NOT pay you in turbulent times.

Eco data today – includes October preliminary S&P Manufacturing and Services PMI’s – both expected to remain well into the expansion zone. We will also get the U of Mich Sentiment surveys – which are expected to remain unchanged.

There are no earnings today – just a bunch of stocks going ex-dividend.

European markets are all lower…Germany down 0.8%, France down 0.7%, UK down 0.5%, Italy down 0.4% while Spain is off 0.2%.

US futures are under pressure…. The Dow down 300 pts, the S&P down another 15 pts, the Nasdaq is struggling to hold the line while the Russell is down 13 pts. It is Friday, it’s been a tough week, I would not be surprised if we ended the day weaker.

The S&P closed at 7,663, down 94 pts, on the south side of the trendline that offered zero support.. We are now just 60 pts away from kissing the intermediate trendline. If S&P futures continue to be weak, I would not be surprised if we tested it…. The key will be what happens next……Will it fail to hold or not…. A failure will see a swift move even lower as the algos go wild……. the chart says 7500 ish…. And just FYI – even if we test 7500 – the S&P would only be down 4.3% off the October high of 7844 – that is not a disaster.

Drunken spaghetti

So, you ask – drunken spaghetti?  How so?  Well – you cook it in water and red wine – a nice Chianti or “vino di tavola” (table wine).  No need to use an expensive red – go out and buy a chianti.   The trick is that you add equal parts of water and wine – bring to a boil and add the pasta – cook for 7 mins and then strain – reserving a mugful of water/wine.   You then finish it off by sautéing in a pan with butter, garlic, pancetta and ½ cup more of the wine…. read on…