When markets bite off more than they can chew

Let’s be clear — the trading technology that exists today, the speed at which it happens, coupled with increasingly complex trading vehicles that react with little to no consideration for fundamentals, is responsible for much of the blood on the street. And that’s my take.

Now, set the stage - Lights dim, curtain goes up and there he is – Frankie. The crowd applauds, women faint and so it is…..and then the music starts, the song is familiar and the crowd roars…..all very dramatic.

“And now, the end is near, And so I face the final curtain.

And then here is the kicker –

“Yes, there were times, I’m sure you knew, When I bit off more than I could chew, But through it all, when there was doubt, I ate it up and spit it out, I faced it all, and I stood tall, And did it my way…..” - My Way – Frank Sinatra - 1969.

And there it is — all of this AI stuff and the excitement it created now feels like we may have bit off more than we can chew. The narrative is changing. AI that was supposed to assist in the workplace is now, apparently, eating us for lunch — just look at the latest Anthropic headlines. But can we really be surprised? The Jetsons predicted this decades ago. Still, I am not convinced that today’s negative headlines suggest the end is near.

The reality is that the AI theme continues to grow and evolve, and companies are spending money like there is no tomorrow in order to stay in the race. Last year, that was fine. Massive capex allocations were met with excitement and surging stock prices. This year? Suddenly it’s a problem. Those same spending plans are now being met with plunging stock prices and talk of disaster. What’s interesting — and frankly ironic — is that investors were happy to bet on AI disrupting entire industries, but didn’t really consider the amount of money required to pull this off.

And not surprisingly, the trades became crowded. Everyone piled in — some methodically, others more haphazardly.

Algorithms amplified the excitement on the way up — you could practically hear the cash registers go cha-ching. But when the narrative changes, they amplify the angst on the way down, and it gets ugly fast.

And sooner or later, it always does. Those same algorithms don’t stop and think. They don’t sit around an investment committee table to discuss, assess, or debate earnings reports or capex plans. They don’t care about the story. They simply switch positions — from buy to sell — amplifying anxiety in the process.

They are great at accentuating the positives. And they are brutal when they accentuate the negatives. Right now, they are accentuating the negatives. Every headline is viewed through a bearish lens. That negativity causes sell algos to ramp up while buy algos step back, creating a void in prices. It’s all very orchestrated — and it creates that unmistakable sucking sound. And when the trend breaks, it breaks hard.

Algorithms respond to price, volatility, momentum, and liquidity. When those signals flip, they all flip at once. What was fuel on the way up becomes an accelerant on the way down. Leadership breaks, selling becomes indiscriminate, and exposure gets cut — especially in the most crowded, “have-to-own-at-any-price” names. That’s how euphoria turns into anxiety — and why moves become exaggerated.

Then the momo guys — double and triple leveraged — pile in and hit the sell button too. And margin calls? That’s where the sh*t really hits the fan. When the bank calls and says, “This is a margin call,” you have two choices: add more money, or hit the sell button. Most people hit the sell button — only exaggerating the move lower.

And we haven’t even discussed correlation. When one stretched asset class — like tech — gets punched in the face, other stretched asset classes get dragged down too. In this case, think crypto and commodities. Come on… you had to know that. The cycle continues, and the pendulum always swings too far to the right (overbought) and then too far to the left (oversold). We’ve seen this movie before.

So let’s look at the RSI — the Relative Strength Index.

The S&P and Nasdaq are sitting just above oversold territory — which makes sense. The Russell and Equal-Weight S&P are in the neutral zone. Meanwhile, the Dow and Dow Transports are kissing the overbought line. Yes — the overbought line. And that makes sense too.

Money has moved out of growth (SPYG -4%) and into value (SPYV +3.3%). Look at sector performance year-to-date: Industrials +8.5%, Energy +16.7%, Consumer Staples +11.9%, and Basic Materials +11.3% — all considered defensive, value-oriented plays.

So yes, it was another down day as the rout in tech, crypto, and commodities deepened. We can debate the reasons all day — it’s like beating a dead horse. Instead, let’s look under the sheets.

Yesterday, the Dow lost 592 points, or 1.2%. The S&P fell 84 points, or 1.2%. The Nasdaq dropped 364 points, or 1.6%. The Russell gave up 46 points, or 1.8%. Transports lost 169 points, or 0.9%. The Equal-Weight S&P fell 74 points, or 0.9%, while the Mag 7 shed 596 points, or 1.8%.

Crypto was ugly. Bitcoin traded near $60,000 overnight — a 52% drawdown. Ethereum hit $1,736 — down 64%. Solana tested $67.50 — a 73% drawdown.

Gold lost $183, or 3.7%, leaving it down 16% from the highs. Silver fell $14, or 16.6%, and is now down 47% since last week.

OK — now pull back the sheets. Because this may surprise you.

The Dow is only down 1.1% from its high. The S&P is down 2.8%. The Nasdaq is down 6%. The Russell is down 6%. The Transports are still making new highs. The Equal-Weight S&P is down less than 1%. And the Mag 7 is down 6.7%.

All of that is well within what is considered a normal trading range.

Now, some of your individual names — and we all have them — may be down more than that. I can name them if you want. But you have to step back and look at the whole picture — your entire diversified portfolio. Assuming you have a diversified portfolio, you should not be panicking.

My diversified portfolio is down 2.5%. That’s a far cry from any single name. And yes, I own tech and crypto (missed the gold play). But I also own the boring stuff that’s holding the portfolio together. Capisce? And THAT is the lesson. Period. Full stop.

Bonds surged yesterday. TLT was up 1.1%, TLH gained 0.9%, as markets started to believe the Fed may have to reconsider. Yesterday’s economic data came in a bit weaker than expected — JOLTS showed job openings plunging, and Challenger job cuts pointed to a surge in layoffs. The 10-year yield fell 9 bps to 4.18%, while the 30-year fell 7 bps to 4.84%.

And by the way — that’s good for stocks. Lower rates support risk appetite. Unless, of course, you believe rates fell because the economy is in trouble — an argument I do not subscribe to.

Oil fell $2, or 3.1%, yesterday to $63.29. This morning it’s up slightly at $63.35 after a wild overnight range between $62.31 and $64.58. It remains locked in the $61.10–$66.20 range.

Gold is rallying today — up $105 to $4,883 — trying to stabilize after a dramatic move off the highs. It remains in a wide $4,544–$5,050 range.

The dollar continues to inch higher — up 19 cents this morning at $97.84 after trading as high as $97.95. It’s getting closer to key trendline resistance at $98.50. A move up and through that level would light a fire under the dollar and continue to reprice precious metals, adding volatility to an already volatile complex.

European markets are modestly higher — better than lower. As expected, the BoE and ECB held rates steady.

U.S. futures are higher: Dow +170, S&P +39, Nasdaq +172 — and that’s with AMZN quoted down 8%, while the Russell is positive.

The S&P closed at 6,798, down 84 points. We’re sitting right on intermediate trendline support — the same level that held back in November when that trendline was closer to 6,534. It held then, and my gut says it holds today.

Look — anxiety is high. Nerves are shot. Geopolitical drama and domestic political noise are deafening. But it’s mostly just noise — and noise does not price stocks over the long term. My view: this is overdone.

This is the moment to keep your head on straight. It is not the time to panic. For long-term investors, this is the time to go shopping. A lot is on sale.

Try the spaghetti arrabbiata

Ok – now this is getting a bit ridiculous….and a lot of people are getting angry – so naturally it’s time to whip up a fan favorite - the Arrabbiatta sauce!

Angry, oh boy…..…..this sauce is simple to make and gets it anger from the red chili pepper… You can serve this with any type of pasta you want - but spaghetti or linguine is best.

You will need: olive oil, onion, garlic, red wine, sugar, crushed red pepper (or chili peppers if you want hot, hot, hot), lemon juice, oregano, s&p, crushed tomatoes, tomato paste and chopped parsley…

Bring a pot of salted water to a rolling boil.

In a large pot (or deep sauté pan) on med-hi - heat up olive oil and garlic… sauté a bit - but do not burn - 3 mins or so... now add sliced onion and sauté until soft - like 5 mins more. Next - add 1/2 cup of red wine, 1/2 tbsp. of sugar, fresh squeezed lemon juice (about 1 tbsp.), oregano, bit of tomato paste and a 28 oz can of kitchen ready crushed tomatoes (not in puree - just crushed tomatoes), crushed red pepper (or crushed chili pepper if you prefer) - bring to a boil and then reduce to simmer and cook for 15/20 mins...

Add the spaghetti to the boiling water and cook for 8 mins or until aldente - strain - reserving a mugful of the pasta water. Return pasta to pot and add back about 1/4 cup of the pasta water to re-moisten. Stir… Now add pasta directly into the sauté pan with the sauce - toss well - add a handful or two of grated parmegiana cheese and serve immediately in warmed bowls. Enjoy with a nice bottle of Brunello di Montalcino. Always have extra cheese on the table for your guests.