Sometimes the opportunity is a stock. Sometimes it is recognizing that the environment has changed before everyone else adjusts to it.
That is where I think we are today.
The S&P 500 bent again Monday but refused to break.
Buyers appeared after the early selling, breadth was not disastrous, and several groups showed relative strength. On price alone, there is still no compelling reason to declare the bull market trapped.
But underneath the indexes, the risk picture continues to worsen.
Oil is above $100.
The 10-year Treasury yield briefly crossed 5%.
High-yield credit has deteriorated, with HYG making a new low.
Breadth has already weakened substantially.
The Fed meets Wednesday with markets increasingly worried that another rate increase may not be a one-and-done event. And since Warsh prides in keeping markets anxiously captive in the dark, this will persist for the foreseeable future.
Yes, any one of those conditions can be absorbed.
The combination is what concerns us.
After all, markets have shown a tendency to prove who the real boss is when faced with an unruly, petulant new Fed chair.
Don’t believe me? Then all you have to do is look back to 2018 for the most recent example after JPow became Fed chair earlier that year and the 4th quarter correction which disappointed many investors that year.
All things considered, the opportunity right now, as I see it, is in optionality.
I want enough cash available to take advantage if the Fed triggers a more significant reset, yields retreat and strong stocks begin emerging from constructive setups.
We do not need to predict Wednesday.
We need to be ready for what happens afterward.
By preparing our stops as well as our watchlists for various reactionary scenarios which could play out in the weeks ahead.
THE TAPE
Monday was another example of why this market is difficult to describe with a simple bullish or bearish label.
Technology and semiconductors were under pressure as concerns about the pace and economics of AI spending resurfaced. Oil remained elevated. Treasury yields pushed higher. Small-caps continued to struggle.
Yet we still did not see indiscriminate liquidation.
Money moved toward pharmaceuticals, energy, cybersecurity and other pockets of relative strength. The major indexes recovered meaningfully from their early lows.
This looks more like sorting than surrender.
The distinction matters because sorting markets can produce excellent future opportunities—but they can also punish investors who assume every beaten-down stock is automatically a bargain.
I would rather identify the stocks institutions continue to support and wait for the market to give them a better entry.
BENEATH THE SURFACE
The dashboard is flashing more warning lights:
Breadth: Weak. Too few stocks are participating compared with what I would like to see in a healthy advance.
High-yield credit: Weakening. HYG making a new low is particularly important because credit sometimes detects deteriorating liquidity before equity indexes fully reflect it.
10-year Treasury yield: Briefly above 5%. That creates a genuine valuation competitor for equities and raises the discount rate on long-duration growth stocks.
Oil: Above $100. Persistent strength adds inflation pressure at exactly the wrong time for the Fed.
I become much more concerned when these deteriorate together than when any one moves against stocks temporarily.
Right now, enough are moving together that I am paying attention.
I’m also paying attention to the fact that relative strength in the Magnificent 7 (MAGS) steadied the S&P 500 and Nasdaq again today as well.
LEARN & GROW
One of the easiest mistakes in a volatile market is confusing a stock that has become interesting with one that has become actionable.
A sharp decline can make something interesting.
An oversold reading can make something interesting.
A bounce off support can make something interesting.
None of those justify you to buy it.
Action-ability comes when price begins confirming that buyers are taking control and the risk/reward becomes definable.
Remember, the market pays us for being right not for being first.
MIXER
I am increasingly watching whether the AI trade begins separating into winners and losers rather than treating everything connected to AI as one giant theme.
If semiconductor weakness persists while hyperscalers, cybersecurity, software and companies with demonstrable AI monetization hold up better, that would tell us the next phase of the AI cycle is evolving rather than ending.
That could become one of the most important rotations of the fourth quarter.
WORTH YOUR TIME
We just got to 7,000 back on April 13th or 106 trading days ago.
The message here based on past milestones is that it could take another year before that target threshold is crossed which has been average. That said, this market has no respect for mere average patterns like this.
So while this is interesting stat fodder, it isn’t actionable!
As long as the price action supports a run toward 8K, we think it is quite realistic to see it at lot sooner than the majority expect. Perhaps even this week.
But, we do need to see some of these early fall frowns turned upside down. :)
YOUR TURN
What would concern you more after Wednesday—the Fed hiking rates, or the Fed hiking rates and Treasury yields continuing higher anyway?
TO TAKE WITH YOU
A market does not have to be weak to become dangerous.
Sometimes the warnings arrive well before the major indexes finally listen. And sometimes when the warnings have already been priced in by the price action.
Which makes this week a lot more challenging than most for those pushing too aggressively in either direction.
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