What are you most focused on when you look at the charts now?

Well, I think we have to look at trends and then where the extension of those trends were and set up for the seasonality and then the bounces.

So you have a lot of reactions today, obviously energy down.

And let's just keep in mind the energy trends are still very, very much in place.

We'll see how durable this is.

I know there's a nice knee-jerk reaction today, but let's watch for the durability, sustainability of that.

I suspect they get oversold and they'll start to retrend again.

And NVIDIA is the only of the mega caps that's giving some back.

You look at the charts and you see what?

I see two different markets.

I see an equal weight S&P that's overbought.

I see a cap weighted S&P that's kind of middling here.

I see tech hardware and semis in particular being oversold and set up for a nice bounce into the end of the month and probably a decent part of November.

But I see a lot of churning going on, and we think that we've got to shift towards defensives.

So despite what we see in the very near term, which I think is some relief in the tech sector, I think the market has made its call, which is defensives are going to have a much bigger place in the return function of the market going forward.

So what do you see in terms of that relationship?

Why are people short selling right now?

Well, I, I don't know what their narrative is, but look, keep in mind that this is the post, uh, the, the, the, the post environment of a bubble situation.

And people can debate bubbles.

We have a quantitative way that we measure it.

It triggered in our work, and, uh, it just says to us that, hey, you get an initial crack, which we had, and that really played itself out through, you know, roughly August.

Uh, you tend to get a, a, a rebound that, that is anemic.

Uh, that's exactly what we saw.

If you're an investor and you're concerned about this, where, what area should you be the most concerned about right now?

When you say you don't love the setup, what's wrong with the setup, do you think?

Well, there's a couple of things.

One, we hit on it earlier, which is government bond yield.

So our yield impact model, which there's a very good relationship between yields, both on the short end and the 10-year yield, and the forward returns for equities.

That's starting to hit that stress zone.

Now, I want to caution people.

What that really means is that you end up with flat returns over the next quarter.

have any intel on the momentum trade, where you think that's going from here?

D- does that mean that we have a pretty good runway between now and then if we've gone through the kind of de-leveraging event that that blow-up obviously showed, uh, and how the market's reacted since?

Uh, I- I- I would caution that.

I think we'll probably poke our heads through the 50-day moving average.

Again, something that's a 30% move, so depending on what stock that is, you know, there's probably maybe halfway to go on, on a lot of those others- other names off those lows.

And then, uh, you tend to drift, and then you tend to roll over.

And so, you know, from, uh, from my standpoint, one of the things that we've been, you know, urging clients for the last three months is you, you don't sell on the way up, you sell on the way down, but really what you do is you shoot them in the back.

In other words, [laughs] once they crack and they start to run away from you and they rally, we wanna start letting go of those names that aren't acting right.

... is, is, is primed to do pretty well?

What does that tell you?

Well, I mean, you're right, Scott.

We had a 4.2 standard deviation event between beta and momentum on, on, uh, Friday that was the largest that we've ever seen in the history of our data, which is the beginning of the S&P 500 back to 1958.

So, you know, it was, it was monumental.

Um, and I think it was a, a shot across the bow.

Um, you know, we've been concerned about the, uh, the, the, uh, the linkage between these two factors just because it was such a crowded trade.

And normally, I, I know it sounds odd, but normally beta and momentum are not the same trade.

Because as Jensen Huang was saying over the weekend, the memory shortage is gonna last for years.

How are you thinking about that as we may be inching towards a deal?

Well, yeah.

Look, you're gonna have some reactions.

You're gonna have some reactions from things that are oversold, uh, particularly weak charts, they'll bounce pretty hard.

I think what investors wanna do, and what we're advising our clients, is you wanna find things that were in good, established trends that might have gotten weak, uh, because of some of this dislocation.

But we're still able to maintain those trends and start to come around.

So, you know, we, we can play for bounces and, and some of these tactical moves, but that requires two very good calls.

... you're, you're, you're looking at it as a, as an opportunity here?

... curious as to how you would answer that question, but I, I used strong, uh, because I wanted to hear how you would address that.

Well, and there's no doubt that there are pockets of this market that are strong, right? And it's very, it's very, very narrow on that.

And you know, they always talk about the, the, the generals versus the foot soldiers, right? And that's kind of what we're in right now.

There are certainly generals in this market, and they're doing well, but c- how well can they do when the foot soldiers are, are really under pressure and under attack? And that's not a new phenomenon.

That's happened a lot.

Obviously it hasn't happened, uh, in the context of AI, but it did happen back, um, in 1999, 2000.

I, I don't think that we're there.

Wouldn't that hurt the energy trade?

Why, why so?

Well, you know, the, the way that we look at markets is, obviously the tape is the dominant, uh, the dominant factor, right? So whether we're dancing or not is really about the tape.

Is the tape moving in the right direction or not moving in the right direction? And right now, it's moving in the right direction.

Um, how confident we are in that direction has to do with the underlying, what we call conditional factors.

And, you know, one of the things we do every, every, the first of every month, is we update what we call our market cycle clock, which is really this juxtaposition between growth, uh, growth data and inflation data that we collect.

And, you know, right now it's in a zone that all the way back to 1948, we look at this data, um, and it's in the worst zone that you'd expect for forward returns for the S&P.

Um, that's because, uh, what we're seeing out of oil, and that's also because, you know, growth is kinda middling right here.

Uh, to a technician's eye and ear, w- what do you respond to that?

Are you a believer in what Tom Lee had to say as a result of that?

No, I don't think the levels are gonna do it, Scott.

Um, I certainly wouldn't use the narrative and rate of change of war.

Um, that's just gonna lead you down a, possibly a primrose path or at least a, a faulty path, so I'd be careful with that.

Um, you know, I think the, w- there's two things that we're watching today that I think are important.

One, uh, are bond yields, which are essentially flat, uh, but more importantly, what's happening to real yields, which are essentially flat.

You're gonna need real yields to come in for, for Tom's story to play itself out, and, and that hasn't really happened in a meaningful way here.

You go ahead.

Yeah

...

there, there are points where you don't wanna chase good charts, and one of the things that we've learned is that when momentum, so, you know, uh, a high momentum name would be a good chart, a low momentum name would be a bad chart.

When that performance differential is wide, uh, and right now it's in the 100th percentile going back 30-plus years, um, that's the point where you wanna be really careful about just pressing into good charts.

And so, you know, we think, uh, it doesn't imply a crash or anything like that, but, uh, it's just the point at which, you know, we can, we can predictably say, you know, quantitatively that that's the, the area where you wanna be careful of really, really strong trends and being underweight really, really bad trends.

And so, you know, we think that there's a certain vulnerability, and I don't know if it's, you know, the next week or the next month, but I certainly think it's at some point probably in this half of the year, um, where the good charts will be underperforming the bad charts in technology specifically.

This isn't the case for the entire market.

... a lot of these names down by tremendous amounts where people say, "This, this is kind of absurd." And then how do you know when it's deservedly so and there's a falling knife aspect to it?

And, Jeff, as you track, uh, you know, what's going into this churning phase that we're in in the markets, what the message seems to be from the tape, what do you come up with?

I think it's a market that's trying to find its own identity right here.

It's, um...

You know, it was, it was overbought.

We haven't had momentum now for probably a good six months.

We've had trend, and usually those environments are, you know, pretty typical of what we're seeing, which is, uh, things get hot for maybe a week or two, and then they cool off, and, um, you start, uh, just, you know, reevaluating and rotating.

And, uh, you know, there, there's not a real clear message from our standpoint.

And when you say that, for example, the private equity names, the alternative asset managers, were flagging, it- y- you meant that they were vulnerable, right? And so now they've come in, uh, a lot, d- uh, and, and yet, because banks are hanging in there, it doesn't really seem to be telling us anything nasty about the broader economy?

Why is that significant?

Well, look, regional banks are part of the lifeblood to small cap, right? So small cap tends to be much more dependent on regional banks and the benevolence of their local bankers.

And so seeing the breakout in small caps and the breakout in regional banks is good news.

It usually is also good news that the yield curve is not going to get out of control and that probably shorter rates are in the offering.

And then just to put a little pin in it, it suggests too that some of the concerns around auto loans and the credit quality of the loan books is probably in a pretty decent spot.

So there's a lot of messaging that can come from regional banks, and I think it's positive here.

Where's it going from here? What is it? What do the charts suggest?

Look, there's a graveyard at one end of Wall Street and a river at the other.

We talk about it all the time because the relationship that it has, not only in the AI trade, but to the, you know, underperforming relative to semis, for example, it still looks bad, according to you.

Yeah, it does.

We had confirmation.

We had a bearish signal that took place back in July, and we had confirmation of that just this last week.

And I know all the news circling around Oracle, but it's far greater than that.

And so until we can see the whites of their eyes that we think that there's some type of pause or some bottom forming there, We're just staying away from those names.

And I think refreshingly, the semiconductors have stayed firm.

But what do you think the charts are saying?

Is that what you mean?

Well, both long and short, right? So, yes, in a way, I think, you know, you look at things like transports.

Transports are breaking out, and that's everything from air freight and logistics to, I think, Southwest is breaking out today, some of the airlines.

Lyft has looked good for a while.

So, that looks good to us.

Actually, homebuilders look good to us, but building products don't.

You look at office REITs.

What does that mean?

Is anything getting knocked off course today in this action?

I don't think, of course, Mike.

I think actually what's interesting is some of these real, real high flyers, particularly in the Russell 3000, the Quantum names and some of the Uranium names and some of these things that just didn't seem to have any sliver of a bearish narrative are right at the edge of being oversold in a lot of our work.

So, I think that's good news.

And it's usually the point at which it starts to feel a little tense out there.

So, I like what we're seeing from that.

Look, I think this is an adjustment.

What are you seeing there in terms of durability and things like the health care move?

What about that, Jeff, the idea of these regional banks, top of the headlines, the alts? managers top of the headlines the stocks of all of those together are not trading well

no doubt about it i mean i i don't worry about the regionals so much i i think there's a little bit of a disconnect there the the alts are far more advanced in terms of a topping pattern um you know as mike said is this a false alarm is this uh issue specific to first brands and the like We'll see.

Clearly, the growth in credit was from the private side over the last 10, 15 years.

If you're going to look for a spot where there might be trouble and maybe a little lowering or lack standards, I think that's exactly where you'd want to look.

Look, personally, we're short these things as the hedge against the bullish call, but keep in mind, I mean, perversely, if it is bad enough and it gives the Fed more fodder, that's, again, still good for these stocks, particularly these concentrated stocks, as this kind of blue sky narrative continues to play out and probably build.

Yeah, don't fight the Fed

Now it's $5,000.

Yeah, look, I think gold is certainly in an uptrend.

They look pretty good, you suggest, from the charts.

100%, Scott.

I think unlike what we're seeing here in the States, which these AI names have been leadership now for two or three years, you're just seeing these big base formations in China start to break out.

You can make the case that they're really just starting this journey after these long consolidations and frankly, a bear market that went on after the 2020 peak.

I think they're set up really, really nicely.

Obviously, I am all for the US winning the AI war.

But certainly, we haven't won it yet.

How do we deal with that when we just look at charts that look okay?

I mean, there needs to be a lot of momentum against a backdrop, frankly, fundamentally, that at least as it relates to the vehicle sales, not good.

Yeah, there's something else going on there.

So I don't think it's one for one vehicle sales in the markets finding something else to obviously add to.

We're not in the narrative business.

We're in the, you know, let's listen to the market business.

And clearly the market is impressive in terms of the price performance.

And We're not in a state right here in the market where breakouts are dangerous.

But Alibaba had new news this week, and you like this chart too?

It's the big moment of the week and arguably holds the key to what Mike Santoli is wondering.

I think that's right.

I mean, obviously, there's a lot of focus on NVIDIA.

We have it as a slight disappointment, so we'll see how that plays out.

It tends to, about 65% of the time, it tends to beat earnings.

But what's funny is the reaction is not 65% of the times it's up, right? So the game within the game is a little trickier, and we think there's some disappointment there.

We'd be favoring things like CrowdStrike that reports the same night.

And I noticed from the charts that you sent us, you are looking at China as well for a breakout.

What about the so-called lower quality nature of parts of this rally? I mean, what what are the charts tell you we should be thinking about?

Well, I'll tell you, I just got back from vacation and I went through a bunch of charts today and I was really shocked.

In fact, I was talking to my group about this, that there are a lot more shorts that I'd be interested in getting on the other side of here than I've seen in probably six months or so.

And so probably longer than that, frankly.

But it's everything from, say, Chipotle to Salesforce to Intuitive Surgical.

Lilly just created a big top, even though I think it bounces.

So I do think that this is a bifurcated market that's probably great for hedge funds.

And this thing looks like it's heading in one direction.