Tech Gets Punched, AI Debt Fears Grow, Oil Pierces $100 Forcing a Flight to Value – Try the Lemon Chicken

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Things You Need to Know

• Ouch! Tech gets punched in the face. CRWV becomes the poster child of the AI spending boom and the mounting fear over rising debt levels.
• Bonds rose on the week – yields are now down 30 bps off their recent highs.
• Oil pierced $100 – as the middle east conflict heats up – just 2 weeks ahead of the mid-terms.
• Earnings from Industrials, Basic Materials and Regional Banks all on deck.
• Try the Lemon Chicken.

Stocks got whacked again on Friday… and if you were surprised, you haven’t been paying attention. This has been building for WEEKS.

But investors weren’t selling everything. They were selling the expensive, crowded parts of the market… and rotating into defensive names. 5% Treasury yields. Stubborn inflation. Oil that refuses to cooperate. And growing worries about just how much money is being poured into the AI revolution all finally forced investors, traders and the algos to ask one question… how much are we REALLY willing to pay for growth?

On Friday, the answer was loud and clear.

At the end of the day, the Dow lost 0.3%, the S&P fell 1.1%, the Nasdaq gave up 2.1%, the Russell lost 1.7%, the Transports gave back 1.1%, the Equal Weight S&P lost 0.4% while the Mag 7 lost nearly 2%.

For the week – the DOW gained 0.7%, the S&P lost 2%, the Nasdaq got CRUSHED down 4.5%, the Russell gave up 3%, the Transports gained 1.6%, the Equal Weight S&P added 0.8% and is up 3.7% since Oct 1^st…, while the Mag 7 lost nearly 4%. The VIX surged more than 20%, piercing the long-term trendline at 18.18 to trade above 22 before settling up 3.53 at 19.99.

And if you look – the headlines would have you believe the sky is falling. It’s not. Look at Friday’s sectors:

Winners: Energy +2.5%, Utilities +1.4%, Consumer Staples +1.3%, Aerospace & Defense +1%, Materials +0.7%, Financials +0.5%, even Real Estate +0.4%.

Now, yes, there were plenty of losers – Technology -2.5%, at the top of list, but if you dug a bit deeper – many of the subsets got hit as well. Semis got slammed again – down 4.2%. AMD – 6%, QCOM – 3.5%, AVGO – 4.5%, MRVL – 5.5% while NVDA only lost 1.4%…..Software -4.8%, Cybersecurity -4.5%, ARK Next Gen Tech -4.4%, Memory names – 5.8%, Quantum got SLAMMED, with IONQ, RGTI and QBTS all down more than 7.5%. Communication Services -2.5%, Discretionary -1.2%, Homebuilders -0.9%.

So, what does it all mean? It means … that investors are getting much more selective. Selective about what they own, what they’re willing to pay, and maybe most important, how long they’re willing to wait for the bell to ring.

And the weekly growth vs. value story makes it very clear…..for the week – the Growth Trade (tech) lost 4.4% while the Value* Trade ended the week UP 1%. Note the names in the Value Trade include – XOM, CVX, UNH, COST, WMT, PG, AAPL, JPM, JNJ, KO, you get the picture.

* The value trade – SPYV – offers exposure to S&P companies with stronger value characteristics, based on their share prices relative to earnings, sales and book value.

Last week, we saw how one ‘story’ can cause an earthquake…. CRWV lost 12% on Friday and about 25% on the week. Investors started to question their debt load, which is now north of $50 billion, causing them to sell both the stock and their bonds – sending the 2031 bond to yield over 16% on Thursday – and that is raising questions about the cost of funding the AI build especially when it hits a name that everyone thought was immune.

NVDA CEO Jensen Huang tried to stop the bleeding – saying ‘all this is going to pass’ as he tried to encourage investors to look beyond the volatility and focus on AI’s long-term outlook. How’d that work out?

Now, the issue is not the AI trade, the issue is FINANCING – because with the FED in hiking mode, that story just got more expensive and as rates rise, the numbers will either work or they won’t.

And the funny part is that bonds actually rose last week – sending yields down.. the 10-yr yield is now down 30 bps from its high to end the week at 5.07, the 30 yr yield is also down 30 bps off their high to end the week at 5.42%., Now with both a HOT CPI and PPI – you ask, Why did yields fall? Because – money ran out of tech and the growth trade and into the very classic ‘safety trade’ – US treasuries, with ‘value’ being a bonus, not the reason.

This morning – the 10 yr is yielding 5.07% while the 30 yr is yielding 5.41%.

And oil – yeah, that didn’t help the conversation…..WTI settled above $100 for the first time in a month…and was up 10% for the week… The catalysts (plural): a missile attack near a key Saudi export port, a missile attack on the Saudi airport, intensified Iranian attacks in the Strait of Hormuz, and a Ukrainian drone strike that knocked out a major unit at a Russian diesel refinery…. Do I need to go on? This morning WTI is trading down $1.80 at $99.60 – but is still at levels that continue to fuel inflation.

Gold – began the week at $4,172 and ended the week at $4,165…. It remains stuck in the $4,000/$4,200 trading range. Yes, lower yields did give it some relief, but with the FED in play – Gold remains stuck in neutral and this morning it is trading up $10 at $4,175.

Eco data today is about the NAHB Housing index – not much of a market mover…..but tomorrow brings the Philly Fed Non-Manufacturing (Services) Activity report along with Housing Starts and Building Permits and Pending Home Sales. Later in the week – we get the October Preliminary S&P Global Manufacturing and Services PMI’s – both expected to remain in the expansion zone.

Earnings today include – GE Aerospace, Fifth Third and Cleveland Cliffs – representing Aerospace & Defense, Regional Banks and Basic Materials (Steel) all before the open. After the bell we will hear from Steel Dynamics, WR Berkley, Zions Bank and Western Alliance – representing Basic Materials (Steel again), Prop. & Casualty Insurance and more Regional Banks.

European markets are all lower…Spain down 1.3% while the UK is down 0.8%.

US futures at 4:30 am are all higher… Dow futures are UP 86 pts, the S&P + 46, the Nasdaq is up 340 pts, while the Russell is up 15.

The S&P closed at 7,659, down 84 points. That pierced the short-term trendline at 7,706, and it’s now about to kiss the intermediate trendline at 7,597. This morning, S&P futures are up 46 points… and that puts us right back at 7,706. So we’re going to find out early what the market’s made of.

Here’s the thing… what WAS support at 7,706 is now RESISTANCE. If we punch through and hold, some analysts will look at Friday as a “shake the branches” move to see who falls out of the trees. If we fail there, the sellers take back control. Then 7,597 gets tested, and if that cracks… 7,500 is next.

So watch 7,706. That’s the line in the sand and since the S&P and Nasdaq are approaching oversold levels on the RSI scale and the Russell is sitting right on top…. a bounce is not a surprise…

If you own high-quality stocks and maintain a diversified portfolio and have your near-term cash needs covered, you are positioned to ride the wave….. Review your portfolio and keep your time horizon in focus. A drawdown in the market does not, by itself, require a change in your long-term plan unless of course the overall thesis and tone changes. For now, it has not.

If you’d like to discuss your goals, evaluate the risk in your portfolio or simply get a second opinion, give me a call at 561-931-0190 or better yet – click on this link to connect. https://slatestone.com/contact-us/

I’m always happy to provide a complimentary portfolio review and risk assessment.

Take good care,

Kp

[email protected]

Source: Bloomberg, CNBC, Reuters, Wall Street Journal

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