Stocks are treading water, moving sideways, and the VIX remains very elevated. The primary culprit of the fall in momentum is the Fed’s rhetoric that further rate cuts are less likely. This hits the historically high equity valuations hard. This is problematic since the primary source of high valuations in the indexes is Mega Tech, and as those heavy positions pull back, it creates an outsized move in index prices, and as indexes sell down, they take the rest of the names with them. This is exactly the concern that we knew the unprecedented top-heavy index structure brought to the table.
The key to a turnaround in the situation will be ’s earnings this Wednesday. A positive surprise by NVIDIA and a recovery to new highs there, now down 12% from its all-time high, would re-energize the entire market. The news that major investors have sold their entire NVIDIA positions (Softbank, Peter Thiel) has put a chill on the shares, as have concerns about the circular financing agreements among the builders of the massive data center buildouts, which are the big buyers of NVIDIA chips. If NVIDIA delivers strong beats and, more importantly, strong guidance, these concerns will be mitigated and the AI theme will be reaffirmed, leading the market higher.
As an example of how powerful moves by major investors can be, today we learned that has taken a $4.9B position in , lifting the shares 4.6% (+52.9% YTD). This move, along with a 3% rebound in has lifted the Magnificent 7 into the green today, while the other names are down.
Interest rates are stable today with the US 2-year flat at 3.61% and the 10-year down 2 bps to 4.13%. The bet on a December cut is modestly lower at 39%. The US dollar index is higher at 99.4. We have started to get government economic data, on a very delayed basis, with the August construction spending reported at +0.2% and the July number revised from -0.1% to +0.2%. It’s not clear how long it will take for all the data to become current again following the end of the record-setting government shutdown. The FAA has also ended mandated flight cuts today.
On the commodity front, we find gold and copper softer, silver modestly higher, and crude oil and natural gas slightly red. The sell-off in crypto, which has taken the most damage from the cautious Fed, seems to have reached a current equilibrium level, with Bitcoin at $94K (-11.7% in a month). Bitcoin has entered the “Death Cross” where the 50-day average price has broken the 200 average price, which will either trigger a meaningful recovery or trigger further significant selling.
In addition to the NVIDIA earnings, this week will get earnings from retailers – , , , – which will give insight into consumer spending trends.