TME kicks us off.
Market recovered. Leadership didn’t
The Nasdaq has rebounded sharply from last week’s panic, but many of the market’s most sensitive AI trades are still struggling to confirm the move. Credit, high-beta technology and several former AI leaders continue to lag, suggesting the latest rebound remains narrower than headline indices imply.
NASDAQ
The Nasdaq has retraced roughly half of Tuesday’s large bullish candle. This is the first short-term support to watch while the index remains trapped inside the 28,800–30,000 range.
Source: LSEG Workspace
Tech laggard
NDX put in a huge up candle 2 sessions ago, but tech remains a laggard vs SPX.
Source: LSEG Workspace
Skeptical credit
Yesterday we highlighted early signs of stress emerging in the credit market. That divergence has widened further, with hyperscaler CDS spreads continuing to widen despite the recent rebound in Nasdaq futures (inverted in the chart).
Source: LSEG Workspace
High beta still lags
The stuff that led the AI mania higher remains trading relatively muted compared to the overall market.
If leadership starts to recover, the broader rally becomes considerably more convincing. Until then, the burden of proof remains on the bulls.
Source: LSEG Workspace
BTIG sums it up perfectly.
Not Overstaying Our Welcome.
- Today is day six of the rally in semis/momentum off last week’s lows. As we discussed in ‘Anatomy of a Bubble’, the median recovery after the first impulse down following a boom/bust top is +35% over 14 trading days.
- Currently, high-beta momentum has rebounded ~25%. A test of the 50 DMA would represent ~32% rally off the lows, and also retrace 61.8% of the decline, in-line with historical averages. At this point we would be taking precautions for another leg lower in momentum.
- RSP Vulnerable. The equal-weight S&P 500 (RSP) has already benefited from an unwind in the momentum trade. From 6/22-7/29, five sectors gained 4%+, and ‘Mag7’ just rallied more than 10% off recent lows. Therefore, if we do see another leg lower in momentum, it’s likely to be a higher-correlation selloff rather than a rotational affair.
- Mag7 Already Surged. ‘Mag7’ just had its largest 4-day rally (+9.8%) since the spring of ’25. However, that was coming out of a -33% drawdown vs. -11% currently. So the forward returns are likely to be far different in the near-term.
- Keeping it Real. 10yr real rates holding above their multi-year breakout level (2.35%). Markets seem okay with them for now, but any spike above ~2.50% could be an issue.
Correction: is an issue. It is the whole and only issue as the Iran war stokes further oil price inflation and El Niño develops.
While Arthur Warsh takes repeated calls from the Madman but refuses to give any guidance, pulling the rug right out from under a twenty-year pampering. Goldman.
Fed Chairman Kevin Warsh has argued that providing less information about then Fed’s reaction function will prompt financial market participants to evaluate the state of the economy on its own terms, not filtered through the lens of likely
FOMC responses.
He would like markets to “learn to play the ball, not the referee” and thinks that this will enable the FOMC to obtain more “direct and unfiltered” information about the economy from markets.
The problem with this approach is that participants in short-term interest rate markets—where Fed communication matters most—price what they think the Fed will do, not what it should do.
This remains true if the FOMC provides less information about its reaction function, except that markets will then be more error-prone.
Such a shift will not provide policymakers with more reliable information. It could, however, lengthen the lags of monetary policy and introduce unnecessary volatility into financial conditions and the real economy.
Maybe. The problem is more basic. Even though he comes to the job with the greatest load of corrupt dovish baggage of anyone since Arthur Burns, he has not proven his inflation-fighting credentials while he is removing any guidance at precisely the wrong moment to prove them.
This risks the Fed losing control of the long end, ala Japan, as the Persian Gulf crisis and a super El Niño refuse to go away.
If/when Trump loses his shit around the mid-terms and puts the republic in jeopardy, the US could face a rerun of its incipient Liberation Day little EM external crisis, and who’s going to save the day with the unknown and QE-intolerant Arthur Warsh at the helm?
The political trashing of the republic and American prestige could be matched in the Treasury market, and stocks will crash.
