With next weekend being a long holiday weekend…and I will be traveling…we will not be sending a piece out. We may send out a very abbreviated piece Wednesday evening…if there is some sort of significant “new-news”…or a big jump in volatility…next week. Otherwise, we’ll be back to our regular schedule after the 4^th of July……Thank you very much…and enjoy the holiday!

Table of Contents:

1) For the second time in four weeks, the tech sector fell 5% last week. What does it mean?

2) The groups we’ve have been bullish on continue to act very, very well.

3) South Korea’s stock market could be the canary in the coal mine.

4) The action in SoftBank’s stock is another candidate for the “canary” theme.

5) Updating the charts on the major indices….Different scenarios for each one of them.

6) Nice rebound in the Treasury market. Will an oversold oil market create problems for this rally?

7) The problems facing the private credit market are FAR from being over.

8) Bitcoin stands and an extremely critical support level.

9) Summary of our current stance…

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---1) For the second time in four weeks, the tech sector fell by more than 5% last week. So, there is little question that this sector is starting to run out of steam. This does not mean it cannot regain its upside momentum going forward, but when you combine the loss of momentum…with some new cracks in the fundamental outlook…it raises some real questions about this all-important leadership group……Given how highly weighted it is in the SPX and NDX, a further decline in the tech stocks will make it very difficult for the recent “rotation” moves to continue in the weeks ahead.

Some meaningful cracks are beginning to appear beneath the surface of the technology sector…even though the long-term AI story remains intact in the eyes of most investors…..However, as always, it’s important to weigh both sides of the bull-bear ledger before drawing any firm conclusions.

On the bullish side, Micron delivered an outstanding earnings report last week…highlighting continued strong demand for its memory chips and reinforcing the view that AI-related infrastructure spending remains healthy……Under normal circumstances, that type of report should have provided another catalyst for the semiconductor group and the broader technology sector. Instead, however, the positive reaction was surprisingly short-lived. The sector quickly rolled over and finished the week lower, creating what looks very much like a classic “sell the news” response…..When markets fail to rally on good news, investors should pay attention.

That reaction becomes even more concerning when viewed alongside Broadcom’s recent earnings report….While Broadcom produced solid results, management failed to meaningfully raise forward guidance…leaving investors questioning whether AI-related demand is beginning to moderate……Taken together, the muted response to Micron’s excellent report…and Broadcom’s more cautious outlook could prove to be a “canary in the coal mine” for the semiconductor industry……This does not mean that a major reversal is imminent, but it IS enough to put it on investors’ radar screens.

Several months ago, software stocks began diverging from the rest of the technology sector as investors worried that advances in AI could make portions of the software industry less valuable. At the time, that weakness remained largely isolated…allowing semiconductors and the Magnificent Seven to continue carrying the broader technology sector higher. Today, however, the situation appears to be changing. The Mag 7 group has already slipped into correction territory…and renewed weakness in chip stocks raises the possibility that the deterioration is spreading across the entire technology complex.

The semiconductor group remains the biggest concern. Despite Micron’s impressive results, the SOX Semiconductor Index still declined last week. At the same time, the economics surrounding AI are beginning to evolve…..Many enterprises are shifting from subscription-based pricing…toward pay-as-you-go models, prompting companies to cap AI usage more carefully. That has contributed to falling input-token prices…and renewed questions about whether agentic AI can generate attractive returns at current cost structures. If token prices continue to decline…hyperscalers may eventually demand lower chip prices or increasingly substitute less expensive AI models (and there is some evidence that this is already beginning)…..Should this occur in any meaningful way, investors will begin asking much tougher questions about the long-term ROI from the enormous AI infrastructure buildout.

Again, none of this means the technology bull market is over…and more evidence is needed before raising a major warning flag. Nevertheless, both the fundamental backdrop and the technical picture (which we’ll discuss below) have become less convincing than they were just a few months ago.

Perhaps the biggest risk is what this could mean for the broader market. Sector rotation can work when technology is merely lagging…or even moving sideways…because capital can migrate into other areas while the major indices remain supported. Be that as it may, rotation cannot work in today’s marketplace when technology is actually falling. With technology representing a historically large weighting in both the S&P 500 and the Nasdaq 100 (over 35% in the SPX and over 60% in the NDX)…any sustained weakness in the sector would almost certainly pull the major indices lower as well.

If that happens, individual investors…who have become an increasingly important force in today’s market…will likely decide not to rotate into other sectors…but instead rotate into cash. This is especially true…given that they’ve been hearing bubble warnings for more than a year……….That is why the recent weakness in technology deserves close attention. It may prove temporary, but if it continues to broaden beyond software…and further into the Mag 7 (and especially into the semiconductors), it could become a much more important warning signal for the market as a whole.

On the technical side of things, this is what we’re looking right now on the key tech ETFs/indices: For the MAGS Mag 7 ETF, it has already fallen into correction territory…and has broken below its 50-week moving average. It has been able to recover from a break below that line relatively quickly sometimes in the past, BUT the fact that it is also seeing a negative weekly MACD cross is a BIG concern. Those kinds of “crosses” have confirmed IMPORTANT changes in trend of the Mag 7 in the past. So, if the present negative cross becomes a more material one, it will definitely raise some serious warning flags. (First chart below.)

As for the SOX semiconductor Index, it dropped back below its key resistance level of 14,000…AND it has seen a negative MACD cross on its daily chart. This is not a significant development yet. It will have to drop below its all-important support level of 12,000 to raise an important warning flag on the chip group. Therefore, this group still has plenty of leeway. However, with the recent news out of Broadcom and SK Hynix, last week’s weakness is something that should not be ignored. (Second chart below.)

Finally, the chart on the broad XLK technology ETF is an interesting one as well. It has broken below its trend-channel from late March…and its weekly MACD chart is curling over (its daily MACD saw a negative cross earlier this month). However, that weekly chart is still quite a ways from seeing a negative cross, so it’s not an imminent issue right how. HOWEVER, the XLK did see an “outside-down” week last week…and that tends to be a compelling indication of a reversal in trend. Thus, it will be key for investors to keep a close eye on this chart as well. (Third chart below.)

It seems like that very time we see some cracks in the tech sector…like the ones we’re seeing now…the situation quickly changes back to the bullish side of things…and the sector (and the market) returns to its upward trajectory……Of course, this does not mean that the same thing will happen this time around…particularly since there are some fundamental issues which are starting to raise some questions. (In other words, it’s just the “froth” issue that is on investors’ minds.)….With this in mind, it will be critical for investors to watch this sector…and these groups within the tech sector…extremely closely as we move into the third quarter of the year.

---2) If the tech sector can avoid a further drop of significance, the “rotation” moves we’ve seen recently could indeed continue. There are some good fundamental reasons to think that the industrials and healthcare stocks can rally further…and the same might even be true for the material stocks…..Also, the industrials and healthcare ETFs are breaking out in a significant way…and it’s causing a lot of people on Wall Street to join us with our bullish stance on these groups.

After an extended period in which technology stocks have dominated the market…investors are increasingly beginning to rotate toward other sectors…including industrials, materials, and healthcare…….Several factors are driving this shift. First, there are growing signs of AI valuation fatigue…as many of the leading technology stocks now trade at historically rich multiples. At the same time, expectations that the Federal Reserve could maintain a more hawkish stance have caused investors to seek sectors with more reasonable valuations and stronger earnings leverage to the broader economy…..Also, the post-Iran ceasefire has also improved macroeconomic visibility, encouraging investors to broaden their exposure beyond the narrow group of AI leaders.

Industrials stand out as one of the more attractive alternatives. Companies are beginning to normalize inventories after several sluggish years…while non-AI capital spending is expected to accelerate by roughly 10% in 2026…following a 2% decline in 2025. That improvement could mark an important inflection point for U.S. industrial activity…with 2026 expected to be the first year of rising industrial production after three consecutive annual declines….Needless to say, continued data-center construction remains an important catalyst…while increasing adoption of robotics offers the potential for improved productivity and expanding profit margins.

The materials sector also appears well positioned. Demand for copper continues to strengthen alongside growing needs for electrical infrastructure…while paper and packaging markets are benefiting from improving industrial activity. Also, lithium demand remains supported by electric vehicle production…reshoring initiatives continue to boost domestic manufacturing…and strong demand for nitrogen and potash is benefiting agricultural markets……In addition, Project Vault’s proposed civilian strategic minerals reserve could provide another important tailwind for domestic producers.

Healthcare is also attracting renewed interest because of its defensive characteristics. Managed care companies are expected to recover following a difficult three-year underwriting cycle…while biotechnology firms should benefit from new drug launches and a potential pickup in merger activity. When you combine this… with the long-term demographic tailwind created by an aging Baby Boomer population…healthcare offers investors an appealing combination of stability and sustainable growth.

The technical outlook continues to improve for the industrial and healthcare stocks…but we do admit that there are some risks for the material names…...The XLI Industrials ETF is once again pressing against its February highs while also registering a positive weekly MACD crossover. It won’t take much additional upside follow-through to produce the decisive breakout we’ve been anticipating for several weeks. We turned bullish on the industrials well before the recent rotation began…and it now appears the rest of Wall Street is finally embracing that view. (First chart below.)

The IYM Materials ETF is a bit more challenging. It has pulled back over the past couple of sessions and is now testing the lower boundary of a symmetrical triangle pattern. That makes this an important technical inflection point. However, sentiment toward the precious metals has become extremely pessimistic…with bullish futures positioning falling to just 10% late last week. That leaves the group primed for a rebound…which could provide a meaningful catalyst for the mining stocks and…by extension…the broader materials sector. (Second chart below.)

Meanwhile, the healthcare sector is also seeing a very strong rally…and it’s being led by the biotech stocks……Looking at the IBB Biotech ETF, it has broken out convincingly…and is beginning to see a positive weekly MACD crossover. So, if that “cross” becomes a bigger one, it will be even more bullish for this subset of the healthcare sector……As for the broader XLV Healthcare ETF, it is testing major resistance from last August, December, and March…while also registering a positive weekly MACD cross. Thus, a breakout above those levels would represent an important technical development…and confirm that investors are increasingly rotating toward the healthcare sector. (The third and fourth charts below.)

Finally, we’d just add that the individual stocks which we have highlighted from these groups have done extremely well since we highlighted them over the recent weeks…with last week’s additions (DE, VRTX, NTRX rallying further in a very nice fashion). As for the other sector that seems to be getting a lot of attention from the Street right now…the banks/financials…we’ll update our comments on them early next week. We’re not as sure as many others that this group will outperform going forward……However, we do feel confident that these other sectors will do well…if (repeat, IF) the “rotational” move we’ve seen recently can continue as we move into Q4.

---3) The return of an extremely high level of volatility in South Korea’s stock market last week should have raised a lot more warning flags than they did last week on Wall Street. This market is extremely leveraged…and leverage works in both directions. Since the KOSPI index has become extremely overbought on an historical basis…and given the leverage in that market…any further decline could be an important canary in the coal mine for global investors.

We have always thought that South Korea’s stock market is one of the most important markets to watch globally…because their economy is extremely dependent on exports. In other words, its stock market is good indicator for its economy…and it’s economy is a good indicator for the global economy.

However, as we highlighted in our weekend piece at the end of May, the KOSPI has become even more important…and it could serve as a another “canary in the coal mine” for risk assets around the world……...While this stock market has enjoyed a strong rally over the past year, several underlying issues suggest that any renewed decline in the KOSPI could send an important warning signal to investors around the globe.

One of the biggest concerns is the extremely narrow nature of the advance this year. The rally has been driven largely by a handful of technology-related companies…most notably Samsung Electronics and SK Hynix. Market leadership has become so concentrated that when the Korean market reached a new 52-week high earlier this month…only 2.6% of listed stocks were making new highs…while an alarming 31% were already trading at new 52-week lows!!! Such poor market breadth often indicates that underlying conditions are far weaker than the headline index suggests.

Another major concern is leverage. Margin balances have surged from 23.3 trillion won ($15bn dollars) at the beginning of the year to roughly 38 trillion won ($24bn dollars) at the start of this month. However, when you factor in the broader credit and unsettled margin transactions, the number is closer to 60 trillion won ($39bn dollars)……This dramatic increase in borrowing has undoubtedly helped fuel the market’s advance. Too often, investors only blame leverage when markets decline…but leverage also magnifies gains on the way up. In other words, some of the strength in South Korean equities has been artificial…driven by borrowed money…rather than genuine investor demand. Thus, a downside reversal could turn into a very quick/violent one (more than we’ve already seen for far this month).

The leverage story extends beyond traditional margin debt. South Korea has become a global hotspot for single-stock leveraged ETFs and highly active options trading. These instruments can accelerate both rallies and selloffs…creating feedback loops that increase volatility. Recent market disruptions have highlighted those risks. Trading halts earlier this month…and again last week…have raised concerns that forced liquidations are becoming a growing problem. Some estimates suggest that roughly $6 billion of forced selling has already occurred…yet the unwinding process may not be complete.

If another significant decline develops in South Korea, investors around the world should pay close attention. A market characterized by narrow leadership…excessive leverage…and speculative positioning…often reveals cracks before they become visible elsewhere. For that reason, weakness in South Korean equities could prove to be an early warning sign for broader global markets.

As for the chart on the South Korea’s KOSPI index…we pointed out a few weeks ago that the KOSPI index had reached the same kind of overbought condition on its weekly RSI chart that it reached at the 2007 top (and more overbought than it was at the high in 2000). More compelling is the idea that it had reached a 257% premium to its 200-month MA…which is dramatically more stretched than any time in history! (First chart below.) We’d also note that although that market is trading at 24x forward earnings, it’s also trading at 1.8x sales. That is 50% higher than it was at the 2007 high!!!

On top of all this, if you look at the very-long-term chart, the KOSPI is now trading at its most overbought reading on its quarterly RSI chart (by a very wide margin)…and it is trading FOUR standard deviations above its 20-quarter MA. (Second chart below.)………..Now, we readily admit that we don’t usually use quarterly charts…but this does show just how stretched that market has become…especially when its weekly chart is coming off such an extreme reading as well.

---4) SoftBank’s recent struggles could become a much more important issue for the technology sector…and the broader stock market than many investors currently appreciate. While AI remains one of the most compelling long-term investment themes…the market has a history of confusing an exciting secular trend with the short-term valuation of the companies tied to it. Those are two very different things.

As we discussed in our daily piece on Friday, the action in SoftBank during the month of June has been very weak…and this could be a canary in the coal mine for the AI stocks going forware…..At SoftBank’s recent annual meeting, CEO Masayoshi Son declared that artificial intelligence is still in its infancy…and argued that any suggestion of an AI bubble was, in his words, “an insult to AI.” We certainly agree that AI is likely in the early stages of a transformational technological shift. However, that does not automatically mean that every AI-related stock is reasonably valued. Many of the sector’s leaders have already enjoyed extraordinary gains…and several appear to have become stretched from both technical and valuation perspectives. (As an aside, we also found it amusing that Mr. Son suggested AI could somehow feel the human emotion of being insulted.)

Instead, investors should ask whether these comments were,…at least in part…an attempt to defend SoftBank’s own shares. The stock has fallen nearly 28% since June 2 and is beginning to suffer meaningful technical damage. That weakness is important because it has been reported that roughly 60% of SoftBank’s investment portfolio is tied to AI-related assets…including its major stakes in Arm, OpenAI, Stargate, and numerous other AI ventures. The company also continues to carry significant leverage…making investors increasingly sensitive to any deterioration in the value of those holdings…..Concerns were heightened further late this week after reports that a potential OpenAI IPO could be delayed, adding another headwind to sentiment surrounding the company.

The technical picture has also deteriorated noticeably. SoftBank had fallen below the important support provided by its October highs from last year (it’s “old resistance/new support” level) early last week. Then, Friday’s sharp 12.5% decline also pushed the stock beneath its uptrend line that had been in place since April while creating a decisive “lower-low” below the mid-June low! Perhaps most concerning, the shares are not yet oversold despite the sizable decline…suggesting there could still be room for additional downside before bargain hunters begin to step in.

Given SoftBank’s enormous exposure to the AI ecosystem, its stock could become an important barometer for investor confidence in the entire AI theme during the second half of the year…….If the shares continue to break down, it could signal that enthusiasm for AI-related investments is beginning to cool. That would not necessarily mark the end of the AI revolution, but it could mean that expectations…and stock prices…have gotten ahead of themselves…creating a meaningful headwind for technology stocks and the broader market in the months ahead.

---5) Index charts………As we head into the end of the second quarter…and prepare for the start of the third quarter…the charts of the major stock averages are sending a mixed…but very interesting, technical message. The S&P 500, the Nasdaq 100, and the Russell 2000 are all showing different characteristics…making it especially important to analyze each one on its own merits rather than treating the market as a single entity.

Starting with the S&P 500, the weekly chart remains constructive…but it has failed to produce the decisive breakout that many investors were hoping to see. (Thus, that old high of 7,600 remains the key resistance level.)…….That said, last week’s pullback was relatively modest and, importantly, the index continues to hold comfortably above its June low at 7,267… which represents the first meaningful support level. The more critical level, however, remains the 7,000 area. That was the major resistance level from earlier this year before the market broke above it in April, and so that “old resistance” has become “new support.”….. As long as the S&P 500 holds above that level…the longer-term technical picture remains intact.

We are also watching the weekly MACD closely. Although it has begun to curl lower…it has not yet generated a negative crossover. Still, that bears monitoring…because each of the last three negative weekly MACD crosses has been followed by a significant decline in the index. (First chart below.)

The NDX Nasdaq 100 presents a somewhat different picture. The index rallied back to its previous highs before reversing lower last week in what proved to be a fairly significant decline. Even so, it remains much closer to its recent highs than to its 2026 lows…so we are not yet prepared to sound any major alarm bells.

The weekly MACD on the NDX has also begun to flatten out, but only modestly. The greater concern is the appearance of an outside-down week…where the index posted a higher high, and a lower low, AND it closed below the previous week’s low. That pattern often signals exhaustion…and can mark an important change in trend….Therefore, if (repeat, IF) the Nasdaq 100 experiences additional weakness and breaks below its June lows (just above the 28,000 level), it would signal that the technical outlook has deteriorated in a meaningful way. (Second chart below.)

The Russell 2000 continues to be the strongest of the three major averages….The small-cap index recently generated a positive weekly MACD crossover…while simultaneously breaking above both its previous all-time highs from earlier this year and the uptrend line that began with the late-March lows. Those are two very encouraging technical developments that suggest momentum is beginning to build in the small-cap universe…..So, unless the Russell reverses sharply in the very near future, its recent breakout should continue to provide a constructive signal for this long-neglected segment of the market. (Third chart below.)

---6) Last week was quite a bullish one for the Treasury market…as long-term yields fell below some key support levels. We do need to point out, however, that crude oil is getting oversold…and sentiment surrounding this commodity has turned quite bearish. Therefore, it could/should be due for a bounce soon. That, in turn, could create some problems for bond investors…and thus they will want to remain very nimble in the days and weeks ahead.

The Treasury market’s biggest story last week was the sharp shift in the narrative surrounding long-term interest rates….One of the key catalysts was new Federal Reserve Chairman Kevin Warsh’s hawkish debut at his first FOMC meeting. Although a more hawkish Fed would normally be viewed as negative for bonds…the market interpreted Chairman Warsh’s strong commitment to fighting inflation as a credibility-enhancing development for the long end of the yield curve. Investors appeared to conclude that a Fed firmly focused on price stability would help keep long-term inflation expectations anchored…allowing the term premium to compress and providing support for longer-dated Treasury securities.

Another important factor behind the decline in long-term yields was the easing of geopolitical concerns surrounding energy prices. Oil prices moved lower during the week as negotiations between the United States and Iran appeared to make meaningful progress. The U.S. decision to grant Iran a 60-day license to sell oil on international markets also helped ease supply concerns…reducing fears that another inflationary energy shock was developing…..With lower oil prices easing inflation expectations, Treasury bonds found additional support.

Demand for Treasuries was also reinforced by market internals. The 20-year Treasury auction attracted very strong demand, signaling that institutional investors remain comfortable adding duration even after this year’s volatility. In addition, the latest Commitment of Traders (COT) report showed that asset managers continued adding long positions in Treasury futures…another encouraging sign that longer-term investors are becoming more constructive on the bond market.

Taken together, the combination of Chairman Warsh’s inflation-fighting credibility, easing oil prices, strong auction demand…and improving institutional positioning helped drive long-term Treasury yields lower last week…….For now, those factors suggest that the bond market is becoming increasingly confident that inflation risks may remain contained despite the Fed’s hawkish stance.

Looking at the chart on the US 10-year yield, you can see that last week’s decline means that it failed to push back above its trend-line from early this spring. After reversing at that line, it rolled back over and dropped below the key 4.4% level we have been talking about recently. (It’s “old resistance/new support” level). Therefore, this bodes quite well for fixed income investors going forward.

HOWEVER, we do need to point out that WTI crude oil is becoming quite oversold and over-hated. Yes, crude oil has fallen WELL below its key support level (its April lows)…and below its 200-DMA. That said, it has become very oversold on its RSI chart…AND we’d note that bullishness among futures traders fell to just 13% on Friday. Therefore, this oversold and over-hated commodity should be dure for some sort of bounce soon. That, in turn, could create some headwinds for the Treasury market……So, like equity investors today, fixed income investors will want to stay very nimble in the days and weeks ahead.

---7) The private credit market has slipped off the front pages in recent months, but that does not mean the underlying concerns have disappeared. In fact, several recent developments suggest that many of the same risks that worried investors earlier this year remain firmly in place. With this in mind, we will continue to monitor the developments in this market…as well as the share prices for the stocks of the private market companies.

Even though there have been a lot of renewed reports of the capping of redemptions in the private credit market, the attention that this market is seeing right now is quite low. However, when you look at the shares of the private market companies, you can see that there are still PLENTY of concerns among investors about this asset class.

Again, one of the biggest warning signs has been the growing number of private credit funds that are once again limiting investor withdrawals. Major firms including Blackstone, BlackRock, Apollo, Monroe…and most recently Ares…have all implemented redemption caps as investor withdrawal requests have exceeded available liquidity. In many cases, redemption requests have reportedly reached 10% to 18% of assets…while fund managers have limited withdrawals to just 5%.

The core issue remains the same: a mismatch between the illiquid nature of the underlying loans and the semi-liquid structures that have been marketed to investors. When investors want their money back…managers cannot easily sell loans without accepting significant discounts. As a result, redemption gates have become an increasingly common tool to manage liquidity pressures.

Valuation concerns also continue to cast a shadow over the industry. Due to the fact that many/most private credit investments do not trade regularly…determining their true market value can be difficult…and critics have described some of these valuations as “mark-to-myth” accounting…arguing that prices can remain artificially stable until a transaction suddenly reveals a much lower value. In some high-profile cases, loans that had previously been valued close to par (100 cents on the dollar)…have later been marked down DRAMATICALLY…highlighting the uncertainty surrounding the sector’s pricing mechanisms.

At the same time, credit fundamentals have weakened. Rising default rates…a growing number of distressed borrowers…and several well-publicized loan losses…have raised questions about the overall health of the asset class over the past 6+ months. Regulators are also paying closer attention to the industry…particularly given the growing interconnectedness between private credit firms, banks, and insurance companies. (Some prominent investors…like Hedge Fund manager…Lee Robinson, have even expressed concerns about insurance company exposure to the sector…and are positioning for potential serious stress in that area.

Also, the recent weakness in publicly traded private credit stocks has begun to raise yellow warning flags once again. While this may not be a crisis that comes to a head immediately…the risks remain significant. Investors should not mistake the lack of headlines for a lack of problems, because many of the structural challenges facing private credit remain unresolved.

We’d also note that the action in the stocks of the publicly traded private market companies continues to be abysmal. Yes, like almost all stocks, they bounced nicely in March and April. However, unlike the major indices, these stocks have ALL rolled back over in the past 6-8 weeks. None of them have taken out their Q1 lows, but the resumption of their declines is definitely raising some renewed questions about this asset class.

With Blackstone still 43% below its 2024/25 highs…Apollo 31% lower…and KKR 44% lower, these stocks have definitely been under serious distribution for a long time now. This is particularly true given that the S&P 500 has RALLIED almost 30% since those outsize declines in these private market stocks began! (We’d also point out that Blue Owl’s stock is down 68%...and is only 3% from its April lows…and they haven’t even revealed their most recent redemptions requests yet!!!)

We’ll finish this point by describing the charts on BX and OWL…..BX broke below its 200-week MA earlier this year. This was important…because that line had provided EXCELLENT support for the stock for MANY years. It has since tried to bounce back and retake that line several times, but it failed once again last week. Therefore, if (repeat, IF) it continues to decline…and takes out its 2026 low (of $100)…thus giving it a key “lower-low” (after failing to regain its 200-week MA), it’s going to be very, very bearish on a technical basis. More importantly, it’s not going to be good for the outlook for private credit either. (First chart below.)

As for OWL, this stock has rolled back over quickly…after a very feeble bounce…and it is now close to its April lows. (No wonder the Co-CEO sold his stake in the Washington Commanders.) That might sound like we’re being wise guys, but the fact that he sold that stake IS something that is quite telling to us…particularly given how poorly the stock acts……Either way, if it breaks below its 2026 lows in any material way, it’s going to be another red flag for the private credit market.

---8) Bitcoin had another rough week last week…as it dropped below the key $60 level in a slight way a few times. Whether it can bounce off this level soon in a substantial manner…or falls below that line in s significant way…is going to be CRITICALLY important for this asset class as we move through the rest of the summer months.

Bitcoin remains at an important crossroads…with both encouraging long-term developments…and meaningful near-term challenges shaping the outlook. On the bullish side, regulatory clarity appears to be getting closer as Congress is expected to pass a crypto market structure bill that would provide clearer rules for platforms engaging in digital assets. Such legislation could reduce uncertainty and encourage broader institutional participation over time. In addition, the institutional infrastructure built during the last crypto boom has largely held up well despite the recent downturn. Bitcoin ETFs, custody providers, and trading platforms remain firmly in place…while many long-term holders have stayed remarkably resilient.

Historically, periods when Bitcoin has suffered declines of roughly 50% have often created attractive buying opportunities for patient investors. Furthermore, Wall Street firms continue to invest in the infrastructure surrounding digital assets…reinforcing the possibility that Bitcoin remains an important part of the future financial landscape.

However, there are also reasons for caution……Retail investors, who were a major force behind previous rallies, have largely shifted their attention elsewhere…particularly toward high-growth AI and technology stocks. Bitcoin ETFs have experienced notable outflows…suggesting investor enthusiasm has weakened. (Last week was the 7^th week in a row of outflows.) The cryptocurrency has also shown signs of decoupling from the equity market…raising concerns that it may not benefit from broader stock market strength. Finally, the long-term threat posed by advances in quantum computing continues to generate debate about future security risks. As a result, Bitcoin’s outlook remains balanced between promising structural progress…and lingering demand concerns.

From a technical standpoint, the outlook has become increasingly concerning. Earlier this year, Bitcoin broke below the neckline of a significant head-and-shoulders pattern near the $80,000 level. Although the cryptocurrency staged an impressive rebound during March and April…that rally ultimately failed when it retested the former neckline in May. The inability to reclaim that key resistance level reinforced the bearish implications of the pattern.

Since then, Bitcoin has rolled over once again and is now testing support near $60,000…which corresponds to the lows established during the first quarter. This level is extremely important. If Bitcoin breaks below $60,000 and establishes a “lower-low” (beneath its March trough)…it would confirm a more significant technical breakdown following the earlier head-and-shoulders violation. Such a development would likely signal additional downside ris…and could trigger a further deterioration in investor sentiment.

With all of this in mind, Therefore, the $60,000 level represents one of the most critical technical battlegrounds in the cryptocurrency market today…and is something investors should watch VERY closely in the weeks ahead.

---9) Summary of our current stance………..We definitely agree that the fundamental backdrop for the stock market does remain constructive in several important ways…which is why it would be premature to declare that this fabulous bull market (which we believe has become a bubble) is definitely on the cusp of coming to an end…..At the same time, we are becoming increasingly concerned that the recent action in the market is beginning to signal that a meaningful correction could be on the horizon…..While the long-term trend remains positive, the number of items on the bearish side of the bull-bear ledger are starting to grow.

On the bullish side, the biggest positive continues to be earnings. At the beginning of the year, Wall Street was expecting roughly 14% earnings growth for the S&P 500. Today, consensus expectations have climbed into the mid-20% range…and although that growth remains heavily concentrated in a relatively small number of companies, it has started to broaden out somewhat, which is an encouraging development. The AI spending cycle also remains remarkably resilient. Micron’s latest earnings report and forward guidance reinforced the view that hyperscalers are continuing to spend aggressively on AI infrastructure…suggesting that the investment boom still has further to run.

Lower energy prices are another welcome development. Crude oil has fallen sharply since the agreement to reopen the Strait of Hormuz…and now stand at their pre-war levels. This is easing inflation concerns…and helping long-term Treasury yields drift lower. No, interest rates have not declined nearly as much as oil prices…but any continued moderation would provide additional support for equity valuations.

The U.S. consumer has also proven far more resilient than many expected. Despite ongoing financial pressures, Friday’s University of Michigan consumer confidence data surprised to the upside…suggesting household spending may remain supportive of economic growth…..Finally, we’re beginning to see encouraging signs beneath the surface of the market. Small-cap stocks have started to outperform…and there has been some nice rotation into industrials, materials, healthcare, and biotechnology (which we predicted would take place)…..If that broadening trend continues, it would strengthen the overall foundation of the bull market.

Nevertheless, we continue to believe we are operating within a stock market bubble. That does not necessarily mean the bubble is about to burst…but history shows that when it eventually does, the decline can be both swift and painful. More importantly, we’re beginning to see some cracks that deserve close attention.

Broadcom’s earnings report a couple of weeks ago was particularly noteworthy. The company failed to raise guidance…and warned that margin growth could begin slowing. When you combine this with declining token prices and lower GPU rental prices…these developments raise legitimate questions about whether AI demand is beginning to normalize…..We’re also seeing AI business models gradually shift from subscription-based pricing toward pay-as-you-go structures. This is causing enterprise customers to become more cost-conscious. While AI spending remains elevated…investors are increasingly asking whether the eventual return on investment will justify the enormous capital expenditures being made today.

Meanwhile, valuations remain extraordinarily stretched by virtually every historical measure…particularly price-to-sales and price-to-book ratios. Market leadership also remains exceptionally narrow…a condition that has frequently characterized major market tops. Narrow leadership often reflects investor confidence in only a handful of momentum stocks rather than confidence in the broader economy.

There are also several macro risks that cannot be ignored. Geopolitical tensions remain elevated despite the recent improvement in oil markets. The Federal Reserve appears increasingly hawkish…and Chairman Waller has indicated that policymakers are placing less emphasis on supporting liquidity through Treasury bill purchases…by stating in their release that their RMP program will no longer be automatic.…..If the Fed put is indeed farther out of the market than investors have grown accustomed to…financial conditions could tighten more than many expect. At the same time, any effort by the Bank of Japan to defend the yen could disrupt the global carry trade and remove another important source of market liquidity.

Adding to these concerns are signs of stress emerging in parts of Asia. Questions surrounding AI demand have surfaced not only through Broadcom but also among memory suppliers such as SK Hynix…while South Korea’s increasingly fragile stock market could prove to be an early warning sign (a “canary in the coal mine”)…….Investors continue to believe that hyperscalers will ultimately earn attractive returns on their AI investments, but that assumption is beginning to face greater scrutiny.

For now, the music is still playing…and investors continue to dance. However, if we begin to see more meaningful evidence that AI demand is slowing…while global liquidity simultaneously becomes less abundant…the market could face a very difficult combination. Those are the developments we will be watching most closely in the days, weeks, & months ahead.

Table of Contents:

1) “Rotation” would be good, but the overbought chip stocks NEED to keep rallying for the market to keep rising.

2) The industrial stocks are starting to breakout. We have another one to look at.

3) The biotech stocks could be another good group which see some “rotation” money very soon.

4) Many of the Mag 7 stocks (even the best ones) are losing some serious momentum.

5) Did Chairman Warsh just tell us that the “Fed put” is not further “out of the money” than it used to be?

6) The bond market charts…and the chart on the bank stocks…stand at very key junctures.

7) Reviewing the charts on the major stock averages.

8) It’s still all about liquidity…so we need to keep a very close eye on the USDJPY.

9) Potpourri……Big negative bet on the high yield market last week.

10) Summary of our current stance.

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Table of Contents:

1) The most important group (the chip stocks) had a great week, but they still need more upside follow-through.

2) The Mag 7 stocks…even the best ones…are struggling right now. This needs to change for the bulls.

3) If the software stocks see any more weakness it’s going to be very, very bearish for the group.

4) Updating the charts on the major indices. The battle lines are clearly drawn.

5) The bank stocks are testing KEY resistance levels…even though the yield curve remains quite flat.

6) The yield on the 10yr Treasury note stands at a key level…with Chairman Warsh taking over.

7) The precious metals are actually seeing some positive developments.

8) Can the industrials and material stocks breakout? The “rotation” trade may depend on it!

9) Potpourri…..More stress in the credit markets.

10) Summary of our current stance.

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Table of Contents:

1) What to look for early next week to see if Friday’s action is something to worry about or not.

2) The impact earnings have had on the stock market in 2026 is not as strong as the consensus is saying.

3) There is an important reason why many on Wall Street are bullish…but they won’t say this reason out loud.

4) If Friday’s bounce in Treasury yields continues, it’s going to be very negative for the bond market.

5) Updating the charts on the major stock indices…which stand at critical technical levels.

6) We’re sorry, but we cannot avoid talking about the SpaceX IPO. (Is it bullish or bearish?)

7) Right on time….Private credit and high yield bonds are seeing some renewed stress.

8) Bitcoin is extremely oversold and “over-hated.”

9) Summary of our current stance.

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Table of Contents:

1) The K-shaped economy is likely to become a much bigger problem between now and the 2028 election.

2) The key bullish factors remain intact…and so does the upside momentum in the stock market.

3) Why aren’t we hearing more about the big delays in construction of data centers?

4) Nice breakout in the software stocks, but they should take a short-term breather very soon.

5) Index charts….Overbought, BUT they could become even more so before we see a pullback.

6) The 4.4% level on the 10yr note is extremely important. Will it break back below that level?

7) What will Chairman Warsh mean for the markets?

8) The recent divergence in the bank stocks needs to reverse if the market is going to keep advancing.

9) Potpourri…..South Korea’s stock market has become EXTREMELY overbought by one measure.

10) Summary of our current stance.

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Table of Contents:

1) Earnings growth and excess liquidity continue to be reasons to think this rally can continue for quite some time.

2 and 2a) The situation in the Strait of Hormuz will HAVE to change very soon…one way or the other.

3) It may not matter, but it IS a fact that there are A LOT of signals today that are normally seen at important tops.

4) Long-term yields fell slightly late last week, but the yield on the 2yr note made another higher-high.

5) The charts on the major indices are quite simple right now, but that doesn’t mean they’re not compelling.

6) A few important divergences are starting to show up in the chip group.

8) We’ve had some great calls in the tech group recently. Let’s look at two more stocks.

9) The industrial stocks are taking a breather. Can they regain their upside momentum?

10) Summary of our current stance…..What is the euphoria in South Korea telling us?

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Just a reminder, I have another wedding to attend this weekend, so I’m sending this piece out before the market closes on Friday. (Therefore, if you don’t get a chance to read it until Saturday or Sunday, you’ll know why something is not right if something big takes place Friday afternoon.)……This is also why it’s a more abbreviated edition once again this week……….Back to the regular schedule and edition next weekend. Thank you very much and enjoy your weekend!

Table of Contents:

1) With bond yields breaking out, this overbought/overvalued stock market should be due for a breather.

2) The upside breakout move in long-term yields is indeed a very, very compelling one.

3) The tech stocks are extremely stretched on a technical basis. (Many stocks have become very expensive as well.)

4) Just how “narrow” is the stock market’s rally right now?

5) Updating the charts on the S&P 500 Index and the NDX Nasdaq 100 Index

6) This earnings season has also been something that have been very “narrow.”

7) Updated charts on the banks and housing stocks. What do they say about the US economy?

8) Summary of our current stance.

---1) The stock market is getting hit pretty hard as we write on Friday morning, but it’s not a big deal compared to the huge rally we’ve seen over the past six weeks. Thus, it’s not something to worry about just yet. That said, there are a lot of reasons to think that…at least over the near-term…the stock market could see a meaningful drop before long. Therefore, we believe investors will need to remain quite nimble ove the coming weeks.

The rally in the stock market over the past six weeks has been extraordinary…especially since it has come despite a further rise in crude oil prices (after oil had already surged by more than 80% since the beginning of the year)…and a push to a 12-month high for long-term interest rates in the US. However, a very strong surge in earnings growth for a handful of companies…and burst of liquidity…has enabled the market to bounce in a somewhat historic way since the end of March.

This does leave the market vulnerable to a pullback at some point soon…and if the Strait of Hormuz does not begin to reopen quite soon, any “pullback” could turn into something more than just a mild affair. In other words, given that this “oil shock” is reaching the kind of length and price movement that has always been followed by deep corrections (or worse) in the stock market over the past 50 years….and given that we’re getting strong signals that an important change in trend for long-term interest rates is taking place right now…today’s overbought and expensive market has become riskier than most investors seem to realize right now.

Yes, as we all know, valuation is a lousy timing tool…and there are many on Wall Street who believe that the level for the price earnings ratio which designates “fair value” for the stock market has risen considerably in recent years due to the technological advances of AI…and therefore the current multiple of 22x is nothing to worry about. Besides, the market has been able to hold up at this kind of reading for extended periods of time in recent years. However, with the price/sales ratio…and the price/book ratio…both at record all-time highs (WAY above the readings at previous tops), it still raises questions about how much higher the market can run…at least over the near-term.

We also have a situation where the stock market is becoming overbought on a technical basis. This is particularly true for the tech laden NDX Nasdaq 100…and for the tech ETF’s…especially the chip stocks. (More on this in point #5)…..On top of this, the rally has been EXTREMELY “narrow”…and that is something that has been followed by declines that are more than 2-3% drops in the past. (More on this in point #4.)……More importantly, the fundamental improvement in the economy has been very “narrow” as well…with only a handful of companies driving the big rise in earnings estimates…and the earnings growth outside of the tech sector in the low single digits.

We’d also note that sentiment is pushing to extreme levels…with bullishness among futures traders pushing above 80% for both the SPX and NDX during this past week. Also, Wall Street strategists have been tripping over themselves to raise their year-end price targets on the S&P 500…much like they did in early 2025…just before the 17% (deep) correction began for the S&P 500 (-20% for the NDX).

None of this means that the bull market which began in October of 2022 is coming to an end. If the level of net-liquidity in the system remains strong, any near-term decline should be limited to what we saw in March…or even something smaller. However, if those who say that the situation in the private credit market is nothing to worry about are wrong…an increase in stress in that market will definitely drain liquidity from the marketplace…and that could create the kind of headwinds which could lead to a full correction in the stock market.

Be that as it may, the bulls have been firmly in charge for most of this year…and there are reasons to think that the “Trump put” is still firmly in place (given the mid-term election)…and that the “Fed put” is also firmly in place (now that Warsh is taking over). Therefore, the advantage remains firmly with the bulls right now. However, we just want to point out that there are some serious risks involved in chasing the stock market in an aggressive manner up at these levels.

Besides, the Patriots lost the Super Bowl this year (like they did in 2008)…the Red Sox are in last place…and the Celtics and Bruins lost in the first round of the playoffs!!!.........Thus, the odds are OBVIOUSLY much higher than usual this year that a big bear market is just around the corner!!!.....”Wilson, get in there and sell, sell!!!”……….Seriously though, there are quite a few developments which have indeed taken place recently that are usually associated with a material pullback in the markets in the past, so investors should be a bit more careful going over the coming days and weeks.

---2) The continued closure of the Strait of Hormuz…and the inflation data coming in higher than expected this past week…bond yields have pushed above their KEY 4.4% resistance level in a meaningful way. In fact, they are pushing above 4.5% today (Friday), so unless they reverse lower almost immediately…and quite sharply…it will confirm a change in trend for the intermediate-term outlook for the stock market on a technical basis…..We’d also note that the action in the high yield market continues to raise concerns for us.

The Treasury market had a very tough week this past week…and the decline in price, and the corresponding rise in yields, was something that should raise some considerable concerns among investors about the fixed income asset class over the coming weeks and months. This in turn, could/should raise some problems for other asset classes as well.

Don’t get us wrong, there are some very good reasons to believe that yields will reverse lower at some point in the second half…… We agree that this should take place, but it does not mean that the yield on the US 10yr note won’t push higher over the coming weeks and months. (If, repeat IF, that takes place it will likely create headwinds for the stock market.)

No matter what it might mean for the stock market, this is a bearish development for bond investors. Again, if this market can reverse VERY quickly, the pressure will ease…but the recent action in the long end of the Treasury market is signaling an important change in momentum to the downside for bond prices…and to the upside for yields.

The yield on the US 10yr note had already broken well above its 1-year tend-line…and made a “higher-low” in April. This past week, it followed these moves…with a clear “higher-high”…and this is something that is confirming an IMPORTANT change in trend for longer-term rates.

We also want to reiterate that the situation in the high yield market is something which could create some real problems for the credit markets. The inability of the HYG high yield ETF to make new highs…at the same time the stock market is making a meaningful new high…is the kind of divergence that sends up some material warning flags. This is especially true since the HYG has begun to decline again over the past 2-3 weeks. As we highlighted last weekend, the negative monthly MACD cross for the HYG is something that has been followed by significant decline in the past for the junk bond market. Therefore, it won’t take much more weakness in this ETF to raise a warning flag on this asset class.

Given that this area of the credit market is one notch ABOVE the private credit market…any material stress in the high yield market will not bode well for the private credit market…as we move into June. Remember, private credit investments are redeemable on a quarterly basis…and that’s why we heard about the growing stress in this area back in March. Well, June is just around the corner…so we’ll be hearing more about this issue before long. If what is going on in the HY market is any indication, another rough patch for private credit could/should hit the marketplace soon.

---3) The tech stocks have seen an extremely strong run since the end of March…with the chip stocks seeing parabolic rise. Some of those names have become very expensive…and pretty much all of them had become extremely overbought by Thursday of this past week. In fact, the tech ETFs are now reaching the kind of overbought conditions that have been rarely seen over the past 50 years. So, we expect the group to see a material pullback very soon.

We highlighted the fact that the tech sector was becoming quite overbought on a short-term basis last weekend. Well, it had become even more overbought by Thursday’s close. Thus, we believe, will lead to a material decline in this all-important leadership group before long…..We do have to point out that Nvidia (NVDA) reports earnings next Wednesday, so this sector might be able to avoid a meaningful decline for a bit longer. However, as good as the news has been for the chip group, many of them have become extremely overbought. So, they should be due for a material decline at some point very soon.

We’d also note that some of these chip names have become extremely expensive…with AMD’s multiple jumping from 30x to over 60x in just six weeks…and INTC’s multiple pushing above 100x. Therefore, they are stretched on both a fundamental and technical basis……We’d also note that our bullish call on NVDA has worked out well…with its 15%+ rally since we highlighted it. However, it’s becoming quite overbought as well. Therefore, there is a risk that we’ll see a “sell the news” reaction to their earnings for the stock…and the group.

Looking at the first chart below, you can see that the SOX semiconductor ETF has become extremely overbought…with an 86 reading on its weekly RSI chart…and a push to over 150% above its 200-week moving average. This RSI reading is the highest since 2000…when it reached 89. So, although there has been one time when the chip group has become even more overbought before it has topped out for a while, it has not been much more overbought…even in the biggest tech bubble in history.

The second chart further shows how extended the tech sector has become. The XLK tech ETF is now trading much more than 2-standard deviations above its 20-week moving average. (In fact, it has reached 3-standard deviations above that line.) This is a level that has been followed by material declines in the past 10 years…so this is another reason to think that this all-important sector is getting ripe for some weakness in the not-too-distant future.

To be honest, we believe that the tech bulls should be hoping for a meaningful decline soon. No market moves in a straight line…so if the SOX and XLK can take a breather soon, it should actually be healthy for the tech stocks. When an group gets as stretched as this one has become recently, a further rise will only raise the odds that crippling reversal will take place further down the road…if it does not take a breather at some point……When the tech sector sees a straight-line rally, it builds up the kind of leverage which can cause a major crash at some point in the future…if the rally does not take time to digest its gains every once in a while.

---4) We have all heard about how “narrow” the rally has been since the late March lows. However, we wanted to put together a list of some of the examples of just how narrow the rally has been…to give it some more perspective. So, here we go:

---The S&P 500 cap weighted index has rallied 15% since March 31, while the S&P 500 Equal Weight Index has advanced just 6.1%. Also, the NDX Nasdaq 100 (63% tech stocks) has rallied 24.7% over that time.

---Mega cap tech stocks are running at roughly 2-3x the S&P’s pace (AVGO +42%, GOOGL +39%, AMZN +28%, etc.).

---Those top 3 stocks alone are driving almost 75% of the tech group’s gains since the lows.

---According to Citadel, only 22% of S&P 500 has outperformed the index itself over the last 30 days…the lowest in 30 years.

---About 270 S&P 500 stocks are positive…meaning only slightly more than half of the index has participated in this rally.

---The median S&P 500 stock has retuned 1.6% vs the cap-weighed index return of 15%. (That an exception gap.)

---Only one stock of the top 10 performers in the S&P 500 since the end of March comes from outside the tech sector (HUM…which is 9^th).

---According to BofA, the private client allocation to equities is now at its highest level since 2021.

---Tech capex is 50% of all S&P 500 capex.

---Since April 20^th, the S&P 500 has rallied over 6%...while the S&P 500 cumulative A/D line has declined by almost 1%.

---The share of mutual funds outperforming the S&P 500 this year has plunged to 28%...down from 60% from the end of February.

---(In other words, diversification is getting clobbered…as those funds cannot keep up with a rally driven by just a handful of stocks.)

---The SOX semiconductor index has seen its best 25-day performance since the internet bubble.

Needless to say, this is far from a complete list. However, it does shows that this is one of most concentrated rally on record…with the gains concentrated to the AI-linked chip stocks, plus a few other hyperscalers. Otherwise, the stock market isn’t doing much of anything. When you combine this with the fact that outside of the tech sector, earnings growth is just 3%...it shows that the “narrowness” of this rally is also a fundamental issue, not just a technical one!!!

We have seen very narrow rallies on many occasions in this century…and basically all of them have ended with at least a meaningful decline…and in some cases, a bear market. The examples of 1999-2000…as well as the failed rebounds of 2022 and very early 2023. The same can be said about 2007, 2018, 2019…and early 2020. All of these narrow rallies ended with outsized declines…so this is another signal that investors will want to stay a lot more nimble as we move through the second half of Q2.

---5) Index Charts…….The S&P 500 Index and the NDX Nasdaq 100 Index had become even more overbought on their weekly charts compared to where they stood last weekend. The SPX has become even more overbought before it has seen a pullback in the past, but it’s still quite extended. As for the NDX, it has also become more overbought, BUT not by much. So, it is quite vulnerable in our minds.

Let’s take a quick look at a few charts. The weekly RSI chart on the S&P 500 has become even more overbought on several occasions before it has rolled back over during the past decade. So, we have to admit that this index could push higher for a while longer. That said, the NDX has only become more overbought before rolling over a handful of times in the past decade. And in each one of those instances, it only became slightly more overbought before dropping. Therefore, the risk levels are definitely elevated right now.

We’d also note that the gap between the S&P 500 Cap-weighted Index…and the S&P 500 Equal-weighted Index has become even more pronounced than it did in November of last year and February of this year. This is another indication that the today’s “narrow” market is on shaky ground.

---6) This earnings season has been a great one, but the growth continues to be highly concentrated in a handful of companies. When you look past the data on “expectation beats”…and look where the growth is actually coming from…it shows that the earnings picture is not as strong as the Street’s narrative is trying to indicate right now.

From a headline perspective, the earnings results for the S&P 500 have clearly exceeded expectations. Roughly 83–84% of companies have reported earnings above consensus estimates…a figure that stands well above the historical norm in the mid-70% range. Moreover, the magnitude of these beats has been impressive, with the average company exceeding earnings expectations by approximately 12.6%...which is another sign of stronger-than-expected profitability.

Even more striking is the overall growth rate. First quarter earnings growth for the index is tracking near 25%, which is roughly double what was expected at the start of the reporting season. On the surface, this kind of upside would typically signal a broadly accelerating earnings cycle…and a fundamentally healthy equity market backdrop.

However, the composition of that growth is where the concern lies. A relatively small group of AI-driven and technology-oriented companies has been responsible for a disproportionate share of the gains. Specifically, just 44 AI-related names have contributed more than 70% of the total earnings growth for the index. These companies are seeing extraordinary expansion…with earnings growth rates averaging over 40%...driven by continued demand for artificial intelligence infrastructure, semiconductor capacity, and related technologies.

When this narrow leadership is stripped out, the broader earnings picture looks far less robust. As we highlighted earlier in this piece, if you exclude the technology sector, first quarter earnings growth for the S&P 500 drops to just 3%. That stark contrast highlights how dependent the overall index has become on a single theme…AI and the technology ecosystem surrounding it.

This lack of breadth is also evident in forward expectations. Since mid-2025, earnings estimates for most S&P 500 sectors outside of technology have remained essentially flat. In contrast, technology sector estimates have surged approximately 25% over the same period. This divergence underscores a market that is increasingly concentrated in both performance and expectations.

Additionally, some economically sensitive sectors are seeing outright deterioration. Consumer discretionary earnings estimates, for example, have been cut by roughly 9% over the past three months, reflecting pressure on the consumer and a more cautious outlook for spending.

There is absolutely no question that the earnings growth for this year has been very strong. Right now, the fact that it is so highly concentrated is not something investors are worried about…as they seem to believe that it will broaden out eventually. It’s just that they’ve been waiting for three years now…and it has not come to fruition in ANY meaningful way…….Yes, we understand that the excess liquidity in the system makes it seem like this very narrow increase in earnings will be enough to keep the market rallying strongly throughout the rest of the year. In fact, that liquidity might be able to do the trick for quite a while longer. However, we just think it’s important to discuss what is really going on with this situation today.

---7 We’d just like to update two charts on the ETF’s of two areas of the stock market which are very economically sensitive…..They are showing that the outlook for the economy is not as bright as many on Wall Street would like to portray it.

---8) Summary of our current stance……..By several standards, the rally in the stock market since the beginning of March has been an historic one. The 18% rally in the S&P 500 over the past 32 trading days is something that usually only happens after deep correction which is culminated by a major “washout” bottom…AND after it comes very cheap. This time around, the SPX had not even reached correction territory…and barely fell below 20x forward earnings. So, there is little question that the current rally has been a spectacular one.

Most of the credit is going to the current earnings season…which is starting to wind down. Earnings estimates have pushed nicely higher during this season…and the consensus is now looking for an increase of 22% in 2026!....The main driver for the rally in the market…AND for the rise in the earnings estimates…has come from the chip stocks and a small number of hyperscalers (who are buying the vast major of those chips). The demand has been relentless…and it is not showing any signs of abating any time soon.

One concern that derives from this action is the extreme “narrowness” of this rally. Again, this “narrowness” exists in both the number of stocks which taking the market higher…AND the number companies which are pushing the earnings estimates higher. In fact, you have to go back to the internet bubble to find a time when so few stocks were pushing the market to news highs. When you combine this with the idea that the companies outside the tech sector are only looking for a 3% increase in earnings…it raises some warning flags for investors. In other words, if history is any guide, this recent “narrow” rally will likely be followed by a decline of some magnitude before too long.

Then again, maybe history is not a very good guide in this instance. Maybe the AI phenomenon will has indeed created a “new economy” (or a “new normal”). Maybe the fair value level for the market has shifted from a 16x multiple to a 22x multiple…and maybe the strength of the individual investors, the “Fed put”, the “Trump put”, “positive gamma”…and other issues like these…have indeed made things different this time.

Our concerns are that there are other things out there as well. To start with, there is also something called “negative gamma”…and leverage of all kinds work in the opposite direction when things get out of hand. Also, with today’s massive levels of debt and leverage in the system, it will not take a major recession to have things begin to unravel. Yes, there is A LOT of liquidity in the system today, but when the level of stress in the credit market begins to grow, that “net liquidity” equation can shift very quickly. This is especially true when debt…especially risky debt…reaches very high levels…like they have today. (It does not take much weakness in the economy to create some outsized problems.)

We also have the war in Iran…and we understand why JP Morgan said last week that the Strait of Hormuz will reopen by the end of June “one way or the other.” We have not seen that report, but we do think it’s safe to say that they are inferring that it might be reopened by force. In other words, a re-escalation of the war is not out of the question…especially now that the summit in China is behind us.

Having said all this, we realize that valuation is a LOUSY timing tool…and that liquidity can be an extremely powerful force in the markets. Therefore, this rally could last several more weeks…and maybe even quite a few more months. However, this does not mean that the risks are not extraordinarily high right now…..There’s a reason that investors are buying such a highly concentrated number of stocks. It’s because very hard to justify buying most other companies! Thus, if earnings growth do not broaden out, it’s going to be a lot harder to justify a further rally…and things could become quite ugly…quite quickly…if the net-liquidity equation ever turns negative for one reason or another.

As I mentioned last weekend, I will be attending weddings the next two weekends, so will be publishing abbreviated editions of the weekend piece on Friday morning both this week and next week. (In other words, is something big takes place Friday afternoon or Saturday, some of what we say here might not make a lot of sense)..…….Thank you very much…and enjoy your weekend!

Table of Contents:

1) It makes a lot of sense for individual investors to raise at least SOME cash today right now.

2) There are some very concerning developments in credit markets…with new cracks in high yield.

3) Don’t chase the parabolic stocks….Here are some others which could/should “run” quite soon.

4) Have the software stocks bottomed? Which ones have the most upside potential near-term?

5) A look at the chart on the tech laden QQQ ETF.

6) The US 10yr Treasury note yield is still quite close to an extremely important resistance level.

7) Here are some other assets that are on the verge of a possible breakout move.

8) Summary of our Current Stance.

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1) The likely end of “TACO Trump.”

2) Earnings continue to impress. If the growth in estimates can broaden out, it will be very bullish.

3) The cryptocurrencies are very close to see an important upside breakout.

4) An unbelievable rally in the chip stocks, but they’re getting very overbought near-term.

5) The most recent rally is an extremely narrow one.

6) Several different commodities are very close to important breakout moves.

7) What if long-term interest rates are determined by something other than growth?

8) What happens when the liquidity dries up?

9) Potpourri….New Fed Chairs usually face crises in their first year.

10) Summary of our current stance….Priced for perfection.

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Table of Contents:

1) If the US backs out before their goals are achieved, it will be a major loss. So, we don’t see it taking place.

2) The credit market problems are not going to go away.

3) We had quite a few excellent calls in Q1.

4) The S&P 500 and NDX 100 are following last year’s script in an eerie fashion.

5) The tech ETF’s are still at a critical juncture on the technical side of things.

6) Some specific tech stocks which could outperform if the market rebounds from current levels.

7) One sector which could/should be a “win-win” situation for investors going forward.

8) How the “Fed put” has made the markets much more vulnerable.

9) Potpourri…..Quote of the week from Warren Buffett.

10) Summary of our current stance.

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Table of Contents:

1) When oil spikes last for more than a few weeks…and rise 80%...it always has a negative impact on the stock market.

2) Private Credit: “It’s not just a crisis of confidence; it’s a crisis of really bad underwriting.”

3) The tech sector is getting hit by both negative fundamental news and negative technical development.

4) There are still plenty of reasons to thing the stock market can rebound quickly…and strongly.

5) Charts on the major averages: Some real technical damage has been done.

6) The Treasury market is also seeing some broad technical damage as well.

7) Are some of the key assets finally regaining their “safe haven” status?

8) Keep a close eye on the European bank stocks.

9) Potpourri….US dollar testing key restistance.

10) Summary of our current stance.

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---1) If you look at history, it tells us that if the price of oil stays as high as it is now…for just a short while longer…the stock market is not even half way through its decline yet……President Trump will not be able to change the narrative with a flip of a switch…like he did last year on the tariff issue. Therefore, unless the next surge in the attacks by the US and Israel are incredibly decisive, the line of least resistance for stocks is still lower.

Needless to say, the ongoing war involving Iran continues to exert a significant and evolving impact on U.S. financial markets…primarily through surging energy prices, rising long-term interest rates, and growing risks to economic growth. At the center of these disruptions is the continued restriction of tanker traffic through the Strait of Hormuz, a critical global energy chokepoint.

Crude oil prices have risen sharply since the conflict began…with WTI crude rising 80% from its December lows (+52% since the war began)….and Brent crude oil up almost 90% YTD (+60% since the war started almost one month ago). Of course, this surge reflects the effective closure of the Strait of Hormuz…which (as we all know by now) typically handles roughly 20% of global oil and liquefied natural gas flows. With tanker traffic severely constrained…reportedly as much as 95% halted at times…the global supply shock has pushed energy markets into extreme volatility and elevated price expectations.

The spike in oil prices has directly contributed to rising inflation expectations…which in turn has driven a notable increase in long-term U.S. interest rates. Treasury yields have moved higher as markets shift from anticipating Federal Reserve rate cuts to pricing in the possibility of further tightening. This rise in yields has already begun to ripple through the economy, pushing mortgage rates higher and tightening financial conditions more broadly.

The action in the stock market at the end of last week was quite telling. The fact that the market did not respond positively to the President’s most recent change in the deadline for Iran…shows that this is a MUCH different situation than we experienced with the tariffs last year.

Back then, the decisions made by President Trump were the only things that mattered. He could flip a switch at will…..Today, the President does not control this situation to anywhere near the same degree. Also, the change in the deadline is only impacting when the US and Israel might attack Iran’s energy facilities. It does not involve a ceasefire…..More importantly, his decisions about these deadlines have absolutely no impact on the flow of shipping through the Strait of Hormuz…..Therefore, merely “making progress” in the negotiations is not enough to impact the markets for very long…and they may not impact on the eventual outcome either…or the timing there of.

The number one issue in all this is the price of oil (duh). How high will it go…and how long will it remain significantly elevated (like it is today) is what really matters to investors. With the Houthis entering the war…by launching ballistic missiles at Israel…this spreads the war to a new front. This not only raises the odds that the war will last longer, but it could/should also impact the price of oil…given that the Houthis have the ability to attack tankers in the Red Sea…which would pinch the supply of global oil even further.

Having said this, there are also some good arguments to be made that this war will not last much longer…and thus the flow of oil will resume…and the situation will start to improve sooner rather than later. However, it is our opinion that it won’t take much longer for it to create some real problems for the economy…and for the stock market. Put another way, if the flow of oil is not opened up rather quickly…and thus the price of crude oil does not fall quickly…history tells us that the stock market is not even halfway through its decline.

First, even if the Strait were to re-open within two weeks…the expectation is that it will still only be at 80% of pre-war levels at first. Obviously, if the war lasts longer, ultimate high for both WTI and Brent will be much higher…and the return to normalcy will take quite a bit longer. The longer it takes to reopen the Strait, the longer oil prices stay extremely high…and the bigger the impact it has on the global economy.

Moving to the stock market itself, there is a misconception on Wall Street about what history tells us about “oil shocks.” If you look at history…when it comes to the idea of how much this “oil shock” will impact the markets…it’s much different than many seem to realize. We keep hearing that as long as this particular oil shock can reverse in the next month or so, the situation will revert back to the way it was in February…and the stock market will bounce-back in a major way. Well, that makes sense if the “oil shock” involves a rise of 40% or 50%...and only lasts for a couple of weeks. In those cases, the market HAS been able to bounce back quickly and strongly.

HOWEVER, when the oil spike lasts for more than just a couple of weeks…and every time in the past 50 years that an oil spike has pushed the price of oil higher by as much as it has this time around (+80%)…the stock market has always fallen by 18%-20% (and by much more than that on a few occasions). (Chart below.) No, it has not always created a recession, but it has ALWAYS caused enough turmoil to knock the stock market down by quite a bit more than it has so far this time around.

Let’s face it, you don’t have to be a market historian to know that the stock market sees an 8% decline (like it has so far) pretty much EVERY year. In other words, the stock market tends to see an 8% decline when issues that are much less serious than the ones we’re facing today (much less how much worse they might get). So, to assume that the market is starting to get quite close to a bottom is likely a mistake…especially since the market is still very expensive…at 20x forward earnings (which IS still very expensive).

Yes, the war could come to a very quick close…and the Strait of Hormuz might begin to reopen significantly very soon. Thus, we are certainly not saying that there no way that the stock market will bottom soon. What we ARE saying, however, is that the reopening of the Strait seems to be pushing out further into time after the developments of the past few days (including this weekend)…and therefore, the odds that today’s stock market pullback becomes a deep correction before it ends…are rising very quickly.

---2) The problems in the private credit market are much more than just a liquidity mismatch. “It’s not just a crisis of confidence; it’s a crisis of really bad underwriting.”…..We’d also note that the issues in the credit market are not just associated with private credit…as 50% of investment grade public bonds are one move away from junk status……This does not have to be something that becomes a systemic problem for it to create headwinds for several different asset classes.

When it comes to the rising stress in the credit market…one of the frequently cited narratives on Wall Street right now…is the idea that the problem with private credit is merely question of a liquidity mismatch. These private credit funds only have quarterly redemptions…and they limit how much anyone can redeem at one time. This is due to the funds holding longer-term (hard to sell) loans. If they get too many redemptions, the investment firms will have to sell their assets at a big discount.

This is indeed becoming a problem now…because the retail investors (who is used to being able to redeem their money immediately from mutual funds or public stock/bond accounts) are frustrated (and worried) about not being able to do so with these private credit/equity funds…..Is this really THE problem that is causing the increase in stress? As Larry Fink stated recently, these redemption restrictions are written at the very beginning of the agreement…so there should be any questions about what they involve.

Thus, in our opinion, the liquidity mismatch, is not the real problem. What really started the problem was the fact that that some key bankruptcies this past summer…followed by the writing down of loans (from 100 cent on the dollar to zero in a matter of weeks) for some other firms in the first part of this year. Also, the very large drop in the stocks of many software companies…which have a lot of private debt…added greatly to the concerns of investors of all stripes…not just individual investors. It is due to THESE issues that the redemptions begin. (It’s not a chicken/egg debate.)

However, we would also add that what is getting much less attention around the Street is that these products do have some of the same issues that the MBS’s did two decades ago. First of all, the lending standards falling in a meaningful way. Yes, there is plenty of evidence that these standards weren’t as low as they in the years leading up to the Great Financial Crisis…but they is also lots of evidence that the standards were not what they should have been.

However, some of the other similarities are more glaring. For instance, for many funds, their success is dependent on packaging the fund and collecting a fee…not on the returns the fund generates. In other words, many of these firms make their money by merely pulling in assets, not creating strong investment performance……We also have the issue of rehypothecation (remember that one?) …where the same collateral is pledged and repledged…..In other words, since the number one way to make money in this market is to bring in more assets…rather than invest the assets effectively…it opened this asset class to become managed with lower standards than they should have been.

Also, it is very hard to trust the “marks”…the pricing…that these firms claim for their assets. The big problem when it comes to this issue is that there is very, very little price discovery going on. Their loans are worth what they say they are…or what somebody they are paying say they are. How do you think that some of these loans have recently fallen from 100 cents on the dollar…to ZERO…in just a matter of weeks???

Therefore, we strongly believe that this situation is much more than a “liquidity mismatch.” Instead, we agree with the plethora of very well-respected Wall Street executives…like Jamie Dimon, Boaz Weinstein, Rodgin Cohen, Michael Gross, Jae Yoon, Jim Zelter, and Jeff Gundlach…who have been warning about the credit market for weeks now. However, we think Christian Stracke of Pimco put it best when he said, “There is a reckoning going on right now. It’s not just a crisis of confidence; it’s a crisis of really bad underwriting.”

It’s also important to point out that the growing problems in the credit market are not isolated to private credit. There are also key issues to consider in the public credit market. First of all, the HYG high yield ETF is breaking down quite badly from its multi-month sideways range…and high yield credit spreads are widening out even further…..The same is true for investment grade spreads…..Also, given that a full HALF of investment grade debt is rated BBB today (vs. 1/3 just before the GFC), any broad string of downgrades will push A LOT of corporate debt down to junk status. Since many institutional investors cannot own junk paper in their portfolios, that could act like a big margin call in the credit market!

We keep reading that the issues facing the credit market today are not a systemic threat. The problem is that even it his is indeed the case, it does not mean that it won’t have a very negative impact on the price of risk assets. As we keep saying (ad nauseam), you don’t have to have a repeat of the GFC (a systemic breakdown)…for a downturn in the credit market to create significant problems for other risk assets…like stocks…especially since the stock market is still very expensive!

(We have updated all of the charts we have posted recently regarding this issue just below. The updated description of the situation is worded within each chart.)

---3) Some important technical damage was done to the tech sector last week…and much of it took place due to some new (negative) fundamental developments. If we see any further weakness in the chip stocks, it’s going to raise a big warning flag on the tech sector. If that happens, you can forget about “rotation” keeping the broad stock market from falling further.

As pretty much everybody knows by now, the tech stocks got hit quite hard last week. Actually, the group starting the week or a strong note…as the XLK technology ETF had risen by 1%...and the SMH semiconductor Index has jumped by 3.7%...as of Wedneday’s close! HOWEVR, everything turned south in a substantial manner starting on Thursday.

Google (GOOGL) announced a new memory algo called TurboQuant…which will allow for more efficient use of storage needed for AI development by reducing the amount of key value cache required for AI workloads. The memory chip stocks (like Micron, Western Digital, Sandisk, etc.) were hit especially hard…and the semiconductor equipment manufacturers (like Applied Materials, Lam Research, KLA, etc.) saw significant declines as well. This caused the SMH semiconductor ETF to drop by 4.5%...which took it back down to its key support level (its 100-DMA).

However, this was not the only negative news that the tech sector received yesterday. META and YouTube (which is owned by GOOGL) were found negligent in the landmark social media addiction trial. META dropped 8% and GOOGL fell 3.4%, so you can see that although the weakness in the stock market yesterday was not broad…it was QUITE broad in the tech sector.

This is important. As we have been saying for some time now, if the tech sector begins to decline in a broad and meaningful way, it will create substantial headwinds for the overall stock market. They are just too highly weighted in the SPX and NDX for this not to be the case. Yes, the “rotation” into other groups that CAN take place if the tech stocks are moving sideways (or only falling very mildly)…BUT if the group declines in a broad and meaningful way, the indices WILL decline…and investors will start “rotating” towards cash. The likelihood that a rotation toward cash will take place is particularly true given all of the talk about bubbles in the last year…and, of course, with the war going on in the Middle East.

What we’re saying is that although the war in Iran is obviously the most important issue for the markets right now, the tech group is seeing the kind of headwinds that would be causing this sector to decline…even if the price of oil had not skyrocketed over 80% since January.

Probably our biggest concern is the recent breakdown in the SMH semiconductor ETF. For a long while, a lot of investors had been thinking that the demand for chips is not going to subside any time soon…even if the hyperscalers (and others) don’t make a lot of profits from the AI phenomenon. However, the rapid implementation of artificial intelligence (AI) and machine learning (ML) across the semiconductor value chain is poised to become a major disruptive force…fundamentally altering industry structure, competitive dynamics, and traditional business models. While AI has historically been a key driver of semiconductor demand, it is now increasingly reshaping how chips themselves are designed, developed, and manufactured.

First, advancements in AI-driven design tools are dramatically improving efficiency across the chip development lifecycle. Machine learning algorithms can now automate complex and labor-intensive tasks…such as floor planning, placement, routing, and verification. These tools can iteratively test and optimize designs, often achieving superior power, performance, and area (PPA) outcomes compared to traditional human-led processes…and doing so in a fraction of the time. In some cases, AI systems can complete design optimizations in hours that previously required weeks or months of engineering effort.

This shift has profound implications for cost structures. Chip design…historically accounting for more than half of semiconductor R&D spending…is becoming significantly less resource-intensive as AI reduces the need for large engineering teams and compresses development timelines. As a result, AI is lowering both the cost and complexity of developing advanced semiconductors, which could erode one of the industry’s most important barriers to entry.

Second, the democratization of AI-powered design tools is expanding access to semiconductor innovation. Cloud-based AI-EDA platforms allow smaller firms to design sophisticated chips without the extensive infrastructure or expertise previously required. This trend is already enabling companies outside the traditional semiconductor ecosystem…such as hyperscale cloud providers…to design their own application-specific integrated circuits (ASICs), reducing reliance on third-party chip suppliers.

As barriers to entry fall, the competitive landscape is likely to become more fragmented and dynamic. Startups leveraging AI-native design approaches are emerging with the potential to challenge incumbent EDA vendors and chipmakers. At the same time, large technology firms are vertically integrating into chip design…further disintermediating traditional semiconductor suppliers and pressuring their long-term demand outlook.

Third, companies that most effectively integrate AI into their design and manufacturing workflows are likely to gain a significant competitive advantage. AI-driven tools enable faster time-to-market, improved design quality, and lower production costs. This allows firms to produce higher-performance chips with fewer iterations. Additionally, AI enables continuous learning across design cycles, meaning each successive generation of chips can be developed more efficiently than the last.

Finally, AI is fostering a self-reinforcing dynamic within the semiconductor ecosystem. As AI improves chip design, it enables the creation of more powerful AI chips…which in turn accelerate further AI advancements. This feedback loop is compressing innovation cycles and increasing the pace of disruption across the industry.

Like we did in point #1, we have provided some updated charts on the tech sector ETFs below. The updated description of the situation is worded within each chart as well.)

---4) As rough as the market has been during March, the decline has been nothing more than we usually see at some point in every year. So, this could just be seen as a normal and healthy respite…before the market returns to rally mode. Earnings are good…the economy remains resilient…and we could see more positive liquidity flows as we move through 2026.

Despite heightened geopolitical risks stemming from the war in Iran…there are certainly several fundamental factors support a constructive outlook for U.S. equities in the near- to medium-term. First, and foremost, the outlook for corporate earnings remains resilient. Pre-conflict surveys of U.S. CFOs indicated expectations for roughly 5% revenue growth and continued hiring gains. This underscores solid underlying demand and pricing power across corporate America. The fact that earnings estimates have actually risen over the past several weeks…with the consensus now looking for 16% growth for earning on the S&P 500 this year.

Second, the United States’ position as a net energy exporter…acts as a key differentiator versus other major economies. While higher oil prices are a headwind for consumers, they simultaneously support investment, profits, and employment in the domestic energy sector…offsetting some of the broader economic drag. This dynamic is particularly important relative to Europe and parts of Asia…which remain heavily dependent on imported energy.

Third, U.S. equities benefit from a more domestically oriented revenue base. Compared to many international markets, a larger share of S&P 500 revenues is derived from within the United States…insulating earnings from global disruptions tied to the Middle East conflict or weaker foreign growth.

On the macro front, the labor market remains relatively stable. While job growth has moderated, unemployment remains near historically low levels and layoffs are still subdued…reflecting a “low-hire, low-fire” equilibrium. Wage growth continues to modestly outpace inflation, supporting real incomes and consumption.

Consumer fundamentals also remain supportive. Although confidence has softened recently, U.S. consumption continues to be underpinned by solid household balance sheets and income growth. Broader forecasts still call for moderate GDP growth around 1.8%–2.2% in 2026, highlighting the economy’s resilience. Retail spending and services activity…while uneven…remain in expansion territory……Also, manufacturing activity has shown pockets of improvement…even amid recent volatility…suggesting that the industrial side of the economy may be stabilizing.

Monetary policy might also provide a potential tailwind for stocks…when the new Fed Chief takes over (soon?). While the Federal Reserve remains cautious in the near term, many economists still expect rate cuts later in 2026. Yes, Fed Funds Futures have begun to price-in a 50-50 chance of a rate hike this year…it’s hard to think that a rate hike will take place just before the election.

Finally, the ongoing AI-driven investment cycle represents a powerful structural tailwind. Strong capital spending tied to artificial intelligence is expected to boost productivity, enhance margins, and support long-term earnings growth. Over time, these productivity gains could offset cyclical pressures and extend the current expansion.

---5) The major stock indices all broke below the key support levels that we have been harping on since the market started to slide lower at the beginning of this month. The SPX and NDX are starting to reach oversold levels on their daily charts, but not on their weekly charts. Also, they have certainly become more oversold on both charts before they have bottomed many times in the past…..Therefore, we could see a bounce at any time, but the line of least resistance is to the downside on a technical basis…and the trend for the market is now bearish.

Last week’s weakness in the stock market…which came became significant on the last two days of the week…took the S&P 500, the NDX Nasdaq 100, and the Russell 2000…all below the support levels we have been highlighting recently. The SPX and NDX broke below all of the support levels we’ve highlighted, but the Russell is still holding above one of them. That said, the small-cap Russell 2000 is not particularly close to becoming oversold (like the other two have), so we could see some underperformance next week if the decline continues.

It is interesting to note that there has not been any sign of “capitulation” or a “washout” move. We frequently see that kind of high intensity drop (with huge volume and horrible breadth) before a market sees an ultimate bottom. However, it does NOT always see a capitulation move when the market bottoms. In fact, in the bear market of 2022…when the S&P dropped 25% and the Nasdaq declined 35%...there was no sign of capitulation. The market made a bottom without much fanfare…and slowly (but surely) reversed its momentum back to the upside over several weeks. Therefore, we could certainly see a bottom without any “washout” move this time around as well.

We would also point out that if we see some sort of bounce soon, it won’t necessarily signal that THE bottom has been made. The past several weeks has seen the market hold up…and even advance…early in the week…only to rollover and take us into negative territory for the week by Friday’s close. (As we’re sure you’ve all heard by now, the stock market has closed lower each of the last five weeks.)…..As some point these recent trends will be broken, but since some real technical damage has been done, the market should continue to decline…unless we get some very positive news on the geopolitical front.

We’ll start…as we always do…with charts on the S&P 500. The first one shows that it did indeed fall below its 200-DMA…and below its key 6,500 support level (the low from both October and November). Since the drop was quite meaningful on Thursday and Friday, both of those support levels have been broken in a meaningful way. So, this is definitely negative on a technical basis…..That said, it’s getting somewhat oversold on its daily RSI chart. Thus, it could see a near-term bounce at any time. However, without some materially good news out of the situation in the Middle East, any bounce next week could/should be a short-lived one.

In the second chart on the SPX, we have provided some possible near-term targets. The first one is 6,215…which is a Fibonacci 38.2% retracement of the entire rally from last April’s low. Next support comes in at the 50% retracement level…down at 5,980. Of course, if that level is broken, there could be plenty of further downside potential…especially if things deteriorate badly in the war.

HOWEVER, if the market does become more oversold…and especially if we see signs of real capitulation…especially if it comes while it’s testing that second support level…it could (repeat, COULD) be an excellent buying opportunity. Remember what we said back in February: Even though the market tends to see major declines which bottom in October, they ALSO see some outsized drops that bottom in March or early April! (Much like last year’s did.) Therefore, as much as we worry that this decline could turn into a drawn-out affair, we will stay extremely nimble over the next couple of weeks……Having said this, the rebound in March of 2022 didn’t last very long…and what became a bear market in that year resumed after just two weeks. So, like any seasonal issue, this is not a perfect one!

The situation is almost exactly the same for the NDX Nasdaq 100 Index. It has broken well below its 200-DMA…and meaningfully below its November lows (giving it a key “lower-low”). Like the SPX, it is getting somewhat oversold, but it has definitely become more oversold many times in the past before it has bounced (not to mention…before it has established an important bottom). Therefore, we believe that the line of least resistance is lower after these important support levels have been broken…BUT we want to keep the above-mentioned “seasonality” issue in mind…and thus, we will remain quite nimble going forward……..As for the near-term target levels, we have the first one at the Fibonacci 338.2% retracement level (of 22,670) and the 50% retracement level (of 21,605)…..(Second chart below.)

Finally, for the Russel 2000, it has broken well below its trend-line from last April. HOWEVER, it has NOT broken below its November low OR its 200-DMA. So, that is somewhat encouraging. That said, it’s not oversold at all. Thus, if it does break below that 200-DMA next week, it could get pummeled pretty good……As for its target levels if it does indeed break below that 200-DMA: First support is the Fibonacci 38.2% retracement level of 2,350…and then the 50% retracement level of 2,239. (Of course, the same seasonal issues apply with this as well.)

---6) The Treasury market had a tough week last week…as interest rates pushed higher once again. It was not just long-term yields that pushed higher. The yield on the US 2-year note also broke above some very important resistance levels. So, although we don’t see rate hikes this year, the 2yr note is the best indicator for what the Fed will do in the future…so we cannot discount that possibility. Either way, we’ve seen a confirmed change in trend for bonds on a technical basis.

It was a very rough week for the Treasury market last week as well. (Of course, that is one of the reasons why the stock market got hit so hard.) Needless to say, the rise in oil prices…back up to their highs for this move…raised fears about inflation. It’s not just the flow of oil that has been curtailed in such a big way, but the same has been true for other items (like fertilizer). This caused markets to dramatically reprice the expectations for what the Fed will do over the rest of this year. In fact, the odds of a rate HIKE by October rose to 50%...and it caused many economists to shift their expectation for the next cut…out to September.

The rise in long-term yields took the 10yr yield WELL above its 15-month trend line…and well above its January high. So, not only did it push above 4.3%, but it closed above 4.4% for the first time since last summer. Therefore, this is confirming an important change in trend for long-term interest rates…and it will take some substantial news to reverse this trend.

To be honest, we believe the odds that the Fed will hike rates this year are quite low. However, we also realize that the Fed actually merely does what the market has already done for them in the end. One of the best indicators for what the Fed will do is the movement on yield of the US 2-year note. This shorter-term yield is also rising in a material way…and it is signaling a change in trend as well. It has broken above its trend-line going all the way back to 2024…and has now done so in a major way. It has also pushed WELL above its January highs…and is even getting close to testing its spring/summer highs of last year. So, it has signaled an important change well.

In other words, if the yield on the 2-yr note remains elevated…and especially if it continues to push higher…it’s not out of the question that the Fed could indeed hike this year. (Again, that is not our base case, however.)

---7) Well, believe it or not, some of the haven assets started acting like they usually in the second half of last week. After weeks of not having anywhere to turn, investors finally started buying some traditional save havens on Thursday and Friday of last week. As we just mentioned, US Treasury notes and bonds were not one of those havens that they purchased…but we finally did see some outperformance in the precious metals and defensive groups like the consumer staples and utilities. That said, we’ll need to see more action like we did last week to confirm that these assets are indeed seen as safe havens again.

We highlighted how gold had become quite oversold last weekend, so we were not surprised that it finally rallied during the late week decline in stocks (and rise in crude oil). Not only was gold oversold, but so was palladium…and although silver and platinum were not as oversold, they still bounced quite nicely late last week. Like gold, platinum had also reached an oversold level…and thus those two might have the most upside potential. However, all of them are looking like they are poised for another leg to their longer-term bull market……Having said this, we are going to have to see more upside follow-through before we can declare that the trend for this asset class has returned to the upside.

It’s interesting to note that the utility group rallied every single day last week, so that one is looking more and more like a good defensive play. As for the consumer staples, the XLP consumer staples ETF bounced off an oversold condition late last week…and is now trying to regain its 200-DMA. If it can indeed regain that line in a material way, it will give us a lot more confidence that this group can outperform going forward.

One last comment about the consumer staples. Whenever it reaches the kind of oversold condition it did early last week, it tends to rally quite nicely…no matter what the rest of the market does. Therefore, this group could actually be a win/win situation for investors. If the broad market keeps declining, this sector should outperform…and if the market bounces, this sector should be able be able to keep up in a surprising manner.

---8) It is no surprise that Europe is feeling the pinch from the decline in supply of global oil and gas. This has caused their equity markets to go from outperformance over the first two months of the year…to material underperformance over the past month. The longer the war goes, the more pronounced this will become……We’ll be watching the European bank stocks. They are testing a VERY important support level. So, if they fall much further, it’s going to create some real problems for this important sector.

After outperforming over the first two months of the year, European stocks have underperformed the US market since the war began….as the ongoing war involving Iran is having a pronounced and increasingly negative impact on Europe. The primary reason for this is the renewed energy shock…disrupted transportation networks…and deteriorating economic sentiment. The region…still recovering from prior energy crises…is particularly vulnerable due to its reliance on imported oil and natural gas.

As it has for the rest of the world, the conflict has driven a sharp rise in energy prices. Brent crude has surged above $110 per barrel, while European natural gas prices have nearly doubled in recent weeks amid supply disruptions and the near-closure of the Strait of Hormuz. Europe’s dependence on imported fuel…particularly liquefied natural gas (LNG)…has amplified the shock, especially as Qatari LNG shipments have been curtailed.

Looking forward, energy prices are expected to remain elevated and volatile. Policymakers warn that if the conflict persists into late 2026 or beyond…the energy shock could extend into 2027. This would prolong inflationary pressures and weakening growth. Even in moderate scenarios, oil prices could remain near $100 and gas prices significantly above historical norms.

The war has severely disrupted aviation across the Middle East. Multiple countries have closed airspace, forcing European carriers to reroute flights, increasing travel times, fuel costs, and insurance premiums. Air cargo capacity has also declined sharply, contributing to higher freight costs and supply chain bottlenecks…particularly for time-sensitive goods.

Europe is increasingly facing stagflation risks. Higher energy costs are feeding directly into consumer prices…with eurozone inflation expected to rise toward or above 4% in some scenarios. At the same time, economic growth is slowing materially, with some forecasts pointing to stagnation or even technical recession in major economies.

Business and consumer sentiment have deteriorated sharply. Eurozone consumer confidence has fallen to its lowest level since 2023, while business activity surveys show a marked slowdown, reflecting weaker demand and rising input costs. Energy-intensive industries are already cutting output or raising prices…further weighing on economic momentum.

Politically, the crisis is increasing pressure on European governments to intervene through subsidies, energy diversification, and defense spending…potentially widening fiscal deficits……..For the European Central Bank (ECB), the war complicates policy significantly. While growth is weakening, rising energy costs are pushing inflation higher, limiting the ECB’s ability to ease policy. Officials have signaled readiness to act if inflation becomes entrenched, with markets increasingly pricing in the possibility of rate hikes rather than cuts.

Last weekend, we highlighted how the STOXX Europe 600 Index could see a strong bounce…if things calmed down in the Middle East. Since they haven’t calmed down…and the war now seems to be looking like it will last for some time…that bullish scenario has flown out the window. Of course, there will be bounces from time to time…maybe even rather big ones. However, unless the next surge from the US and Israel is something that ends this war quickly…and reopens the Strait (which IS possible)…the underperformance for European stocks will likely continue.

We’ll be watching the bank stocks in Europe for more clues. The STOXX Europe 600 Banks Index is has rolled over and dropped 15%. This decline actually began in early February…several weeks before the war began. (There has been some chatter about large short positions in silver for the European banks for some time now.) This extended drop has taken the European banking index down to its 50-week moving average.

The 50-week MA has provided excellent support for this index ever since it regained that line following the bear market of 2022. Therefore, if it breaks below that line in any significant way, it’s going to send up a bigger warning flag on this group than already existed. That, in turn, would raise more concerns about the European stock market in general. The bullish consensus around the Street on Europe has certainly reversed since the war started. If their bank index breaks below its key support level, these new concerns should rise in a material manner.

---9) Potpourri………As we usually do each week, we have put together some very quick thoughts on several other issues again this weekend. Some of bullet points have to do with the markets…while others have absolutely nothing to do with them. We hope you find them either interesting, thought provoking, or simply just fun.

---The XLE now has its most extended overbought reading on its weekly RSI chart…ever. We’re still bullish on the energy stocks, but they could/should see a decent sized short-term dip at some point soon.

---Heard the song, “Get into the Groove” by Madonna on the car radio today. I had forgotten how good her early stuff was.

---There is nothing…and we mean NOTHING…better than the springtime in Boston…all three days of it…….(How can the fall season be so awesome…and the spring season suck so badly…except for about 3 days)?????

---For some reason, we just cannot shake the feeling that world is going to be a much different place a month from now. We just don’t know if it will be a lot better off…or a lot worse off.

---The Euro has the largest weighting in the DXY dollar index (by far). So, the chart below might say more about the euro than the dollar…but there is no question that the DXY is testing an extremely important resistance level.

---10) Summary of our current stance………..We have spent the past several weeks talking about how the risk/reward equation in the stock market was weighted dramatically towards the side of risk. Given that the stock market had dropped just a 3%…and then 5% (last weekend)…after a MAJOR spike in oil prices (as well as the concerns surrounding the AI industry and the private credit market), we felt that the stock market had the downside risk of 20%...and the upside potential of just 5% or so. Of course, now that the market has fallen further, the risk-reward equation is not as bad as it was a week ago. However, since the odds of a recession…or at least a material slowdown in growth…are moving higher, we still think there is more potential risk than potential reward right now.

Our biggest concern is that the war in the Middle East is going to last longer than most people are thinking (and more than the market is pricing in). Therefore, we worry that the economic outlook…and thus the earnings outlook…will turn south soon. We also believe that since the market is still very expensive, the last thing the market needs is a reversal in earnings expectations.

However, we are also very concerned about the fact that there are two other issues which could create problems for the stock market…even if the situation in the Middle East calms down quickly. First, it is becoming more and more evident that the AI phenomenon is not going to create the kind of broadly dramatic increase in earnings for the tech sector that the market has been pricing in for a couple of years now. Second, the problems facing the private credit market…AND other areas in the credit market…is something that could have a negative impact as well.

What particularly bothers us is that SO MANY people on Wall Street keep telling us that these issues are not something investors need to worry about…because they are not as bad as other similar incidents in the past for these three subjects. They said that since this oil shock will not be as bad as the 1970s oil shock, it’s nothing to worry about…and everything will go back to normal quickly. They’ve been saying the same thing about the AI bubble…and that it’s not as big as the internet bubble of 25+ years ago. Finally, they also say that what is going on today in the credit market is not as bad as it was in 2007/08…and thus it does not pose any systemic risk.

The problem with this thinking is that just because these issues are not as bad as they were in the worst blowups these issues have provided in a generation…does not mean they won’t create some meaningful problems for the markets…….Look, in the three examples we just mentioned, the S&P 500 declined 50% in each case. Therefore, the only thing these people are saying when they state that these issues are not as bad as the worst examples of the past 50 years…is that the S&P 500 is unlikely to fall 50%!!! We’re sorry, but that should offer little solace for investors…given how expensive the market still is today.

We must admit that we understand why people would think that anything less than a total disaster is a reason to remain bullish. Let’s face it, the 35% decline during the pandemic was completely erased in six months…and last year’s deep correction was erased in less than five months! Also, the expectations for renewed liquidity injections (both monetary and fiscal) probably make many of these people believe that we can see the same kind of revival this time around…..In fact, we do agree that this is entirely possible. (We also agree that we don’t have to see a big “capitulation move to form a bottom. We certainly didn’t get that at the end of the 2022 bear market.)

However, we’d also note that it took two full years for the 2022 bear market to recover all of its losses. On top of this, there are plenty of examples in the past where the spike in oil prices…a significant reversal in the tech sector…and some meaningful problems in the credit markets…have been followed by periods of meaningful weakness in the equity market…even if it did not involve a recession …….With all of this in mind, we think investors should be playing today’s markets more defensively than they have up until now…especially if it looks like the war in the Middle East will become something of a protracted conflict.

Table of Contents:

1) The risk/reward equation for the markets is skewed heavily to the side of risk right now.

2) Long-term Treasury yields broke a couple of very important resistance levels last week.

3) The situation in the private credit market (and the credit market in general) did not ease last week.

4) Earnings estimates are starting to rise again…and a few other reasons to remain bullish.

5) Index charts: Some key support levels were broken last week.

6) Charts on the tech sector: They’re still holding their support levels…but not by much.

7) The energy group still looks good. Time to take a shot at a few drillers?

8) Gold….The recent “forced selling” is creating a great buying opportunity.

9) Potpourri……Two interesting oversold charts.

10) Summary of our current stance

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1) It’s now or never for Israel.

2) Liquidity is an extremely powerful force. So, it could keep the markets buoyed for a while longer.

3) The stress in the credit markets is broadening out.

4) Treasury yields stand at an extremely important resistance level.

5) It won’t take much downside follow-through to confirm a change in trend in the major averages.

6) Look to broaden out your exposure in the energy sector….CVX is getting very extended.

7) We remain bullish on gold.

8 & 9) A potpourri of charts…which show that the stock market is skating on thin ice.

10) Summary of our current stance.

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Table of Contents:

1) We know where you live.

2) The stress in the credit markets might not be large, but they’re definitely growing.

3) Rotation? Well, the tech sector is still extremely important…and the chip stocks still hold the key.

4) When markets move to extremes, they don’t have to reach record levels to be considered bubbles.

5) Updates on the charts of the major equity indices.

6) We’re going to dislocate our shoulders.

7) More signs that another leg for the rally in “hard assets” is beginning.

8) The “HALO” stocks are getting expensive and overbought near-term.

9) Potpourri…..The XLF stands at a critical technical juncture.

10) Summary of our current stance.

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Table of Contents:

1) The continued revaluing (and thus reweighting) of the tech sector is likely going to stay with us.

2) Can the chip stocks continue to keep the broad tech sector from falling in a meaningful way?

3) We love Japan, but they are still facing some serious issues.

4) Nice rally in Treasuries, but part of that is due to an increase in stress in the credit markets.

5) Updating the charts on the major averages….Two are testing key support levels.

6) If the home builders continue to climb, two names should outperform from here.

7) Alphabet (GOOGL) is testing a VERY important support level.

8) Updating six charts which have seen some wild moves so far this year.

9) Potpourri…..Bitcoin chart.

10) Summary of our current stance…..Volatility tends to be contagious.

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