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Table of Contents:

1) Earnings are very strong. If the broaden out more than they have so far, it will be quite bullish.

2) The tech indices & ETFs are testing resistance levels. If they break above them = very bullish.

3) Many factors are causing yields to rise…and many of them are bearish for stocks.

4) A significant rise in LT yields and oil price always causes problems for stocks eventually.

5) The Treasury market is far from the only fixed income market feeling stress.

6) Update of the charts on the S&P 500, the NDX Nasdaq 100, and the Russell 2000.

7) While nobody was looking, China’s stock market has fallen into correction territory.

8) Some stocks that should outperform if the market rallies further.

9) An update on several key charts…and none of them are positive updates.

10) Summary of our current stance.

---1) The earnings backdrop remains a major bullish force…with 2026 S&P 500 estimates rising sharply to more than $340 and 2027 estimates approaching $400. However, the improvement is not as broad as it appears…with much of the strength concentrated in technology, energy and materials…while other sectors (like financials) are seeing far smaller gains or outright declines. Therefore, the upcoming third-quarter earnings season will be critical.

With the S&P 500 and the NDX Nasdaq 100 both closing the week within 1% of their all-time highs, it makes perfect sense to begin this week’s piece on the bullish side of the bull/bear ledger. As always, we like to provide issues and developments from both sides of the bull/bear ledger in our weekend piece…while still letting you know which side of that ledger that we stand on at any given time…….We’ll begin by discussing the most bullish issue in the equity market right now: earnings……Again, this issue is obviously a quite bullish one, but it is not as broadly bullish as some on the Street would like to portray it.

The earnings revision story for the S&P 500 in 2026 has been one of the most dramatic in recent memory. Consensus EPS estimates for the broad index have moved sharply higher since January…reflecting stronger-than-feared corporate execution, a resilient U.S. economy…and a significant repricing of commodity-linked earnings. Consensus is now looking for just over $340 in S&P 500 earnings for 2026…up from roughly $290 at the beginning of the year…a 17.5% increase in the estimate. Looking further out, the 2027 estimates have risen from approximately $351 to $396…a gain of more than 19%.....These are not incremental adjustments. They represent a meaningful re-rating of the expected earnings power of U.S. companies…and it has been a key reason why the stock market has rallied so strongly off the March lows.

However, beneath the index level is a story of extraordinary dispersion. The largest upward revisions are concentrated in commodity-sensitive and technology-driven businesses…while several rate-sensitive and structurally challenged sectors have seen substantial downward revisions. Interestingly…despite technology remaining one of the major leadership groups in the stock market…it is not the highest-ranking sector in terms of estimate growth for the next two years. Some of this has to do with the fact that tech estimates were already strong going into 2026, but the breakdown between sectors is still interesting.

Earnings estimates for the tech sector have increased by 28% for this year, and 53% for 2027…while the energy sector has seen their estimates jump by 85% and 40%, respectively! The material stocks have seen their estimates jump by 73% and 15% for each of the next two years…so you can see that these two sector have seen bigger jumps.

It’s also interesting to note that some groups…where Wall Street has spoken very positively on this year…have actually not seen big advances in their earnings estimates. For example, the financials have only experienced a 1.6% rise for 2026…and just 2.6% for 2027……In other words, as much as there has been a lot of talk about how the earnings growth is broadening out…it’s not as broad as some on the Street are trying to portray.

Don’t get us wrong, the rise in earnings estimates (and the actual earnings reports so far this year) HAVE broadened out. So, this IS still a bullish development……It’s just that they need to broaden out quite a bit more if the stock market is going to rally a lot further over the coming months.askb

This makes the upcoming third-quarter earnings season particularly important. Double-digit earnings growth is expected across six sectors…utilities, Industrials, Materials, Consumer Discretionary, Healthcare and Technology. Yet Financials, which investors were extremely bullish on only a short time ago…are now expected to deliver only around 2% earnings growth. That is a significant change in expectations.

There is no question that earnings have been a major driver of the stock market’s advance this year…with the major averages now close to record highs. However, we also have to remember that expectations can change very quickly when the underlying environment changes. In the first half of 2007, for example, consensus was looking for 16.2% earnings growth…only to see earnings ultimately decline by roughly 16% that year…and nearly 50% in 2008……No, we are not suggesting that today’s environment is comparable to the Great Financial Crisis. The point is simply that earnings expectations are not fixed.

There are several potential catalysts that could derail this earnings cycle: trade policy and tariff uncertainty, geopolitical developments…particularly anything that causes another sustained increase in oil prices…and increasing pressure on the consumer. If energy prices remain elevated…the consumer could face further cracks…creating a difficult feedback loop for corporate earnings.

So, our view is straightforward: the earnings revision cycle has been spectacular…but its composition deserves very close attention. A significant portion of the improvement is concentrated in commodities and technology…while important parts of the economy are seeing estimates deteriorate. (Let’s face it, higher commodity earnings are certainly positive for those companies…but they are not necessarily positive for the broader economy or the all-important consumer.)

For now, the earnings numbers are spectacular, and if they continue to come through at these levels, they will clearly provide an important bullish catalyst for stocks. However, with estimates having risen so dramatically…and with some investors even describing portions of the forecast as approaching bubble territory…we believe the third-quarter earnings season will be critical……As long as these expectations continue to be met or exceeded, the earnings cycle can continue to support the market. But if the environment changes, those elevated expectations could become a significant source of risk…….Which is a long-winded way of saying that the upcoming earnings season will be extremely important once again…and the expectations will need to be exceeded in a meaningful way.

---2) Technology Stocks…Can They Break Out?........Technology has rallied strongly, but the key question is whether the move represents the beginning of a sustained advance or simply another rally within a long trading range. The SOX, XLK and major technology ETFs need decisive breakouts above their prior highs to confirm a broader advance, while individual stocks such as PLTR are showing improving technicals and GOOGL remains a concern; the technology group could either drive the next leg higher or become a major headwind.

As we move into the fourth quarter…and after last week’s positive action…we believe the technology sector is approaching a critical juncture. Since the tech sector remains (by far) the most important one in the stock market, this “critical juncture” is not only for technology itself…but for the broader stock market.

Technology has enjoyed a very nice rally over the past week…helped in large part by the introduction of Meta’s Muse AI agent. The enthusiasm surrounding Muse helped lift virtually every major group within technology…and several areas moved back toward their all-time highs. The question now is whether this is the beginning of another sustained leg higher…or simply another rally within what has largely been a sideways market.

Our view is that we need to see considerably more upside follow-through before we can conclude that a durable new advance is underway. The semiconductor stocks are particularly important because they remain the key area of weakness within technology. The SOX semiconductor Index rallied nicely last week…which helped it move back above its 100-day moving average…and generated a positive MACD cross. However, it is still trading below its August highs…and remains meaningfully behind both the S&P 500 and several other technology groups…..A break above the August high near 12,800 would be an important short-term bullish signal. Ultimately, however, the semiconductors will need to break decisively above their June all-time highs to signal that a much larger advance is developing. (First chart below.)

The XLK technology ETF is also at a critical point. It has moved close to its all-time high near 198…and a meaningful break above 200 would be particularly constructive. Conversely, failure at this level could create a double-top pattern and reinforce the idea that technology remains trapped in its broader trading range……Given technology’s enormous influence on the S&P 500…what happens next for the XLK could have significant implications for the entire market. (Second chart below.)

We also continue to watch Meta’s Muse story closely. We view Muse as a genuine product breakthrough…with extraordinary early adoption potential…but we believe the meaningful financial contribution is more likely a 2027–2028 story at the earliest. The bullish case is based on Meta’s enormous distribution, multiple potential monetization avenues, and the possibility that its massive capital expenditures ultimately become revenue-generating assets rather than simply costs. The risks are equally important: near-term free-cash-flow pressure, competition, and platform gatekeeping from companies such as Amazon…as well as privacy concerns, and the possibility that monetization continues to be pushed further into the future…are all issues which leave the level of uncertainty quite high.

As we keep an eye on the key tech ETF’s, we’ll also be watching some individual stocks as well. On the bullish side, Palantir (PLTR) remains particularly encouraging. It has broken above its downward-sloping trend channel, reclaimed its 200-day moving average and generated a positive MACD cross. So, a move above its $208 all-time high would provide an important confirmation that its advance is becoming more powerful. (Third chart below.)

Alphabet (GOOGL), however, is a stock we are watching with considerably more caution. It has made another lower high…and has struggled to generate upside momentum…and is testing its 200-day moving average for the fourth time. A strong bounce would be constructive…but a meaningful break below that support would be a major warning flag. (Fourth chart below.)

GOOGL is widely viewed as one of the potential long-term winners of the AI race, so significant weakness would raise broader questions about the sustainability of the AI investment cycle. The fact that Amazon was a dominant beneficiary of the original Internet boom did not prevent its stock from falling dramatically when that bubble burst. In the same way, even a company with enormous long-term AI potential would not necessarily be immune if the AI investment cycle begins to deflate.

Therefore, as we enter the fourth quarter, technology remains one of the most important areas for us to watch. If semiconductors, XLK, (and the MAGS Mag 7 ETF) can break decisively higher…it would provide important confirmation that the market’s advance can continue. However, if these rallies fail again…and they roll-over… tech could become a significant headwind for the broader market. There will be plenty of key tech names to follow, but we believe that PLTR and GOOGL are ones which should be watched particularly closely.

---3) Our view on longer-term interest rates is pretty straightforward. Although we could see a near-term rally in bonds (drop in yields), we would not confuse this with the end of the multi-month rise in those yields. We also do not see this as a reason to be bullish on the stock market. In other words, even though there are signs that the US economy is improving, that is far from the only reason for the significant move higher in yields this year. The other issues are very important…and we believe they will keep yields elevated for the time being.

We want to touch on the near-term outlook for the Treasury market first, however. It has become quite oversold…and sentiment is deeply depressed. In fact, futures traders are showing bullishness of only about 10%...and an 18-day average of just 14% bullishness! This is extreme…and when you have that many investors positioned on one side of the boat, it creates the conditions for a material contrarian move. So yes, we could see bond prices bounce and long-term yields come down before long…but we would view that as a trading opportunity…not necessarily the beginning of a sustainable decline in rates.

Why? Because there is much more going on here than simply a stronger economy……We readily acknowledge that the economic data have improved. The Citi Economic Surprise Index has surged from roughly 15 to 46 over the past two months. That tells us the economy has been outperforming expectations. However, inflation is also proving to be more persistent than investors had hoped…with both CPI and PPI recently coming in hotter than expected.

And then there is the Federal Reserve……This is where we think the stock market may be underestimating the risk. Since the Fed’s rate increase, the message coming from Fed officials has been decidedly hawkish. Michael Barr, Anna Paulson, Thomas Barkin, Beth Hammack and Susan Collins…have all emphasized the need to remain aggressive in fighting inflation. Also, Austan Goolsby has gone even further….saying that the economy may have to experience some pain before inflation gets back to the Fed’s 2% target.

That is not the language of a Fed that is preparing to quickly reverse course…and thus we believe it’s something that will negatively impact the equity market before too long. In fact, this is exactly how the spoke after they began their rate hiking cycle in 2022. So, we are becoming increasingly concerned that the market is still thinking in terms of a “one-and-done” rate hike. We think that is dangerous……If the Fed ultimately DOES stop after one additional hike…there is a good chance it will be because the economy has weakened materially. And if that is the reason, it certainly would not be a bullish development for stocks.

But perhaps the biggest issue is fiscal policy…..Investors around the world are demanding a higher risk premium because governments are running enormous and deteriorating budget deficits. More importantly, this is not just a U.S. problem. The 10-year Treasury is at its highest yield since 2007, while the 30-year Treasury is at its highest level in roughly three decades. Japan’s 10-year JGB has moved above 3%...its highest level since 1996. On top of this, the U.K. 10-year gilt is at its highest level since 2007…and the German 10-year Bund is at its highest level since 2009. So, you can see that this is a global phenomenon. These are not countries that are seeing outsized growth at all…and in the case of France, things are slowing materially.

Speaking of France, the fiscal situation is becoming increasingly serious. The country has failed to get its deficit below the EU’s 3% threshold since 2018, recently abandoned its 2026 deficit target…and its CDS prices have risen to levels not seen in more than a decade!

Therefore, we believe the bond market is telling us something important. This is not simply a story about stronger economic growth. It is about inflation, Fed policy, massive government borrowing and investors demanding to be paid more for taking on that risk……Could long-term rates fall in the short run? Absolutely. In fact, given how oversold the bond market has become, we would not be surprised to see it happen.

However, unless we see a significant slowdown in growth over the next three to six months, we believe the risks remain skewed toward structurally higher long-term yields…and that matters enormously for stocks……History is very clear: when long-term interest rates rise sharply and stay there, the equity market eventually pays the price. The old saying is, “Don’t fight the Fed.” Right now, we would add another warning: don’t fight the bond market either.

---4) Rising Rates + Rising Oil Prices…….History shows that periods when long-term interest rates and oil prices rise sharply together have often been followed by significant equity-market declines…even when stocks initially absorb those pressures without much difficulty. The current resilience therefore should not create complacency…particularly with diesel prices also rising; the concern is that higher financing and energy costs eventually begin to pressure consumers, corporate earnings and economic activity.

One of the most important arguments we have made repeatedly this year is that investors should not become overly complacent simply because the stock market has been able to absorb a significant rise in long-term interest rates and oil prices without suffering a major decline…at least so far. History tells us that this type of resilience is not unusual. In fact, the stock market has repeatedly been able to “shake off” these pressures initially. The problem is that, eventually, it has not been able to do so forever. Eventually, these issues always have a negative impact on stocks.

This is something we’ve been talking about quite a bit over the last month or more…but we think this is a good point in this weekend’s piece to reiterate the history behind these moves. (It’s also…finally…something that others on the Street are beginning to talk about.)

Over the past 40 years, there have been several important periods—including 1987, 2000, 2007, 2011, 2018, 2020 and 2022…when a significant rise in long-term interest rates occurred alongside a meaningful increase in oil prices. In every one of those instances, the S&P 500 subsequently experienced a substantial decline…ranging from roughly 19% to 50%. The historical pattern is remarkably consistent: higher borrowing costs and higher energy costs eventually become a meaningful headwind for corporate earnings, consumers and economic activity…not to mention the competition those higher guaranteed rates give the stock market

The relationship between rates and oil is also important because the two can reinforce one another. Higher oil prices can intensify inflationary pressures…making it more difficult for interest rates to decline…while higher rates can increase the economic burden created by expensive energy. This does not mean that every increase in rates or oil prices automatically produces a bear market. However, when both move sharply higher over a relatively short period, history suggests that investors should take the combination very seriously.

That is why we are not particularly reassured by the market’s ability to absorb these moves today. The argument that “the market has already shrugged it off”…or “has already price it in” misses the historical lesson. The market has almost always shrugged it off initially. It is what happens later that has mattered.

We have previously shown charts demonstrating the relationship between major increases in long-term interest rates, oil prices and subsequent weakness in the S&P 500…and we have reproduced those charts below……We have now added a third chart examining diesel prices over the past two decades. (Third chart below.) This is particularly relevant because diesel remains critical to the transportation of goods and people throughout the global economy. Transportation companies may not represent as large a share of the economy as they did decades ago…but the cost of moving goods remains an important economic variable. A sharp rise in diesel prices therefore creates another potential source of pressure on businesses and consumers.

Our point is not that the market must decline immediately. It is that investors should not mistake short-term resilience for evidence that the historical relationship has disappeared. The stock market has repeatedly demonstrated an ability to ignore rising rates and energy prices…until it doesn’t. And historically, when that reversal has occurred, it has not been a minor adjustment. It has often been a very significant decline……That is why we believe these trends deserve considerably more attention than they are receiving today.

---5) The key message we wanted to convey in the past few points is that the stress in the fixed-income markets is much broader than simply higher Treasury yields. It is not just the 10-year Treasury that is under pressure; even shorter maturities…including the two-year note…are moving toward 5%. More importantly, however, a number of indicators across the fixed-income landscape are beginning to flash warning signs that are not yet being reflected in traditional credit spreads.

As we have emphasized before, credit spreads tend to remain remarkably tight…until a credit problem has already become serious. That is why we believe the charts we have provided below are particularly important: they provide a clearer picture of the underlying stress. (A picture is worth a thousand words.)…..With this in mind, we have updated several charts from recent weeks…to explain what we mean.

The high-yield market, for example, has been diverging from equities for roughly a year…making a series of lower highs and, more recently, a significant lower low. HYG has also declined sharply…creating an increasingly important divergence with the stock market. Most notably, its monthly MACD is now approaching a potentially significant negative crossover…a development that, when it has occurred in the past, has often preceded substantial additional weakness in high yield.

The same concerns extend to private credit. Despite repeated assurances that conditions are stabilizing…we continue to see restrictions or closures of withdrawals from private-credit funds…while the stocks of major private-credit firms are showing meaningful technical deterioration. Blue Owl (OWL) has rolled over sharply from its 50-week MA…and is approaching a negative MACD cross……Also, Blackstone (BX) has fallen below its 200-week MA…and is nearing a similar negative weekly MACD signal…while Apollo (APO) has formed a descending triangle…and is approaching a potentially important negative MACD cross.

There are also warning signs within the credit markets surrounding the hyperscalers. We continue to believe that the hyperscalers could ultimately be an important catalyst for another leg higher in equities. HOWEVER, the behavior of their CDS prices is raising questions. Credit-market pricing is becoming less comfortable even as companies such as Oracle (ORCL, Alphabet (GOOGL) and Amazon (AMZN) are seeing their CDS prices make substantially higher highs. This divergence raises legitimate questions about the enormous amounts these companies are spending on AI infrastructure and…the debt they’re raising to fund this spending…and ultimately, the return they will earn on that investment.

The bottom line is that the fixed-income market is exhibiting considerably more stress than headline credit spreads suggest. None of these indicators, by themselves, guarantees a broad stock market decline. However, taken together, they suggest that investors should be paying much closer attention to ALL of the credit markets…because they may be signaling problems well before those problems become obvious in traditional measures of credit risk.

---6) Major Index Charts…..The major averages have essentially gone nowhere on a net basis for roughly six weeks…leaving the S&P 500, Nasdaq 100 and Russell 2000 at important technical crossroads. The Nasdaq has improved significantly and could become very bullish if it decisively clears its prior highs…while the S&P needs to break out despite a negative weekly MACD signa…and the Russell 2000 is showing greater deterioration……In short, the bulls need to deliver a meaningful breakout soon.

The stock market has been remarkably quiet on a net basis. The S&P 500 and Nasdaq 100 are almost exactly where they were six weeks ago…and both have essentially been moving sideways for the past three to four months. Thus, even though they are close to new highs, the net moves have not been important recently……..The Russell 2000 has followed a similar pattern…although it did outperform during the summer…and is now beginning to underperform again.

That lack of movement is about to become much more important because all three major averages are approaching critical technical levels.

Let’s start with the S&P 500. It remains just below its all-time high and, despite last week’s gain, it is still below the trend line that goes back to March. More importantly, the weekly MACD has recently generated a negative cross. That deserves attention because the last two times we saw this same signal, the stock market subsequently suffered outsized declines. It does not mean another decline is inevitable by any means, but it tells us that the S&P cannot afford to stumble here. It needs to move higher…and it needs to do it soon. That said, if it CAN move higher…and take out it’s all-time high in any significant way…it will be very bullish……So, you can see, the SPX does indeed stand at a critical juncture. (First chart below.)

The Nasdaq 100 is in better shape. It had a very strong rally last week…broke out of its symmetrical triangle pattern…and generated a positive weekly MACD crossover. This tech-heavy index was helped by renewed enthusiasm surrounding Meta’s Muse AI product…and that strength spread across much of the technology complex…..There is, however, still one hurdle that matters: the NDX has not broken above its old highs in a meaningful way yet. If it can…it will be VERY bullish. However, until it decisively clears those highs, we have an improved chart…not a confirmed breakout. (Second chart below.)

And that distinction is extremely important. If the Nasdaq can push above those highs and hold the breakout…it could unleash a significant amount of upside momentum……Given how close the S&P and Nasdaq already are to their all-time highs, a breakout in both would be a very powerful technical development.

The Russell 2000, however, is sending a different message. It declined last week and is now testing its weekly trend line extending back to March 2025. It has also already experienced a negative weekly MACD cross. Thus, if that trend line breaks decisively, the technical deterioration in small caps could/should accelerate. (Third chart below.)

So, this is the message heading into next week: the market is at a technical crossroads. The S&P and Nasdaq are knocking on the door of new highs. vIf they break through, the resulting momentum could be substantial—and could finally produce the type of broad market rally the Trump administration has been hoping for.

That said, there is very little room for complacency. The S&P’s MACD warning…and the Russell’s weakening trend are telling us that the market has to prove itself. The next major move matters…and right now, the charts are saying that the bulls need to deliver. If not, the above-mentioned moves in several other asset classes could create a significant change in trend…very quickly.

---7) China’s economy continues to face structural challenges from the prolonged property downturn, weak consumer demand, deflationary pressures, demographic changes and excess capacity…while shifting trade dynamics add further uncertainty. The CSI 300 Index has essentially gone nowhere over the past year…and is now testing important support. Therefore, a decisive break below that level would represent a meaningful deterioration…and could have broader implications for global growth.

With all the attention surrounding the potential summit between President Trump and President Xi…there has been surprisingly little discussion about what is happening beneath the surface of the Chinese economy and its stock market. That is something we believe investors should not overlook. China’s economic trajectory over the past several years has been uneven, and while we still expect the economy to produce positive growth…that growth is likely to remain structurally slower for some time.

There are several reasons for this. The prolonged property downturn continues to weigh on household wealth and confidence…while subdued consumer spending and persistent deflationary pressures remain significant concerns. At the same time, shifting U.S.-China trade dynamics create another layer of uncertainty for Chinese manufacturers and exporters. Beyond these cyclical issues, China also faces important structural headwinds…ncluding an aging population and what is often referred to as “involution”…intense domestic competition and excess capacity that can undermine pricing power and corporate profit margins.

All of this matters for the stock market because slower growth…weaker consumer confidence…and excess capacity can constrain corporate profitability, capital investment, and consumption for years rather than merely a few quarters. Against that backdrop, it is not particularly surprising that China’s stock market has fallen roughly 12% over the past three to four months.

What is more concerning to us, however, is the technical picture. The CSI 300 Index currently stands almost exactly where it did 12 months ago…meaning that despite considerable volatility over the past year…investors have essentially gone nowhere. More importantly, after its recent decline…the index is now testing important support established by the lows from December of last year and again in March and April of this year.

That makes the current level particularly important. If the CSI 300 breaks decisively below this support, it would represent a meaningful technical deterioration…and could signal that the weakness in Chinese equities is becoming more than simply a consolidation. (Chart below.)

Our point is not that China is about to experience an economic collapse. Rather, we believe investors need to pay attention to the risks developing outside the United States. We remain focused very closely on the U.S. economy and markets…but we do not want that focus to cause us to miss important developments elsewhere. If global growth is already facing structural challenges, a meaningful slowdown in China would only add to those concerns…and could ultimately have important implications for the global economy and financial markets.

---8) Despite a cautious six-to-twelve-month market outlook, several individual stocks could benefit if a liquidity-driven…and momentum-driven rally…develops in the near term. AAPL remains in a strong uptrend…MSFT is attempting to break out of a multi-week consolidation…IONQ is breaking out of a symmetrical triangle…and BE has repeatedly found support at its 200-day moving average. Thus, any decisive moves above their respective resistance levels would strengthen these bullish technical setups.

Our overall view of the stock market remains cautious…particularly as we look out over the next six to twelve months. There are simply too many developments coming together that, historically, have often accompanied important market tops. Valuations remain elevated, the rally has been unusually narrow, interest rates have risen sharply…and oil prices have moved significantly higher. At the same time, we are seeing important divergences…particularly between the S&P 500 and the semiconductor stocks and between the S&P 500 and the high-yield market. On top of all this, we still have major questions surrounding the ultimate return on investment from the enormous amount of capital being committed to AI.

Taken together, these are not developments we want to ignore. In fact, when several of these conditions occur simultaneously…history tells us that the market can become increasingly vulnerable to a more significant correction.

That said, being cautious over the next six to twelve months does NOT mean we believe the market has to decline immediately. Quite the contrary. We can easily envision another near-term rally…particularly between now and the election. There is still considerable liquidity in the financial system…as reflected in the continued expansion of the Federal Reserve’s balance sheet. The administration also has a strong incentive to maintain favorable financial-market conditions into the election.

There is another potential catalyst that we cannot dismiss: a surprisingly positive development regarding the Middle East. A meaningful announcement concerning the war…even if it ultimately proves temporary…could produce a sharp relief rally in stocks…particularly if it causes oil prices to retreat and reduces some of the geopolitical risk premium embedded in markets.

So, our message is that investors should definitely remain extremely nimble. Yes, the situation could turn down rather quickly, but it’s not out of the question that a momentum-driven (& liquidity-driven) rally could take place over the coming weeks…especially if the SPX and NDX can push to some compelling new highs.

With this in mind, we want to identify the areas of the market that could benefit the most…if (repeat, IF) a big breakout move does indeed take place……..That is why we will focus next on four individual stocks that, in our view, could outperform if this near-term rally develops….even though our broader six-to-twelve-month outlook remains decidedly more cautious…….We will provide a very short description of each chart...and needless to say, this is not a conclusive list by any means. However, they are some stocks which look poised to rally strongly…if the broad market sees a bullish move between now and the election.

Apple (AAPL)…….This stock has been in a well-defined uptrend for nearly a year…consistently producing higher lows and higher highs…and it recently broke to a new all-time high. The stock has also generated a positive weekly MACD cross…a technical signal that historically has often preceded additional gains. If the broader market rallies between now and the election, AAPL appears well positioned to participate and potentially extend its recent advance.

Microsoft (MSFT) has rallied strongly following its earnings report but has spent the past five to six weeks consolidating in a sideways trading range. The stock is now attempting to break out of that range…while also generating a positive MACD cross. So, a decisive move above roughly $520 would strengthen the breakout…and could provide the momentum needed for Microsoft to outperform over the next several weeks.

IonQ (IONQ) is breaking out of a “symmetrical triangle” pattern…while simultaneously generating a positive MACD cross…creating an increasingly constructive technical setup. A move above its August highs near $48 would represent an important upside breakout. Such a move could generate significant momentum…and put the stock in position to outperform.

Bloom Energy (BE)…..This stock suffered a sharp midweek decline last week, but staged a very strong rebound…demonstrating considerable underlying buying interest. The stock has also developed two separate “higher-low/higher-high” sequences over the past two months and has once again bounced off its 200-day moving average…the third such successful test in three months. Therefore, a decisive breakout above the $290–$300 area would significantly strengthen the technical picture and could lead to another powerful advance.

---9) Several important market segments are showing technical deterioration beneath the surface…including financials, banks, consumer discretionary, retailers and the S&P 500 Equal Weight Index……The XLF and KBE have broken…or are testing…important trend lines, while the XLY and XRT are weakening further. Finally, the S&P 500 Equal Weight index has broken below its March trend line with a negative MACD cross…underscoring the narrowness of the market…and raising questions about the sustainability of another broad advance.

As much as we think there are reasons to think that the market could see a boost between now and the election, we do NOT see this scenario as a given. In fact, we still believe that the stock market is extremely vulnerable right now…for the reasons we have spelled out in several different points this weekend.

In other words, even tough we just listed several stocks which could do well IF the market pushes higher near-term…we also want to update several different charts from recent weeks…which provide a further explanation as we why we are concerned about the stock market overall right now. (Like we did in the previous point, we will provide a quick description of these updated charts just above the chart.)……We’re afraid that all of them have deteriorated since we posted them recently, but they’ll have to fall further before they raise any serious warning flags.

We’ll begin with the XLF Financial ETF…which has broken below its trend line dating back to March…while also registering a slightly negative weekly MACD cross. This combination is technically concerning and suggests that momentum in the financial sector is deteriorating. Thus, any additional downside from here would likely confirm a more meaningful change in trend for this important sector.

The KBE Bank ETF…is testing a much longer-term trend line dating back to the spring of 2025 and is also approaching its 50-week MA. More importantly, it has already experienced a meaningful negative weekly MACD cross…suggesting that a change in trend may be developing…..A decisive break below the trend line would confirm that deterioration and would be technically negative for the banking group.

The XLY Consumer Discretionary ETF has slipped slightly below the lower boundary of a “symmetrical triangle”… while also experiencing a negative weekly MACD cross. The key level to watch is 108…because a break below that level would create a significant “lower low.” Any further downside follow-through would therefore strengthen the evidence that the ETF is beginning a more meaningful technical deterioration.

As for the XRT Retail ETF, it has already broken below its trend line dating back to April 2025…and is now testing its 100-weekMA…which has provided important support over the past year. At the same time, the ETF has registered a negative weekly MACD cross…adding to the technical concerns. Therefore, it would take relatively little additional downside to confirm a key change in trend for this important consumer-related group

Finally, for the S&P 500 Equal Weight Index, it has broken below its trend line from March…and has also registered a notably negative weekly MACD cross. On the last three occasions this signal occurred, it was followed by declines of meaningful magnitude. The deterioration in the equal-weight index is particularly important because it underscores the narrowness of the current market…and raises concerns about the ability of the broader market to sustain a further rally.

---10) Summary of our current stance……..We continue to see a very mixed picture in the stock market…with legitimate arguments on both sides of the bull-bear ledger. On the bullish side, there are still several reasons to believe the market could move higher over the near term. The most important of these is the strength of corporate earnings. Earnings estimates remain very strong, and as long as that strength continues, it provides an important fundamental underpinning for equity prices……Liquidity also appears to remain quite plentiful…which is another meaningful positive. Moreover, if the administration can make progress toward an agreement that would bring an end to the war in Iran…and/or help bring oil prices back down…that could provide another significant boost to the markets over the next several weeks.

Perhaps the most important technical factor to watch is whether the S&P 500 and Nasdaq can break decisively above their all-time highs. A marginal move above those levels would not be enough. We would want to see a meaningful breakout accompanied by sustained upside momentum. If that occurs, it could trigger another leg higher and carry the market significantly further in the near term.

HOWEVER, while we recognize the possibility of another rally, we remain quite concerned about the market’s longer-term sustainability. The problem is that we are seeing a large number of conditions that historically tend to appear around significant market tops…….It would be one thing if we were dealing with only one or two warning signs…but when numerous warning signals appear simultaneously, the overall picture becomes much more concerning.

Valuations remain stretched…market breadth is unusually narrow (with the advance has been heavily dependent on a relatively small number of stocks). At the same time, oil prices have risen sharply over a relatively short period…while long-term interest rates have also moved substantially higher. The equity market has a remarkable ability to ignore rising rates and energy costs for months at a time…but history shows that it eventually reacts…and often reacts quite negatively.

We are also increasingly concerned about important divergences. The S&P 500 has not been confirmed by one of its most important leadership groups...the semiconductor stocks, while the high-yield market is also failing to provide the kind of confirmation we would like to see. Add to that the considerable geopolitical uncertainty around the world…and the risk profile becomes even more difficult to ignore.

Given that our longer-term concerns are substantial…and that a further break-down in a small number of them could quickly reverse the outlook for earnings growth over the next 12-15 months…we are leaning heavily to the bearish side of the ledger…and that “lean” will become more prominent if the market holds up until Election Day…….A further rally is far from a lock…and thus investors should remain very, very nimble. Either way, we believe that they should be watching the developments in the ENTIRE fixed income asset class. There is more going on there than most people on Wall Street are discussing.

Table of Contents:

1) Investors may be underestimating the significance of higher interest rates and the Fed’s recent tightening.

2) The recent rebound in the chip stocks is positive, but it needs to see more upside follow-though.

3) The MAGS Mag 7 ETF is testing a very important resistance level, so it’s next move will be extremely important.

4) The outlook for the European stock market is suddenly dimming quite quickly.

5) The charts on the major indices. (The A/D lines are rolling over in a precarious fashion.)

6) The recent weakness in the financial sector is raising some material warning flags.

7) Is the meaningfully poor action in the Transports telling us something about the US economy?

8) The recent retail sales data was spectacular…so why are the consumer stocks under so much pressure.

9) Potpourri…..Five important charts on BX, HYG, USDJPY, Gold, and Bitcoin.

10) Summary of our current stance.

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Table of Contents:

1) The US Treasury bond market is in very rough shape, but it’s due for some near-term relief.

2) Similarly, oil prices are extended on a technical basis…even if they continue to head higher over time.

3) The fact that the chip stocks continue to lag…in the face of such good earnings…is a big warning flag.

4) The charts on APPL and ORCL….One looks very good…one, not so much.

5) The broadening out of the rally is quickly becoming a thing of the past.

6) The high yield market is starting to send out some very serious warning signals.

7) The US dollar is on the cusp of an important change in trend.

8) The action in the housing stocks is starting to signal some real concerns for the US economy.

9) Bitcoin’s “golden cross” could be exactly what the bulls have been looking for.

10) Summary of our Current Stance….Can “they” keep the holes in the dyke plugged until the midterm election?

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Table of Contents:

1) Budget deficits and massive corporate supply are making it much harder to jawbone the bond market.

2) Can the financial stock sector breakout & help push the broad market higher? Watch GS for clues.

3) Crude oil is on the cusp of breaking out…just as the situation in the Middle East is escalating again.

4) It’s still extremely important to watch the chip stocks closely. It’s still very reminiscent of 2000.

5) The hyperscalers are trying to breakout to the upside. Will they succeed?

6) Charts on the major indices…a different look.

7) The weakness over the past few weeks in the aerospace/defense sector has created a good opportunity.

8) When in the world did the precious metals lose their role as a hedge against inflation???

9) Potpourri…..The carry trade could be in big trouble.

10) Summary of our current stance.

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I will be out a couple of days in the middle/end of next week. HOWEVER, even though I will not be publishing my daily piece in the second half of next week, I will be publishing my weekend piece next weekend……..That said, since next weekend is a long weekend, I probably won’t be sending it out until that Sunday evening or Monday morning (Labor Day)…………Thank you and enjoy the last week of summer!!!

Table of Contents:

1) Fed Chairman Warsh just told us that the “Fed put” is going to be further out-of-the-money going forward.

2) The chip stocks continue to pursue the same path they followed in 2000…when the last tech bubble burst.

3) The hyperscalers are acting better…and they now stand at a key technical juncture.

4) The Transportation stocks (especially truckers/airlines) are suddenly rolling over in a material way.

5) Index charts: The stock market’s momentum is weakening ahead of the seasonally rough time for the markets.

6) Energy stocks remain well position for further gains.

7) Gold, silver, and Bitcoin maintain constructive long-term trends.

8) The industrial stocks are becoming more vulnerable as their technical momentum fades.

9) Potpourri….The housing stocks stand at a key juncture.

10) Summary of our current stance….The developments of the past two weeks point to increased volatility.

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Table of Contents:

1) Signs that the system is broken…..Bond Market Warning Signs & Equity Valuation Risks

2) Bull Market Support: Earnings…AI…Growth…and Liquidity

3) Nvidia Earnings: A Critical Test for the Chip stocks.

4) AI Investment Risks & Semiconductor Technical Warnings

5) The Recent Mag 7 Weakness & Emerging Trend Risks.

6) The charts on the Major Indices: Technical Cracks & Key Levels

7) US Dollar Weakness….Hard Assets & Bitcoin Momentum

8) Bank Fundamentals vs. Deteriorating Technicals

9) Japan: Rising Economic, Fiscal & Market Risks

10) Summary of Our Current Stance: Hurricane Season is Here…Buy Some Insurance.

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I will be on vacation next week, so there will be no weekend piece next weekend (nor daily pieces as well)……I will be back on Monday, August 17^th…and will return to my regular publishing schedule. Thank you very much.

Table of Contents:

1) Fed Liquidity: Why the Fed may have little choice but to keep supporting the financial system.

2) Long-Term Interest Rates: Why Treasury yields could eventually decline—but remain vulnerable to further increases.

3) Corporate Bonds: Growing credit-market stress, heavy debt issuance, and warning signs for risk assets.

4) Technology Stocks: Why the tech rebound may not be the all-clear signal—and why 2000 still matters.

5) Major Averages: A powerful market rebound that still needs broader confirmation and follow-through.

6) Precious Metals: Gold, silver, and miners are rebuilding bullish momentum after their earlier correction.

7) Energy: Why the Strait of Hormuz, tight oil supplies, and technical setups keep the sector compelling.

8) Aerospace & Defense: A potentially multi-year defense-spending cycle—and why Northrop Grumman stands out.

9) PLTR & KTOS: Two technology-driven stocks on the cusp of potentially meaningful technical breakouts.

10) Summary of our current stance.

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Table of Contents:

1) The Tech Sector has to Bounce A LOT More to Signal that the Worst is Behind it.

2) Wall Street has to Adjust to Warsh as the New Fed Chief, Not the Other Way Around!

3) Higher Long-Term Interest Rates Are Being Driven by More Than Inflation.

4) Japan’s Yen Intervention Could Have Major Liquidity Implications.

5) Key Support and Resistance Levels for the Major Averages Will Shape the Market’s Next Move.

6) Escalating Geopolitical Risks Continue to Favor the Energy Sector.

7) Housing Stocks: Short-Term Relief Possible, but Intermediate-Term Risks Remain Elevated.

8) The Healthcare Sector Still Looks Quite Bullish, but it Does Need to Rebound Further Soon.

9) Summary of our Current Stance.

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Table of Contents:

1) Strong earnings & abundant liquidity continue to provide important support for stocks.

2) The AI leaders continue to deliver strong fundamentals, but weakening price action is raising important warning flags.

3) Credit Markets Are Beginning to Crack…as some key credit spreads are beginning to wide significantly.

4) Long-term interest rates ARE at levels which should provide headwinds equities…no matter what other try to say.

5) Index charts: The broader market remains resilient, but several key technical indicators are beginning to weaken.

6) Geopolitical risks should keep oil prices elevated…supporting a constructive intermediate-term outlook for energy stocks.

7) Rising energy and food prices suggest inflation may remain more persistent than many investors expect.

8) Consumer spending remains resilient, but mounting inflation and higher interest rates are beginning to test that strength.

9) Potpourri…..The financial stock ETFs remain at key technical junctures.

10) Summary of our current stance.

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Table of Contents:

1) “Sell the news” is becoming a common reaction to earnings/guidance…especially in the tech sector.

2) Lots of charts on individual tech stocks……….Also, “something is rotten in the state of Denmark.”

3) We’re seeing a lot more “rotation” than a “broadening out” move right now….There’s an important difference.

4) People invest in bonds and stocks…not inflation. (Yields are elevated despite subdued inflation.)

5) Review of the Index charts….Key levels to watch.

6) The outlook for the energy sector is suddenly looking much brighter again.

7) First, it was the breakdown in the South Korean KOSPI…now other stock markets in Asia are doing the same.

8) Not only is the energy sector looking better…so is the broad commodity asset class.

9) The banks are breaking out strongly. It will take a significant reversal to change their bullish outlook!

10) Summary of our current stance.

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Table of Contents:

1) Broadening vs. Rotation: Why the Chip Stocks are Still the Key to Whether the Bull Market can Continue or Not.

2) Hyperscalers at a technical Crossroads: Key Support/Resistance Levels for the 4 Biggest Names (plus AAPL).

3) Chip Stocks at Similar Crossroads: The Key Support/Resistance Levels to be Watching.

4) Aerospace/Defense: A Healthy Pullback or the Start of a Downtrend? Fundamantals Remain Strong as Technicals Reset

5) The Market Indices at an Inflection Point: S&P 500 & NDX 100 Pause…While Russell 2000 Signals Broader Strength.
6) Will this Week’s Inflation Data Push Long-term Rates to a Level that will Signal a Key Change in Trend to the Upside?

7) Financial Stocks at a Critical Crossroads…and Earnings Should Determine if the Rally Continues or Reverses.

8) Why Any Further Weakness in South Korea’s KOSPI Index Could Hold Important Clues For Global Markets.

9) Potpourri….Will Geopolitics Matter for the Markets Again Soon? (They Matter Don’t Right now.)

10) Summary of our current stance.

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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…

Take advantage of our 25% discount to join The Maley Report….at this critical time in the markets!….This offer ends early next week!

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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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