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SpaceX the Phone Company?
ATTN: Sami Abusaad and James Rich Young’s Pristine Mentorship starts soon. Check it out here.What a week! AI stumbled on reports of disappointing revenues at OpenAI. Middle East tensions kept oil prices high. US Treasury iields hit multi-decade highs. And Elon Musk’s SpaceX might be your new phone company! Let’s jump into it. Skip Ahead! October Is Getting BetterElon Musk Wants a Big Piece of the Phone/Internet/Cable PieJensen Huang Might Be Right About MarvellSentiment Is NeutralNext Week Will Be LoudRate Hike Expectations Subject to ChangeREMINDER: Join the Mentorship October Is Getting BetterSeptember was a very tricky month, with just 113 of S&P 500/SPY stocks up for the month. The average name was down 4.6%, and tech was the only major sector that was in the green. Things are broadening out in October. The SPY is up 2.1% for the month, and every sector is in the green, aside from Communications.And Communications would be positive if not for T-Mobile (TMUS) and Verizon (VZ), which got hit after Elon Musk’s SpaceX (SPCX) agreed to buy up wireless phone spectrum. Speaking of that news…Elon Musk Wants a Big Piece of the Phone/Internet/Cable PieSpaceX is looking to acquire low-band wireless spectrum from Grain Management. Upon FCC approval, SpaceX Mobile aims to become “a major mobile carrier in the US.” That’s because this new spectrum works indoors, unlike SpaceX’s Starlink, which generally requires a clear view of the sky. SpaceX also got FCC approval to launch 15,000 new Starlink satellites that supposedly offer 100 times the bandwidth of the current generation Americans spend hundreds of billions per year on phone, internet, and television service. Elon wants a piece of that pie. So before long, we might be paying Elon for combined phone and data service! That could mean tens of billions a year in revenue for SpaceX. By the way, here’s JR Romero’s take on SpaceX stock:Jensen Huang Might Be Right About MarvellIn June, Nvidia (NVDA) CEO Jensen Huang said Marvell Technology could be the next trillion-dollar company because of wild demand for networking infrastructure. It looks like Jensen might be right. I later bought Marvell stock, because I assume Jensen knows what’s getting bought in the world of AI infrastructure. And since Nvidia owns a $2 billion stake in Marvell, I gotta figure the companies will do lots of business together. Anyway…At Marvell’s Investor Day on Tuesday, the company issued FY2028 revenue guidance of $20 billion, and FY2031 guidance of $70 to $90 billion. These numbers were well above Wall Street estimates. This is just the latest in a stream of “all systems go” indicators for the AI industry. Because in recent weeks, we’ve seen AI-dependent companies like Micron (MU), Everpure (P), and Penguin Solutions (PENG) deliver huge results and guidance. This week, the market raised its eyebrows on a report that OpenAI’s revenues were lower-than-expected. But observers were comparing OpenAI’s reported numbers with Anthropic’s, which uses a different method of calculating revenue.Sentiment Is NeutralThe latest AAII Sentiment Survey shows that 40.3% of investors are bullish.That’s technically above the long-term average of 37.5%. However, it comes after three straight weeks of bearish readings. So that’s not exactly a sign of an ecstatic crowd. Plus, CNN’s Fear & Greed Index is at just 46/100, indicating neutral sentiment.So there’s not a ton of enthusiasm for a market near all-time highs. I’d guess people are still smarting from a rough September.Next Week Will Be LoudThis week was quiet. Next will be loud. We’ll get the critical CPI and PPI reports, and FOMC Chair Kevin Warsh will appear on an IMF Panel on Thursday. And earning season starts cranking Tuesday with JP Morgan (JPM), UnitedHealth (UNH), Goldman Sachs (GS), Wells Fargo (WFC), and Citi (C). We also have two major tech reports with semiconductor giants ASML (ASML) and Taiwan Semi (TSM). Investors want them to indicate that AI-driven semiconductor demand remains sky-high.Rate Hike Expectations Subject to ChangeThe market is pricing in a 19.4% chance of a 25 bp rate hike at the October 28 meeting, according to the CME’s Fedwatch Tool.And the market expects an 86.4% chance of at least one hike by year-end. However, based on the busy economic calendar next week, these numbers could change, big time.REMINDER: Join the Mentorship Sami Abusaad and James Rich Young’s Pristine Mentorship starts soon. Learn about it here. Want to get to know them? Watch this webinar:
Continue Reading -->Brace for Impact
I’ve been trying to catch the bottom in TLT and the top in rates since March. Thrice I’ve thought I’ve seen a bottom, bought, and have gotten stopped out for a loss with the third attempt occurring this week at $77 on the TLT. Rates should have spiked out in the last Fed meeting and be sinking back towards 3.75% by now, and the market should be breathing a sigh of relief. Instead, rates on the 10yr remain “bid”, and the 2-10 yield curve is re-steepening. This is a pretty wicked bear steepener at a moment when we should be seeing a bull steepener where the short end falls as the business cycle enters into the contraction phase. The facts that Warsh raised at the last meeting and that there is talk of another hike this month are alarming. I’m not saying the Fed is doing anything wrong, as I think they really just follow the bond market where it wants to take rates rather than set rates themselves (which is the way it should be in a free market system), but the fact that they keep seeing a need to hike means that the natural path for rates is higher even at these elevated levels. The dollar agrees with rates as its uptrend remains firm. Every penny above $101 on the DXY is pulling demand from financial assets like stocks and broadcasting the slowing velocity of dollars in the real economy. While the real economy is not in as terrible of shape as people feel, the financial economy is in a far more dire situation than prices would suggest. Stocks are far too expensive for any real capital allocators to step up and bid even if we get a 20% correction. I think the odds of an October crash are increasing with every tick higher in the 10yr yield. In real life, it’s irresponsible to yell “fire” in a crowded theater, but when my irreplaceable capital is on the line, my policy is to panic first and ask questions later. I can always chase stocks higher if I need to. There will be wave after wave of sectors and stocks in those sectors that setup and breakout if this spurt higher in the S&P and the NDX has legs and the market gets away from me while I’m in 75% cash. I’m wondering now if even that much cash is too little… Policy makers have staved off a normal correction at every turn since 2012. Capital allocators have never forgotten, and prices seem to have a memory as well; the SPX tagged its 2014 highs in the March 2020 spike down as a form of declaration that the move from those levels has significance. Like water in a container after a perturbance, stock prices will want to level out at a natural equilibrium, but we have no idea where that is after a decade of central planning. I’ve been waiting for a rally back to $53,000 in the DJI for a chance to short, but now I’m wondering if I’ll get that chance at all. The way I thought this story of a market top would play out is a nice looking, although unhealthy breakout in the SPX and NDX and a bounce in the DJI and RUT near their 200 day moving averages; all being the result of a normal bounce in the US Treasury bond long end as rates peaked then sank lower. There still may be a chance it plays out that way, but the TLT would have to bounce hard in the up coming week. We’d want to see the bonds rally as SPX falls as that would indicate a normal end of a cycle and maybe a 20-30% drop in stocks (which wouldn’t alleviate the expensiveness of stocks, but prices of all things may never get back to pre 2020 levels). I was expecting that level of correction to happen pretty quickly in October which would give it a “crash” feeling. But if rates keep going higher, and assuming I’m correct in my view that stocks reset lower this month, it means we have something else on our hands entirely. There are exactly zero market participants that have a working memory of trading through a market when both stocks and bond are declining. That’s the scenario we could have in front of us if the TLT doesn’t start reversing hard this week. The last time stocks and bonds declined in unison was in the 1970’s, and to viscerally remember the experience of trading through that, a trader would have had to have been in his 30’s then, which would make him in his late 80’s now. We don’t have any 86 year old traders now that Buffett is retired. The only source of knowledge we have on that period in market history has to come from books. Buffett’s annual letters are the only source I’ve read on the topic, and it doesn’t sound like an environment in which traders conditioned to a decade of central bank intervention could thrive. We are all products of the environment in which we grow, and while it is possible for a skilled trader to adapt to a new market environment, the unfortunate reality is that a bull market makes many traders more successful but undisciplined. I’ve known traders that came of age in the bull market in the late 90’s and got rich. They were professional traders that made it through the .com burst and kept winning into the 2008 burst, but they struggled to adapt to the QE era starting in 2012. Some of those guys were amazing traders, pushed through their obstacles and are still winning consistently in the market today. One saw even more success in 2021 than he ever had in decades of successful trading and retired from full time trading with a massive account in the 8 figures. These guys are proof that we can adapt and thrive in any market environment.
Continue Reading -->Desperation for Dollars and Liquidity
The Nasdaq 100 has gone nowhere for 4 months. Trillions in market cap is simply treading water. The price weighted Dow Jones Industrial Average has been declining for 2 months. Its two largest components are GS and CAT at $900 and $800 respectively. Both topped out over two months ago. The next largest component, MSFT, is a $500 stock, and it put in a 52 week high almost a year ago with a double top completed in Oct, 2025. While the SPX and NDX are near highs, the number of stocks making new 52 week highs is sinking lower with every rally in the averages. The number of new 52 week lows is expanding with every impulse higher in the averages. This is an unhealthy market. Insiders in many of the stocks I follow have been selling their shares all year while they use shareholder equity to do share buy backs of the very same shares they themselves are selling out of their personal holdings. The insiders know what their stocks are worth, and they are voting with their own money. Valuations of stocks in every single sector are far in excess of the average earnings power an owner of those shares can expect to receive over 15 or more years. This is an expensive market. It’s the banking sector that is most troubling from a valuation perspective. As the rate on the 10yr US Treasury Bond rises, the assets that sit on the regional banks’ balance sheets deteriorate in value. In the depths of the SVB crisis in 3Q 2023, regional banks were holding unrealized losses of $675B on their books vs $2T of equity capital. Rates are now higher than they were then. We changed accounting rules for “held to maturity” assets then so we could pretend our banking sector was solvent, and we must continue to pretend now even though their assets are presumably worth even less than during the SVB crisis. We’ll have to wait another month to get the total unrealized losses sitting on regional banks’ balance sheets after this most recent rise in rates. The potential exists that one third of our banking system’s equity is impaired in long duration assets they can’t sell from their books. This is exactly what happened in the S&L crisis in the 1980’s. The savings & loans went bust, and the banking system created the collateralized debt obligation security market to package up all the low interest rate loans no one wanted to buy in a high rate environment. We later realized this was in part the origin of the 2008 GFC, as the CDO market went into overdrive by the early 2000’s. This time however, the impaired assets aren’t held by a niche corner of the banking system. The impaired assets make up a major portion of all regional banks’ balance sheets. The stock market seems to be in a state of suspended animation. The SPX and NDX seem like they want to breakout higher. The DJIA, DJT, DJU, and RUT aren’t in a mood to follow. The market needs a catalyst to move in either direction. I think there’s only one bullish catalyst that could propel the market higher: an end to the Iran situation and a resumption of trade relations with China. There are rumors leaking out now that indicate we could see that, but even if that news does come out soon, the market should look right past that to post midterms when the conflict is almost sure to resume. Any rally on Iran or China news should bring the DJIA back up to the $53K level I’ve been watching to short. In fact, I’m counting on a rally in the next couple weeks to test out my theory on an October crash. A failure for the DJIA to trade above $53,700 before Halloween makes a crash a high probability event by my analysis. While there’s plenty to dislike in this market, there’s three interrelated forces I see driving the current environment. The stock market is being ruled by a triumvirate of higher rates, a higher dollar, and lower liquidity. Rates are going higher across the developed world. Only China is not seeing rate increases. The most common explanation for the higher rates is that global growth is picking up, but I can’t see any indication of that accelerating growth in the stocks that should be benefiting from growth. The growth explanation to rising rates floats like a lead balloon. The real reason rates are going higher is simple: asset holders are selling their bonds to raise the much needed dollars to keep up with rising borrowing costs. As the DXY rises above $101, we are witnessing the scarcity of dollars in real time. Every penny above $101 is another tranche of demand pull away from financial assets. A plethora of dollars means lots of potential demand for financial assets that can go into stocks and support prices. A scarcity of dollars implies the opposite. Without the willingness to freely supply dollars, liquidity in the financial system is drained, and asset prices are vulnerable. No asset is more vulnerable than an absurdly expensive stock market that has to compete with short term US debt for income. Long term holders of stocks are sitting on massive gains. They’re eyeing the real rates they can get by switching into bonds now. Real rates are over 2% now and increasing. Due to these higher real rates, bonds are acting as competition for increasingly scarce dollars that need a home. Gold is sinking as real rates rise. Gold is showing us the future path for stocks unless policy makers respond with liquidity creation soon. I’ve always followed the gold signal, and right now, gold is telling me there is a deflationary event on the horizon. It’s been my view for some time that the deflationary event is the end of the current business cycle. The business cycle is obviously entering into the contraction phase, but Warsh
Continue Reading -->AI Earnings Boom: Never-Ending Story?
ATTN: Sami Abusaad and James Rich Young are hosting an Open House next week. Sign up now for 5 full days of day and swing trades, plus in-depth training. 100% free. September was a slopfest and rate hikes may be farther away than we thought. Meanwhile, the AI earnings boom just got more ridiculous. So let’s dig in to the biggest and baddest stories in the market. Skip Ahead! September Was RoughMicron & the Ridiculous AI Earnings Boom Sentiment Is Still Not BullishNo Rate Hikes?Next Week Is About RestREMINDER: Join the Open house September Was RoughSPY was down 0.3% in September, while the QQQs were up 3.3%. Not so bad. But things were way uglier below the surface. Just look at all the red in this table showing September ETF performance:Just 113 of S&P 500/SPY stocks were up for the month, and the average name was down 4.6%. And by the end of the month, the average stock was 21.1% off its 52-week high. Essentially, you had to be overweight the right tech names (mostly semiconductors) to have had a decent month.Micron & the Ridiculous AI Earnings Boom Memory maker Micron (MU) dropped another amazing earnings report after the close, and AI is the driver. This chart showing Micron’s quarterly earnings per share over the past 10 years illustrates just how transformative AI has been:Micron earned $33.42 per share last quarter, more than 10X the $2.59 it earned in its last quarterly earnings peak in 2022. By the way, JR Romero expects Micron to hit $1,434. See why here:And the AI earnings boom seems to get more ridiculous by the week. FactSet reports that analysts now expect S&P 500 earnings growth of 29.1% in Q3, which would be the third straight quarter of 25%+ growth. And AI monsters like Nvidia (NVDA), Dell (DELL), and Super Micro (SMCI) are leading the charge. Estimates are going up so fast that analysts expect 63.5% earnings growth in the Information Technology sector. That is wild. It’s not like this is the first year of a bull market where we’re working off easy year-over-year comparisons. We are almost 4 years into the AI cycle and it shows zero sign of slowing! Starting to feel like a never-ending story.Sentiment Is Still Not BullishThe latest AAII Sentiment Survey shows that just 34.6% of investors are bullish.This is the third straight week of below-average bullishness. Meanwhile, bearishness remains high at 46.5%. Plus, CNN’s Fear & Greed Index is at just 32/100, indicating moderate fear.So there remains little enthusiasm for the market as a whole.No Rate Hikes?Friday’s weaker-than-expected Nonfarm Payrolls report came in the wake of the Fed’s Williams saying there is no urgency for rate hikes. So now the market is pricing in a mere 20.5% chance of a rate hike at the October 28 meeting:That’s down from 64.2% last week. However, traders are still pricing in an 81.9% chance of at least one rate hike by year-end.Next Week Is About RestThis week had some key events like the Micron (MU) earnings report and the Nonfarm Payrolls report. Next week, we get to take a break. There are no market-moving earnings reports or major economic data. But remember, we could get news on Iran so keep an eye out.REMINDER: Join the Open house Sami Abusaad and James Rich Young’s Open House begins Monday. Jump in now! Want to get to know them? Watch this webinar:
Continue Reading -->Why Apple Is My Favorite AI Stock
What a week! Meta (META) became an AI superstar, bond yields hit new highs, and I found yet another reason to love Apple (AAPL). Let’s dig in! Skip Ahead! September = SlopWe Have Yet Another AI MonsterApple Is My Favorite AI StockSentiment Is Not BullishTraders Fear Higher RatesFed Expectations Point to HikesNext Week Is About Two ThingsREMINDER: The Pristine Mentorship Is Open September = SlopSeptember is historically the worst month of the year for the S&P 500, but we’ve squeezed into the green:However, just 137 of S&P 500/SPY stocks are up for the month, and the average individual name is down 3.1%. And only 2 of 11 S&P sectors are positive: Technology and Communication Services Interestingly, the Communication Sectors sector has a 22% weighting in Meta (META), which is up over 31% this month on the back of its Muse AI launch. It would be in the red if not for Meta. Related: Why META Is Going to $1,000 So while we could theoretically write a headline “SPY Is Up for September,” the underlying data stinks outside of tech. Meanwhile, small caps have been getting destroyed with IWM down over 3% because of higher interest rates. JR Romero explains here: We Have Yet Another AI MonsterEvery week, I learn about another company reporting blockbuster demand because of AI buildouts. Last week, it was power infrastructure name Forgent Power Solutions (FPS). This week, it was data storage play Everpure (P), which used to be called Pure Storage. The stock exploded Thursday after the company announced monster guidance for FY2028, thanks to AI-driven demand.On Friday, Goldman Sachs said it expects the 5 biggest US hyperscalers (Amazon, Alphabet/Google, Microsoft, Oracle, Meta) to spend $1.2 trillion on AI infrastructure next year. That’s up 54% from this year.Apple Is My Favorite AI StockThere is another AI infrastructure boom happening… at home. More and more people and companies are opting for open-source AI models that run on local computers. That’s because if you run locally, you avoid monthly or per-token charges, and you have greater control of your data. This market appears to be dominated by Apple’s (AAPL) Mac Mini and Mac Studio, which get rave reviews because of their warp-speed processing and low power consumption. Apple just released new Mini and Studio models on Tuesday. I spent some time on Apple.com researching different configurations to see how fast they ship. The earliest shipping date I could find for a Mac Mini was October 15-22. And some Mac Studio configurations don’t ship for another 15-17 weeks. The Mac accounted for just 9% of Apple sales last quarter. I suspect that number will go way up. The Information reported in August that Apple itself was surprised by how many enterprises are using Mac hardware for AI. And they also said Apple was considering a return to the server market. If that happens, let’s pray for the shorts. Apple is my largest stock position, so take what I saw with a grain of salt.Sentiment Is Not BullishThe latest AAII Sentiment Survey shows that just 32.7% of investors are bullish.This is up from 28.8% last week, but it’s still below the long-term average of 37.5%. Meanwhile, 48.8% of investors are bearish, which is well above the average of 31.5%. Plus, CNN’s Fear & Greed Index is at just 38/100, indicating modest fear.So there remains little enthusiasm for the market. And it looks like rates are an issue.Traders Fear Higher RatesOn Thursday evening, I asked members of the Alpha Team VTF® if they were worried about higher rates. 65% of members said yes. Plus, many more members manually typed out a “Yes” instead of taking the poll This wasn’t the most scientific survey in the world (sampling one room of active traders after a tricky day in the market), but rates are clearly a worry.Fed Expectations Point to HikesLast week, the FOMC raised rates by 25 bps, with Chair Kevin Warsh saying “The plain fact is that inflation is too high and has been for too long.” The CME’s FedWatch Tool now shows the market is pricing in a 64% chance of a 25 bps rate hike at the October meeting.That’s up from just 10% one month ago. And the market is pricing in a 51% chance of 50 bp in total hikes by year-end.Next Week Is About Two ThingsObviously, the market wants to see US Treasury yields and crude oil down. Plus some kind of deal between the US and Iran to get the Strait of Hormuz fully open. But as far as the official trading calendar goes, two things matter. The first is the Nonfarm Payrolls Report on Friday. And the second is Micron’s (MU) earnings report on Wednesday. I think this is bigger. As noted, demand for AI infrastructure just keeps going up, so in all likelihood, Micron will sing the same old song about being supply-constrained. But on the off chance Micron says anything negative, expect havoc in the market. Because AI is clearly holding the economy and market up. Anyway, if you care, this is what else is coming:REMINDER: The Pristine Mentorship Is Open Sami Abusaad and James Rich Young’s Pristine Mentorship is open and there are just 13 spots left. In this video, they take you through the 4 steps to becoming an elite trader.
Continue Reading -->Bull or Bear? Pick a Side and Fight
Have you ever wondered why we refer to the daily battle of buying and selling that takes place on Wall Street as the bulls vs. the bears? I think it has to do with the nature of each beast’s relationship to man. A bull sees its target, puts its head down and horns up, and charges ahead no matter what obstacle is in its way. A bull doesn’t stop until it either kills or is killed by the matador. A bear spends much of its time in hibernation and hiding, and it only makes its presence known at the moment of attack. A bear keeps away until a victim enters its territory. In trading we’ve got to take the same approach as these two beasts. If we do the work and determine that we should be bullish, we’ve got to charge ahead on the long side and disregard obstacles. If you’ve ever been long a stock that was charging higher, you know how great the temptation can be to sell early and lock in profit to make sure it doesn’t slip away. Ignoring the negatives in a real bull trend higher is a difficult skill to attain, and perhaps the best we can do is try to hold on a little longer each time we’re in one. In the same vein, if we do the work and determine the appropriate stance is bearish, we’ve got to wait for the market to come into the area we want, then attack and leave. Bulls charge relentlessly, and bears maul swiftly. This is the proper way we should think about our own trading. Each one of us has to determine for ourselves whether we are bullish or bearish. There’s much work that goes into that conclusion, but once we’ve chosen a side, we must use our capital to fight. As for myself, I’ve determined that the appropriate stance for my irreplaceable capital is on the bear side. I’m in 75% cash and waiting for a spot to short. I’m waiting for price to come into the area I want, about $53,000 on the Dow Jones Industrial Average, and then like a bear, I’ll attack. The market is leaning bullish now with the SPX and NDX breaking higher so the DJIA could get nearer the $53K level in the last weeks of September or by the first couple of weeks in October. I’m looking to short the DJIA ETF, the DIA, at around $530 with a tight stop above $537.75 which is the high for September. Above $540 on the DIA and I’ll flip to bullish and scramble to get long something. I’ve also incorporated a time stop into my trade plan: if stocks haven’t started to decline by Halloween, I’ll abandon the bear side for the rest of the year. I’m not going to hold on to a losing position just because I’ve done a thorough analysis and decided I’m bearish. DIA Trade Plan: But what exactly are the facts that give me a reason to be bearish? Merely being “concerned” about stocks’ advance is not a rigorous analysis. Professional speculation requires real analytical work, especially when trying to pinpoint a bull to bear turn. I’ve done the work that leads me to the conclusion that there’s a near picture perfect analog to the 1929 and 1987 crashes. I’ve kept a checklist of signs to indicate when the turn in the business cycle is approaching, and I’ve been keeping an eye out for the anecdotal evidence I remember from the 2008 crash like constant road construction as municipalities rush to spend the record high tax revenues from a previously booming economy and signs of excess like the Hummer EV, which is a nearly exact replica of the sign of excess of the Hummer H2 I saw in the housing boom leading up to the 2008 crash. But a proper analysis requires more than just anecdotal evidence to be taken seriously. So I’ll present my bear case here for anyone to pick apart. Below is a video showing my analysis of the 1929 and 1987 crashes and how they resemble the current market in 2026. 1929 and 1987 Comparison to 2026 video: In addition to the historical October crash analogs, I see further evidence that we are in the early stage of a bear market when I look outside the popular stocks. Aside from several mega cap technology stocks, the underlying market health has been deteriorating for some time. The transports and utility stocks are not confirming any of the bullish narrative. On the contrary, they are looking more like tops. I’ve never seen a bull market in stocks work out with the transports and utilities in a compromised price structure like they currently exhibit. DJT: DJU: The housing stocks are also showing stress. Housing is a major driver of consumer spending which is 70% of our economy. With Warsh’s latest rate increase, I don’t see how housing will pick up without a major move lower in house prices. Neither higher rates or lower prices are going to be supportive of higher economic activity in the short run. XHB: Warsh’s latest rate hike also reminds me of 1987. Alan Greenspan was selected as the new Fed Chair in August of 1987. He thought that business activity was too hot and consumer prices were about to skyrocket so he took rates from 6.5% in August to 8% by October 1987. The rate hikes proved too difficult for the bull market to charge through. The rate hikes were the banderillas thrust into that bull market’s back to wound it, and Treasury Secretary James Baker’s October 18th remarks that he would tolerate a much weaker dollar in response to the Bundesbank’s rate hike was the estocada, the fatal blow delivered to the bull market. Stocks crashed the next day. So far, Warsh’s tenor as Fed Chair is a great analog to Greenspan’s just before the 1987 crash. Aiding my bearish stance is the fact that we’ve
Continue Reading -->Bottom-Up Roadmap for Stocks Over the Next 6-9 Months
Every trader, in order to be successful, must have some systematic process for identifying, entering, and exiting trades. Each trader’s specific process is going to be unique to their own experiences and beliefs. My own process has been developed over almost 20 years in markets, first as a hobby while I was a telephone salesman in a cubicle for a big tech company, next as a trader on a prop desk, then as a professional equity portfolio manager for a small RIA, and lastly as a refinement when I completed the CFA exam. Because I operated in both the trading and investing worlds, my process is a combined approach that incorporates both fundamentals and technicals. Similarly, I combine both a top-down and bottom-up approach to asset, sector, and individual stock selection. In previous posts I’ve explained my top-down reasoning why my view continues to be that we are in the contraction phase of the business cycle. This week I’ll present what my bottom-up analysis reveals to us as we try to anticipate price movements in the stock market over the next few quarters into 2027. As opposed to a top-down approach which starts from trends and works down more granularly to individual stocks, a bottom-up approach starts with individual stocks and works up to extrapolate larger themes. A bottom-up approach is a wonderful antidote for the narrative heavy environment in which we currently find ourselves. An analysis of individual stocks often reveals that a popular narrative is not gaining traction in the stocks that should be strong if the narrative were true. As a naturally born contrarian, I’m skeptical of any popularly accepted narrative, and I rely heavily on scrolling through thousands of charts a week to verify that the prevailing narrative is being validated by price. Thankfully, we don’t have to go over thousands of stocks to get a workable roadmap for how to deal with this market into 4Q 2026 and early 2027. A smaller sample of stocks is enough so I’ll keep my bottom-up analysis contained to a manageable list of sectors and stocks in this week’s post. I’ve taken the leading stocks in the sectors that are most crucial to the US business cycle at the moment: semi-conductors, transports, industrials, utilities, chemicals, and basic materials. The industrial sector contains seven sub industry groups: aerospace, automotive, construction, distribution, electrical equipment, building products, and machinery. I’m focusing on just the leading stocks in these sectors because I think they are a full representation of the most influential narrative in the stock market today: the AI buildout. I want to analyze the individual stocks in these sectors to discover any clues they might tell us about the future path of the AI buildout, which will dictate the path of the US business cycle, which will ultimately influence stock prices. We start at the bottom and work our way up to get to our goal: anticipating the movement of stock prices. The sectors and stocks we’ll analyze seem like a lot of material to digest, but I’ve distilled the information down to a basic form that is easy to absorb in a short amount of time. It’s a useful exercise for anyone risking their capital in the stock market. These are the stocks we’ll be analyzing in each sector; semi-conductor: ADI, AVGO, MRVL, MU, QCOM, TSM, and TXN; transports: UNP, NSC, CSX, JBHT, ODFL, DAL, and UAL; industrials: aerospace: GE, RTX, BA, LMT, GD, HWM, TDG, LHX, and NOC; auto parts: MGA, BWA, and MOD; construction: PWR and FIX; distribution: URI, GWW, and FAST; electrical equipment: ETN, VRT, and EMR; building products: TT and JCI; and machinery: CAT, DE, PH, ITW, CMI; utilities: SO, NEE, and DUK; chemicals: APD, DOW, LYB, SHW, ECL, PPG, and DD; and basic materials: BHP, RIO, FCX and NEM. I’ll begin on the fundamental side and analyze the valuations and end with a video on the technical side to show what I think the price and volume structures are warning us about. The only goal I have when analyzing fundamentals is to answer the question “do I want to own this stock?” That means I like to think as a business owner would if he was considering pouring all his family’s capital and his life’s energy into a business. I like to take the 15 year average of pretax income as a rough estimate of what the company would be able to earn on average over a business cycle, in other words, its earnings power. If the market cap of equity is 10 times the average earnings power, I know that stock is probably below fair value. If 10x is below fair value, 20 times the average 15 year earnings power is about the top of the limit. 20x means there’s very little room left for good price appreciation from an ownership perspective. Stocks that trade this high are for rentals only, not ownership, as they are mainly earnings growth stories that can experience temporary, but powerful price movement in either direction. The market cap to earnings power ratio over this 15 year time frame is what I refer to as the PE15. I like to see lots of sectors with low PE15s because that means too few positive outcomes are priced in, and any good development will cause money to flow in. If enough sectors of the market have low PE15s, it means the market is attractive as a long term asset. Long term buyers are what create price trends that last. However, if the market is unattractive to long term money, I would not expect a new price trend higher to materialize in the next 6 to 9 months. The PE15’s for each group of stocks by sector and my assessment of the potential for a proper trend higher are listed below, but if you want to jump to the conclusion without any of the detail, here it is: with a couple exceptions in mainly chemical commodities, natural resources, and small auto
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Bad news? Who cares? This market is a survivor. Keep reading for the evidence. Skip Ahead! This Is the Survivor MarketWe May Have a New AI SuperstarCrypto Is Back on TopSentiment Is Not BullishThe Great Rate Debate ContinuesNext Week SHOULD Be QuieterThe Pristine Mentorship Is Open This Is the Survivor MarketSeptember is historically the worst month of the year for the stock market. And we’ve had plenty of tricky news to navigate, including:Hot CPI & PPI reportsThe FOMC raising rates and signaling more hikes comingThe 10-Year Treasury Yield hitting 5%OpenAI’s Sam Altman and Anthropic’s Dario Amodei calling for a slowdown in AI developmentCrude oil hitting $100+ because of ongoing Iran tensionsBut all things considered, we’re hanging in okay.The SPX is down 0.7%, while QQQ is up 0.1%. And the leading semiconductors are up, with SMH rising 1.4%. Technically, the S&P tends to fall an average of 0.6% in September. So we’re doing worse than usual. But falling just -0.7% in the face of all the aforementioned bad news is impressive. This market is a survivor. And it may be thanks to all this bullish AI news:We May Have a New AI SuperstarThe market got a short-term spook Monday when OpenAI’s Sam Altman and Anthropic’s Dario Amodei called for a slowdown in AI development. But we keep seeing more and more signs of staggering demand for AI infrastructure. This week, networking equipment maker Ciena (CIEN) announced it expects 30% compounded annual revenue growth through 2029. Power infrastructure name Forgent Power Solutions (FPS) skyrocketed this week after a monster earnings report thanks to data center demand. By the way, FPS is a clear candidate to be the next AI superstar. It’s growing like mad, dropped gigantic guidance, and it’s still 40% off the highs:Meanwhile, neoclouds CoreWeave (CRWV) and Nebius (NBIS) both implemented price increase for compute capacity. And Nvidia’s Jensen Huang said the company will double chip sales next year. The good times just keep on rolling. And that’s helping hold up the economy and market.Crypto Is Back on TopBitcoin and Ethereum have been a mess this year. But they’ve picked up steam, and the Grayscale Ethereum Trust ETF (ETHE) is now 70% off the lows. And it looks like it may be breakout out of its month-long range.Sami Abusaad just explained the bull case for ETHE on Wednesday, when it was trading at $19.33. Sentiment Is Not BullishThe latest AAII Sentiment Survey shows that just 28.8% of investors are bullish.This is down from 38.0% last week, and it’s well below the long-term average of 37.5%. Meanwhile, 53.3% of investors are bearish. This is the highest bearish reading since May 1, 2025. Yes, 2025. Not 2026. Plus, CNN’s Fear & Greed Index is at just 28/100. Fear & Greed was in the mid-60s in August. The crowd is not exactly in manic depression mode. But there is not a lot of joy out there.The Great Rate Debate ContinuesThe FOMC raised rates by 25 bps on Wednesday, with Chair Kevin Warsh saying “The plain fact is that inflation is too high and has been for too long.” The CME’s FedWatch Tool now shows the market is pricing in a 58% chance of a 25 bps rate hike at the October meeting.And it’s pricing in a 44% chance of a third hike at the December meeting. This has the 10-Year Treasury yield at just over 5%. And this is fascinating, because there was a time when people were worried about the 10-year hitting 4.5. Now we’re way past that and the stock market just keeps on chugging along.Next Week SHOULD Be QuieterBased on the calendar, you’d think the market should be quiet. We have no economic data Monday because of the Yom Kippur holiday. And after that, we have some Treasury auctions, Durable Goods, and Michigan Consumer Sentiment. And Costco (COST) is the lone big earnings report. However, it feels like anything could happen with Iran, and at some point, higher bond yields will matter.The Pristine Mentorship Is Open Sami Abusaad and James Rich Young’s Pristine Mentorship is open! (spots are limited) In this video, they take you through the 4 steps to becoming an elite trader.
Continue Reading -->Any Trade With a Stop Is a Good Trade
There was one change that improved my profitability as a trader and had more impact on my account and my life than anything else I’ve ever done. That was my decision in 2022 to stop allowing negativity and pessimism to form my beliefs. Instead, I chose to constantly find something to be bullish about, get long, and let price show me when I was wrong. My initial foray into the stock market almost 20 years ago was not a profitable endeavor, partly due to the fact that my desire for wealth was greater than my skill in attaining it, but largely due to my persistent negative mindset. In retrospect, I can see now what I could not see then: my beliefs were not aligned with winning. I was reminded of my old habits recently while talking with friends who insisted their money troubles were due to “the system” being set up against them. I certainly won’t dismiss their valid concerns about the systematic devaluation of our money, but as I pointed out to them, gold has already compensated us for the risks inherent to our fiat currency system. While, in general, I sympathize with their feeling that the necessities of life are becoming less attainable due to “the system,” what I find far more problematic to their particular situation is a negative mindset, a belief that gaining wealth is impossible, which leads to behaviors that ensure that it is. Once you believe you can’t, you’ve ensured you’ll miss all the opportunities that prove the contrary. I recognized immediately my own former limiting beliefs in their expression of concern. When I believed the system was aligned against me, I traded like it. I took small wins out of fear the market would take them back. I allowed losers to take up long term residency on my position statement because I was certain with a little more time I would be proven correct. I was trading poorly, like someone with all manner of insecurities and unhelpful attitudes towards money and that views themselves a victim of forces beyond their control. Belief is a powerful force that can allow you to see the positive or limit your mind’s eye to only seeing the negatives life brings your way. For reasons I’m still trying to pin down in my middle aged years, my former beliefs in my youth had created a negative bias through which I viewed the world and my trading. With such a negative bias, I wasn’t able to see the market for what it is: an endless stream of opportunities waiting to be exploited and a means to a better life. The way out of this negative bias is simple but not easy; it comes down to a choice each of us, as traders, must make for ourselves. I had to make the choice to trust in my ability to consistently show up, wait for setups I recognize, get in without hesitation, and get out without regrets. Of course this approach required an immense amount of study and practice before I was able to deploy my approach at a large enough scale for professional speculation. My study included analyzing thousands of my trades over many years. The main takeaway from my analysis is this: stops keep my account in tact. I need my account near all time highs to aggressively allocate to whatever trend I find developing. There is only going to be one, maybe two big trends a year that I can take advantage of to pump my account to new levels. There will always be uncertainty as to exactly when a new trend is developing, but with stops, I can limit my risk of loss and try repeatedly to get into what I think is a developing trend. But what is the next trend? All my analysis leads me to conclude that the underlying forces that will create the next trend are building underneath the surface level of index prices we see on the tape. It’s still my view that we are in the contraction phase of the business cycle, and because of this, we should see economic and inflation pressure subside within the next three to six months. That should bring down the long end of the yield curve, but the market doesn’t agree with me right now. I’m not fighting it. I’m letting my analysis of price structure take me out of a losing trade with TLT. Was it a bad trade? Absolutely not. I followed my plan exactly, and I did it in the appropriate size, which has always been my weak spot. As long as I follow my process, I’m not going to get overly concerned about losses. New opportunities will come, and having the confidence to move aggressively when I see a setup I recognize is what will get me in a good trade. For TLT, I’m out with a small loss, but I’ll keep stalking this for a better setup to get long when the market is more agreeable to my view. My account is still within a stone’s throw of all time highs, and I plan on keeping it there. Until I take them out and spend them, the dollars in my account are simply ammunition in my armory that will be needed for battle. A big trend that will pump my account to a new level will come. That’s what the market promises, that prices will always move. When the forces align that move prices in a trend, that is the time to engage in battle. Until that time, I’ll defend my account with small skirmishes that are required to not take any more losing months this year. March was my only down month, and that was due to TLT as well. I’ve had to sell off my positions in fertilizer and energy stocks to offset my loss in TLT for September, but I’ve done so after concluding that locking in good gains is more important than positioning for me
Continue Reading -->Knowing When To Press Your Bets
Last week I laid out my case for a top in long rates on US Treasury Bonds. This week, I’m growing more confident that an important low in the price of US Bonds has been made. However, I’m still a fair weather fan, so I’ll be out in a heartbeat without remorse if my stops are hit. It’s been my view that we are in the contraction phase of the business cycle, and if that view is correct, we should see growth and inflation expectations start to come down for 2027. This shifting dynamic is what can finally put a bid under US Bonds. This is because there will always be demand for income. When I was running an equity portfolio for a small RIA shop, I had to stretch way out the risk curve far beyond where I was comfortable playing to get the portfolio yield just barely into the 3% figure. I was buying foreign telecom OTC equities to get there. This was during the financial repression of the QE era, and it was not a good time to be a dividend portfolio manager. Today, we are being offered higher yield, even above what I had to stretch for back then, in a money market. You can lock in way higher than that if you are willing to extend duration a decade or more. The TLT, my preferred way to play the top in yields, pays a monthly div of ¢33, about 4.7%. This may not look exciting compared to the gains you can get from a well placed equity trade, but believe me, 4.7% return with no risk is nothing to shake a stick at. The unfortunate reality is that at the moment, there is nothing more attractive than US Bonds for my irreplaceable capital. I’ve been in about 75% cash since March, 2026 when I peeled off the last of my gold miners I was willing to part with (I’ve still got my core position in the big 5 miners) so I’ve been looking for another core position in which to allocate. Stocks are just not attractive other than trades right now because they are all trading at about 20x pretax earnings across the board; no matter what sector you look at, every single stock worth owning trades at basically 20x what you can expect it to earn every year. The only exceptions are the oils like XOM and CVX which trade about 15x and my favorite fertilizer, NTR, which trades about 12x what I estimate is an average of earnings over a cycle. These names can still offer potential for reward with the small chance of an energy or grain price spike, but the risk is shifting to the downside as the Iran conflict seems to be nearing a conclusion, or at the very least, a de-escalation. Any way I analyze the attractiveness of stocks for ownership, I come up lacking any justification for anything other than renting specific names for a trade. In an environment like this, it’s best to just stick with the easy trade, and for me, TLT is the easiest one out there. If the lows of this week hold in TLT, then my focus will shift towards deciding where to add. Proper speculation requires only averaging up, never down. Stan Druckenmiller said the key to his success was forming a trade idea, putting on a position, then really stepping on the gas and levering up when his position started to work. I want to apply the same logic to TLT. The first step is seeing the TLT hold the lows of this week at about $81.75. The next step would be to see some strength above $83. A weekly close above $83 on strong volume would be some indication that it would be time to press on TLT with tight stops below $83. This TLT play feels a lot like my gold trade that won me the ability to trade for myself, but this time, I’m going to apply the lessons I learned from that campaign. I did almost everything wrong during that speculative campaign: I averaged down, didn’t have a trade plan, didn’t use stops, had no risk control, etc. The only thing that made the trade work out for me was size. I was 90% long in one sector because I was confident in my analysis. I used 8th grade math to plot the dollar value of US debt going back 50 years, and used an R-squared regression to get a y=mx+b equation. I plugged in the year 2030 for “b”, and got $45T for our debt. I then took the current portion of foreign held debt outstanding at 20%, and I asked, if even 1% of that dollar value shifts to gold, what would the supply and demand balance look like? It turns out, that at the time I performed this basic analysis in 2023, the new demand for gold would be 4.5 tons at the $2,000 price gold was then, and new supply would be only 2 tons by 2030. It was a no brainer, and the trade worked out. This time around, I’m going to still rely on my analysis that we’re in the contraction phase which means growth and inflation should be coming down, but I’m going to adhere to strict risk controls to put on my TLT allocation. Each time I see a higher low hold, I’ll treat that as a new tactical spot to buy stock to add to my strategic core position. Like Druck’s playbook, if the trade starts to work, then and only then will I add. The reason I can be so confident in my analysis that we are in the contraction phase, is because all the signs I’ve been looking for are appearing. I’m relying on signs to form a checklist approach to pinpointing the turn in the cycle rather than hard data points because a data-driven, statistical modeling approach is notoriously wrong at turning points. Modeling
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