-
Monday:
N/A
---
Tuesday:
Building Permits (1.4M exp.)
Housing Starts (1.31M exp.)
---
Wednesday:
N/A
---
Thursday:
Initial Jobless Claims (200K exp.)
---
Friday:
N/A
-
Monday:
N/A
---
Tuesday:
GE Aerospace
Netflix, Inc.
RTX Corporation
Intuitive Surgical, Inc.
---
Wednesday:
Meta Platforms, Inc.
Tesla, Inc.
Lam Research Corporation
Philip Morris International Inc
---
Thursday:
Procter & Gamble Company (The)
Union Pacific Corporation
Western Digital Corporation
Valero Energy Corporation
Lockheed Martin Corporation
---
Friday:
American Express Company
Regular Correction Or Something More?
Note: This missive will be unusually short this week due to some personal circumstances.
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The market sold off hard into the end of the week, in what turned out to be the highest liquidation event since June. The S&P 500 declined -1.09% on Friday to close at 7,659.44. The Nasdaq Composite fell further, dropping -2.15% on Friday and -4.48% for the week. In contrast, the Dow posted a modest +0.67% weekly gain, while the Russell 2000 lost -3.05%. This divergence tells the story of a continued rotation out of growth and higher-risk assets into value and safer plays.
The selling was orderly, concentrated and professional. The selloff was triggered by worries over how the AI infrastructure buildout would be financed. CoreWeave lost roughly a quarter of its value, with its bonds yielding above 15%, prompting investors to dump anything AI-related. The semiconductor ETF (SMH) fell -10.5% for the week, with Lam Research down -17.2%, Micron -14.6%, and Intel -14.2%.
Goldman Sachs prime brokerage data showed hedge funds net selling global AI stocks for five consecutive sessions, fully reversing their net buying since early 2025. Long sales outnumbered short sales by roughly 3.5 to 1, indicating de-risking from previous long positions rather than a fresh bet against the market.
The macro backdrop made things worse. Hotter-than-expected consumer and producer inflation reports lifted the odds of a December rate hike to 74.3%, with Fed Chair Warsh arguing that a surge in spending (particularly capital expenditures) is driving inflation higher. Brent crude rose +3.7% on Friday to $109.86 amid no progress toward an Iran deal. The VIX climbed to 20.16 from 14.84 a week earlier. As investors sought safety, the rotation into Treasuries pushed the 10-year yield down to 5.09% from 5.24%.
However, despite the bearish headlines and commentary, not EVERYTHING got liquidated. Defensive sectors led the way, with staples (XLP) up +5.0%, energy (XLE) +4.9%, and health care (XLV) +3.5%. The equal-weight S&P 500 gained +0.5% while the cap-weighted index fell -2.0%.
So what comes next? Is this a set up for a rebound rally, or is more pain to come? The Goldman note from Friday morning said deleveraging is “closer to its beginning than its end”. That end may or may not have come by the session’s finish.
The answer to that question will ultimately depend on corporate earnings, a lot of which will be revealed later this week. For now, the sector causing the widest distress (semiconductors) is experiencing an intriguing confluence of factors. Total GEX is more than -2.7 Standard Deviations below the mean and roughly equal to the date when the Situational Awareness fund blew up (the news broke right after the fact).
We are also noting a visible and similar spike in both Dark Pools buying on the day, as well as confirmation that buying volume is not just a byproduct of total volume, as evidenced by the Dark Pools index (lower panel — which expresses buying as a percentage of total volume). Since the price level of SMH is also similar, at around $540, evidence points to at least a reprieve in selling, if not a more meaningful and resilient bounce.
The bar for earnings is high this week. FactSet reports that 84% of companies have beaten estimates so far, yet the market has sold those beats by an average of -0.2%, compared with a normal +0.9% gain (the earnings quarter is still starting, so we can’t take this rate at face value). Magnificent 7 earnings are projected to grow 33.2%, but that figure falls to 7.5% when Nvidia and Meta are excluded.
Meta’s report on Wednesday is the real test. If defensives and value continue to attract buying while technology stabilizes, a reflexive bounce is likely due to the broadening effect of such a move. RSP has already reversed a good chunk of its underperformance vs SPY and the move has further to run if history is any guide. In this sense, it does not look like the current rotational move is truly over and done.
However, if the selling spreads into the equal-weight index as well, the issue runs deeper than AI alone.
Technically speaking, SPY closed below the key 20 and 50 DMAs, as well as the M-Trend level amid negative GEX positioning. Downside risks are now increased, as trading below these key levels implies more short term volatility.
Medium-term, the trend remains cautious until the benchmark ETF can reclaim the 50-DMA and dealer gamma exposure becomes neutralized. The next level of support becomes the 100-DMA at $755, with additional downside to $717 (S1). If we run a bollinger bands analysis, we note that each of the last three closes below the lower band, on June 10, July 29 and September 16, marked a short-term low within a few sessions. The lower band at $756 lines up very close to both the 100-DMA, as well as the 6-Month lower trend line.
As such, we would mark the $755 - $758 area as key support, with a strongly negative implication should SPY fail at this level.
The only saving grace for the market is the very source of worry over the past month - market breadth. The number of stocks trading above key averages has not collapsed in line with the index, as the rotation from growth to value has proven resilience. Even late in Friday’s session, roughly 228 of the 500 S&P members were still higher on the day. The damage was concentrated in the largest names and marks the distinction between a rotation and a market where everything sells off all at once.
As such, we’re most likely witnessing a pullback inside an uptrend, which is setting up a tradeable bounce.
The options market is not fully conforming to the “pullback is over” thesis. The market’s aggregated distance to its long-term call wall (which reflects long-term upside potential) has declined during the selloff. This metric spiked during the March Iran war crisis and the 2025 tariff tantrum, making the current move counter-intuitive.
We would also expect the distance to the medium-term put wall to decline. It has done so, but only to a smaller extent, leaving risk elevated relative to the compression seen during those earlier crisis episodes.
We would not consider the decline complete until risk levels match those observed during the Iran war episode.
This week marks a more intense phase of earnings season, with 79 S&P 500 companies reporting, including five Dow components. After last week’s AI-driven selling, the key question is whether the declines reflected fundamentals or positioning.
Wednesday after the close is the focal point, with Meta, Tesla, Lam Research, Texas Instruments, and IBM all reporting. Meta carries the most weight among the Magnificent 7, and its capital-spending guidance will be closely watched as a signal on whether the AI buildout can continue to be financed with yields above 5%. Lam Research offers insight into semiconductor equipment demand, while Texas Instruments provides a read on the industrial and analog cycle.
The rest of the week tilts toward the “old economy” sectors that outperformed. Tuesday brings Netflix, GE Aerospace, RTX, and Capital One; Thursday includes Procter & Gamble, Union Pacific, Lockheed Martin, Honeywell, and Blackstone; and Friday features Exxon Mobil and American Express. Solid results from staples, industrials, and energy would give the rotation out of tech a stronger fundamental basis.
The economic calendar is light. Housing starts, building permits, and pending home sales arrive Tuesday, followed by weekly jobless claims and the leading economic index on Thursday. Friday brings the flash S&P Global PMIs and the final University of Michigan survey, with particular attention on one-year inflation expectations after last week’s hot CPI. Wednesday’s $13 billion 20-year Treasury auction is also worth watching, as a weak result could reverse last week’s decline in yields.
The Fed enters its quiet period Saturday ahead of the October 27–28 meeting, so no speakers are scheduled. Markets currently price a 74.3% chance of a December hike. Oil remains a wild card, with Brent near $110 and no resolution on Iran or the Strait of Hormuz. The rolling 90-day correlation between oil and long term bonds has steeply retraced from -2 standard deviation extremes, signaling that higher oil might not imply higher yields from here on out due to fears of unsustainably high prices causing a slowdown in the economy.
Our Trading Strategy (Sigma Portfolio)
Though our portfolio and models have certainly taken some hits recently, the overall risk / reward setup has improved, given the trading that we’ve performed last week and cash levels which remain relatively high as a percent of portfolio allocation.
Our primary factor correlations are Small Caps (IWM) and Mid-Caps (MDY), with Momentum (MTUM) now clearly taking a back seat.
The great thing about the current positioning is that we are not forced to make a move. Dip buying conditions have been activated, and the plan is to deploy our remaining cash if the market can hold up well for a year-end rally.
Disclosures / Disclaimers: This is not a solicitation to buy, sell, or otherwise transact any stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this blog post. I currently do not own or plan to own any position, long or short, in the securities mentioned.
I am not a financial advisor licensed in the United States. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject to change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this blog post.
I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter. Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.
I wrote this blog post myself, and it expresses my own opinions. I do not have a business relationship with any company whose stock is mentioned in this blog post. The information in this blog post is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
The primary purpose of this blog post is to share industry expertise and research and receive feedback (confirmation / refutation) regarding my investment theses.