» Full transcript:

Good afternoon, everyone. It's Monday afternoon, just after noon. I want to walk through a few charts, share some research we reviewed over the weekend, and talk about what we're watching as we head into the week. I won't have a video next weekend because I'll be out of the office early in the week, so I wanted to get you updated today.

Let's start with the broader market and the S&P 500. We're only down 1.8% from all-time highs, which is interesting considering how much pessimism is out there. On social media and across financial news, there was a lot of talk over the weekend about a potential “Black Monday.” Obviously, that didn't happen. The market is up a little today, and overall, it's been a pretty strong day.

It's interesting to see that kind of rhetoric when the market is still in a good position. We're up about 12% year to date and less than 2% below all-time highs. I think part of the concern is that people have a hard time with a market that moves sideways. If it isn't going up, we tend to assume it must be going down. But that isn't necessarily the case.

We're trading around the same level we were on August 4, and the market is only up a little more than 1% since June. It's been moving sideways for a couple of months.

What we're seeing underneath that is a lot of strength in company fundamentals. Remember, the stock market is made up of individual companies. Those companies have reported strong earnings and profit margin growth. We anticipate another strong quarter of earnings as reporting picks up over the next couple of weeks.

The market seems to be saying, “We don't need to push prices much higher right now, but we also don't want to move lower because these companies are producing strong margins.”

Looking at relative strength, one of my favorite momentum indicators, we're seeing the same sideways movement. The upper dotted line is 70, indicating overbought conditions, and the lower line is 30. Right now, we're hovering between roughly 40 and 60, without a clear indication of which direction momentum wants to go.

Overall, I see that as a net positive. We're not moving lower, especially after the returns we've already had this year.

Interest Rates and Inflation

One of the bigger concerns has been rising interest rates. Rates peaked a couple of weeks ago in early October, and we took the position that they were likely to fall. We extended duration on many of our bond holdings to take advantage of that potential decline.

The market is currently pricing in about four Federal Reserve rate hikes over the next 12 months. Based on the research we're reviewing, we think that may be a little overblown.

Yes, inflation remains a problem, but the broader trend has still been downward. Oil is another major piece of the inflation picture. With oil trading around $100, a resolution involving Iran could potentially bring prices back toward the $60–$70 range relatively quickly. That's easier said than done, of course, but it illustrates why we don't want to give too much weight to inflation fears when a major component could change with a geopolitical development.

Oil has been trending higher over the past couple of weeks, which may be one reason the market has stalled. But prices are still below their previous highs. We'll watch where that move stops and whether it turns around.

Returning to interest rates, yields ticked up a little today, but we still believe the recent peak could be part of a larger topping pattern, potentially setting up a meaningful decline.

There's a red line on this chart that I want to explain. If we go back to 2006 and 2007, interest rates peaked in July 2006 and then rebounded to form a double top around June 2007. That's when recession fears began to settle in, and rates eventually declined.

That level has historically mattered for investor psychology and market sentiment. I don't know whether it's been too long to place much technical significance on it today, but I find it interesting that the 10-year Treasury yield is again peaking around the low 5.2% range.

Why We're Watching the Two-Year Treasury

More important to me is the two-year Treasury yield. For context, the 10-year Treasury yield represents the return you receive for lending money to the federal government over 10 years.

The two-year yield moved higher again in 2026 but has had difficulty getting past 5%. The important reference point is its peak back in 2023, at the height of inflation concerns, when it settled a little above 5%.

We're not above that level today, and the yield appears to be stalling just below it. That doesn't mean it can't turn around and move higher. It absolutely can, and we'll be watching closely.

If the two-year yield crosses above 5%, we would exit our longer-duration bond position. The two-year yield is generally considered a closer reflection of what the market expects the Federal Reserve to do with interest rates over the next year.

That's why holding below 5% is important. Ideally, we'd like to see yields move lower, but this level has been significant since the height of inflation concerns in 2023, and we're right back in that range today.

The U.S. Dollar

The last chart I want to cover before moving into the research is the U.S. dollar.

A stronger dollar has been a headwind over the past few years because it can create challenges for corporate profits. On the weekly chart, the dollar is running into resistance around its 200-week moving average. Each candle on this chart represents one week of trading.

We've seen a broad bottoming pattern in the dollar, followed by a rally back toward that moving average. But the recent move hasn't been accompanied by a lot of momentum, and we're not seeing overbought conditions.

We're hopeful that the dollar is starting to roll over. A weaker dollar could be positive for stocks and could also provide support for gold, which we're watching closely.

On the daily chart, the dollar recently ran up toward 103 before declining over the last couple of days. We'll see whether that downward move continues.

Investor Sentiment and Put Buying

Let's turn to a few charts from our research providers.

Macro Charts highlighted the third-highest put volume of all time. As a refresher, when someone buys a put option, they're generally positioning for the market to decline. So unusually high put volume tells us there's a significant amount of bearish positioning.

But when we look at the last four major spikes in put buying, the historical outcomes are interesting. Several occurred at or near market bottoms. In another instance, the market eventually moved lower, but the timing was off by several months. We also saw a huge spike in 2025 that coincided with the exact market bottom.

The point is that we can't look at unusually high put buying and automatically conclude the market is about to fall. Historically, these extremes have sometimes pointed in the opposite direction.

Gold: A Potential Opportunity

Another chart from Macro Charts focuses on gold and investor sentiment.

As I mentioned earlier, gold and the U.S. dollar often move in opposite directions. When the dollar weakens, that can create a catalyst for gold.

The daily sentiment indicator for gold bottomed in early 2026, followed by a rally. More recently, sentiment returned to that same low level and has started turning higher again. It resembles a double bottom in sentiment after a strong rally in gold prices.

Looking at the gold price chart, we saw a significant rally from around $2,000 per ounce to approximately $5,400. After a healthy pullback, gold is trying to establish another low. Importantly, that low is higher than the previous one.

We're seeing a similar pattern in momentum. Relative strength has formed a higher low and never reached oversold conditions following the earlier overbought reading. Those are encouraging technical developments.

We haven't taken a position yet, but we're watching for an opportunity to add gold to portfolios, particularly if interest rates and the dollar begin to fall.

One potential approach would be to establish a position with a stop order around $3,900, or slightly below, to manage downside risk. That could create an attractive risk-reward setup.

Small-Cap Stocks and the Russell 2000

Another interesting chart from Macro Charts looks at the Russell 2000 and commercial options trader positioning.

The chart goes back to August 2017 and shows just how negative positioning has become toward small-cap companies. Commercial options traders and short sellers are heavily positioned against this part of the market. We're seeing some of the highest short positioning in the Russell 2000 over that period.

Historically, when this measure has reached similar extremes, it has often been a favorable opportunity to buy small-cap stocks. We saw examples around late 2020 and again in 2022, 2024, and 2025. The timing wasn't always perfect, but those periods ultimately offered attractive opportunities.

We continue to maintain our small-cap exposure. The market has pulled back a little, but we may add to that position if we see a stronger turn.

Earnings are a major factor here. The broader market is priced at the higher end of what I consider fair value, though I wouldn't call it overvalued. Strong earnings are needed to support those prices.

If earnings come in strong and small caps begin to move higher, we could catch a lot of investors on the wrong side of their positions and potentially see a year-end rally.

Institutional Investor Positioning

This next chart comes from Duality Research and looks at positioning in the S&P 500 among asset managers and institutional investors, including hedge funds and mutual funds.

Current positioning is around $354 billion, compared with more than $400 billion back in late May or early June. Since then, positioning has continued to decline even as the market has moved higher.

That creates an interesting situation. If earnings are strong and stocks continue moving higher, these investors may find themselves underexposed. They don't want to underperform the market, so they may be forced to come back in and buy shares at higher prices.

We want to already own those shares if that happens.

There may also be a significant rotation underway. Technology has been weak, while consumer staples and utilities have been strong. Those lower-volatility sectors have historically tended to hold up better during recessions, and investors appear to be positioning for that possibility.

Our view is that we're not currently in that recessionary scenario. If the market continues higher, investors who have moved defensively may need to reposition.

Artificial Intelligence Stocks and Hedge Fund Selling

Duality Research also highlighted unusually heavy selling in global AI stocks. Hedge funds sold these stocks at the second-fastest pace of the year, behind only the selling associated with the Situational Awareness fund situation in July.

That earlier episode involved a former OpenAI employee who moved into hedge fund management, built a large position in AI stocks, and ultimately had to liquidate the fund. Following that selling, AI stocks established a durable low and began moving higher.

We're now seeing another significant wave of selling. That's worth monitoring because, when so many investors have already sold, it may reduce the potential for another aggressive move lower. If AI stocks start moving higher instead, those investors may feel pressure to buy back in, amplifying the rally.

This is one of the challenges of trying to trade in and out of markets. If you're on the wrong side of a move, you may end up chasing stocks at higher prices, which can significantly affect returns.

Is AI Another Tech Bubble?

I was listening to economist Jeremy Siegel on a podcast last week. He discussed the comparisons people are making between today's AI market and the technology bubble in 2000.

One statistic he highlighted was the NASDAQ's forward earnings multiple. Back in 2000, the NASDAQ was trading around 100 times forward earnings. In other words, investors were paying approximately $100 for every $1 of expected profit over the following 12 months.

Today, that multiple is around 22.

That's a significant difference, and it's why I don't think it's fair to draw a direct comparison between today's AI valuations and the technology bubble of 2000.

Could AI stocks need a breather or a period of slower growth? Absolutely. Could valuations continue to expand? That's possible, too. But from a valuation standpoint, we're nowhere near what we saw during the internet bubble.

It's important not to draw sweeping conclusions from one statistic that happens to resemble something from the past. Those comparisons often generate attention, but the broader context matters.

Corporate Earnings: The Biggest Story

The biggest thing we're watching this week, and over the next several weeks, is corporate earnings.

Earnings are going to have to do the heavy lifting to support current market valuations. But it's worth looking at how consistently analysts have underestimated earnings growth over the past year and a half.

On this chart, the green line represents forward earnings-per-share growth: the growth analysts expect from the average S&P 500 company over the next 12 months. The purple lines show historical analyst projections.

Back in early 2025, expected earnings growth was around 12.5%. Analysts generally projected that growth would remain flat for a period and then begin to decline.

When earnings growth dipped in early 2025, analysts anticipated a modest recovery followed by weakness heading into 2026 and 2027.

But quarter after quarter, earnings growth continued moving higher, eventually approaching 40%. Analysts repeatedly expected that growth to peak and fade, and those forecasts have consistently underestimated what companies delivered.

That's a major reason stocks have continued moving higher and why so many investors have been caught underpositioned. Earnings haven't just been a little better than expected. They've significantly exceeded earlier projections.

Current analyst projections again suggest that growth will decline from roughly 40% and weaken through 2027. I'm not saying that can't happen. But given the forecasting record over the past several quarters, we shouldn't simply assume those projections will be right.

Earnings are central to the entire market story. They're also one reason I don't see today's valuations as comparable to the bubble in 2000. Back then, investors were paying around $100 for every $1 of expected earnings. Today, earnings themselves—the “E” in the P/E ratio—have been growing at a very strong pace.

That growth provides support for current stock prices.

As earnings season picks up, we'll be watching year-over-year growth, how results compare with expectations, and what companies say about their outlook for the coming quarters.

Overall, things seem relatively calm right now. The market has moved sideways, and there's plenty of noise and pessimism, but the underlying fundamentals remain encouraging.

The next couple of weeks of earnings reports will be especially important. We'll see whether companies can continue delivering the growth needed to support current valuations and whether that could help fuel a year-end rally.

I appreciate you joining me for a longer update today. If you have any questions, please reach out. I hope you have a great week.