Several Markets Are About To Decide
Markets At A Crossroads
The AI trade remains firmly in control, but signs of stretching are becoming increasingly difficult to ignore. Semis continue to go vertical, Bitcoin is deeply oversold, gold is testing major support, and bond yields remain near key technical levels.
SOX on steroids
SOX put in a massive hanging man candle yesterday, a possible reversal candle. Semis remain firmly inside the steep trend channel that has defined the rally since the March lows. Even a 7–8% pullback would merely take the index back to the lower end of the channel, while still keeping it above the 21DMA.
Source: LSEG Workspace
Funding the semis squeeze
MAG lost its touch a long time ago. High-quality tech has become the primary funding source for the semis squeeze, and it is hard to blame investors given the performance gap. Over the past year, SOX is up 187% versus 35% for MAG. Since the recent lows, the gap is even more striking: SOX +83%, MAG +20%.
Source: LSEG Workspace
Source: LSEG Workspace
Full blown parabolic
The SOX/MAG ratio has gone vertical, moving from near all-time lows to the most extreme level since early 2020 in just a few months. We are not calling the end of the semis trade, but some mean reversion would hardly be shocking. If profits start getting taken in semis, expect some money to find its way back into boring, high-quality mega-cap tech. More here.
Source: LSEG Workspace
The key risk?
TS Lombard estimates roughly 85% of AI ecosystem revenues still come from spending within the ecosystem itself. As long as hyperscaler capex keeps rising, revenues should remain strong. The risk is that today's AI boom is proving that spending creates revenues, not necessarily that sustainable end-demand exists.
Source: TS Lombard
Massive
Bitcoin has collapsed over the past sessions and trades close to the massive $60k support. This is the make or break area to watch.
Note we traded lower overnight, so we could be looking at a short term hammer candle forming.
Source: LSEG Workspace
Oversold
Bitcoin is now trading with an RSI below 18, one of the most oversold readings in years. We hate stepping in front of a falling market, but when conditions get this stretched, a reflex rally is usually not far away. More here.
Source: LSEG Workspace
Channel lows
The US 10-year is trading right at the lower end of the trend channel that has defined yields since March. Latest rates note here.
Source: LSEG Workspace
Source: LSEG Workspace
SPX multiples and yields
History suggests the valuation headwind becomes much stronger once the 10-year moves meaningfully above 4.5%.
Source: MS
Decision time
Gold is trading right on top of the 200DMA and the massive $4,400 support zone. The longer-term trend line sits slightly lower, but $4,400 remains the key level to watch. If gold is going to bounce, the time is now.
