Wall Street Is Running for the Exit | The AI Trade Is Getting Dangerous | Kenny Polcari

Well, good morning. Yes, it's me, Kenny Polcari, coming to you live today from the floor of the New York Stock Exchange. There's a CNBC booth behind me, and I'm standing right here under the opening bell. Today is Monday, July 27th, 2029, and here are the things you need to know to get your day started. Well, Bank of America's bull and bear indicator, well, we'll talk about that because what's up with that? Tech, they continue to get sold. Blue chips though saved the day on Friday. Bonds are up, yields are down, oil is down, and gold, well, that's ticking higher. And it's Big week. We got earnings with ECO data and we got the Fed all coming together. And what do we have at dinner tonight? We're gonna have the Villa Capricciosa. So if you read my note last week, then you learned that both Goldman and UBS told us that the hedge fund guys, the Momo guys, uh, had been running for the exits at breakneck speed, tripping over each other as they tried to lock in profits ahead of earnings season that began, uh, you know, just a couple of weeks ago, right? They reduced their exposure to AI semiconductors, the Mag 7, and the memory names. Their message was clear: the momentum trade had become too crowded and valuations had become too stretched. Nothing that should surprise anybody. It made sense, right? It's not like we hadn't been discussing that for weeks. Then Bank of America comes out and tells us that their bull and bear indicator, it's a tech indicator, is, uh, is sitting at 9.6 on a 10-point scale, one of the highest readings that we've seen in years. A 9.6 suggests extreme bullishness, right? At first glance, uh, those reports sound like they're in direct conflict with each other, right? One says the hedge fund is out, the other one says it's extreme bullishness. But they're really not. That's because they measure two different things. Goldman and UPS are focused strictly on the hedge funds, the prime brokerage units, just focusing on the hedge funds. Bank of America is looking at the entire investment community position. They're looking at mutual funds, ETFs, pension funds, institutional managers, hedge funds, yes, cash balances, credit markets, and other technical indicators. And here is the important part. The bull and bear indicator is actually considered contrarian, right? Why? Because a reading of 9.6 isn't telling investors to run in and buy because everyone's bullish. It's actually warning investors that the bullishness has become too much and that stocks could actually weaken. And it's not going to happen today. But now think of the Relative Strength Index, right? When the reading approaches 70 and pierces 70, that's usually a technical sell signal, right? When it kisses and breaches 30 on the downside, it's usually a technical buy signal. And guess what? The S&P and the NASDAQ RSI indexes were screaming overbought from late April through early June, which generally didn't bother anyone until, of course, the hedge fund community started to aggressively sell stocks in early June ahead of the earnings again, right? Something that we discussed. Recall I said that the earnings bar had been raised, right? The estimates were high and stocks were priced to perfection. So nobody should be surprised if we see a sell-the-news type of reaction, which is exactly what we've been seeing. In any event, readings above 8, uh, have been viewed as technical sell signals for Bank of America because when everyone's on the same side of the boat, there aren't enough buyers left to keep driving prices higher. And that doesn't mean that there aren't buyers, it just means that they're becoming more discerning. They're not aggressively buying. So let's put the pieces together. Bank of America warned us that the market had become overcrowded, right? Stretched. Goldman and UBS were showing us that, that the Momo guys recognized that risk and had begun running for the exits. Goldman even suggested that after weeks of relentless selling, the, the hedge— the Momo crowd, the hedge funds, may finally be showing signs of capitulation or exhaustion. Again, we discussed last week, right? It's important because they're not saying the market is showing signs of capitulation. They're saying the tech sector is, and that actually is not such a bad thing, ironically, right? When it's overdone, it's overdone. Then earnings arrived and the results so far have been nothing but fantastic. 86% of the, of the companies beating estimates, 80% beating the bottom line, 86 on the top line, 80% beating the bottom line. And we've only had 27% of them report so far. So we can expect those numbers are probably going to change over the next couple of weeks. Now, after Thursday's tech-driven flush, the market tried to regain its footing on Friday, but the recovery was anything but convincing. It wasn't a broad-based buying spree at all. It was more of a pause, a chance to digest what had just happened. By the time the bell rang on Friday, the Dow was up 236 points, helped by traditional blue chip names. You can think, uh, travel, insurance, Home Depot, IBM, Sherwin-Williams, Visa, Johnson Johnson, JP Morgan. The S&P 500 managed to tack on 3 points. The Nasdaq, however, remained under pressure, losing another 162 points. The Russell lost 10 points, uh, the Transports gave up 102 points. The Equal Weight S&P rose by 62 points while the Mag 7 lost 27 points. And that tells you that we're still in that rotation out of technology story, um, and it also tells you that maybe it isn't or wasn't over just yet. The Momo guys continue to lighten up on many of the same AI and semiconductor names that, that led Thursday's sell-off. Now, tech lost 1.5%, but the money rotated into the other sectors where they're— where the market's not so dependent on aggressive growth assumptions. Real estate, basic materials up nearly 2.2% and 2% respectively. Consumer staples up 1%. Financials up 0.9%. Communications up 0.9%. Healthcare up 0.7%. Energy industrials up 0.4%, while utilities gained 0.2%. Again, this only supports the idea of rotation versus complete liquidation. The bond market initially found some stability. The TLT and TLH up 0.1% and 0.2% respectively. Yields eased somewhat after Thursday's spike, with the 2-year now ended Friday at 4.32% and the 10-year at 4.69%, the 30-year at 4.15%. This morning though, yields are lower. On the back of a possible ceasefire in the Middle East. And oil pushed higher on Friday. Brent traded above $100. WTI traded at $92.40 amid fears of these escalating tensions and further supply disruption. But cooler heads did prevail on Friday afternoon. Rumors of a renewed diplomatic effort helped to ease prices going into the close. And over the weekend, the news is that those diplomatic efforts have been successful. Peaceful. But we've seen that before, um, easing those tensions and pushing prices even lower. This morning Brent is now trading at, uh, $88 and WTI is down $7 at $82.60. Gold, which has been confused, trading between $4,000 and $4,200, not sure if the inflation is an issue or when the geopolitical drama was going to end, leaving it to settle at $4,052. This morning though, on the back of this news, Gold bugs are taking gold higher on the assumption that inflation will not be an issue and the drama may— drama in the Mideast may be closer to an end rather than the beginning. Right. It's up $50 at $4,100 basically, and it remains in that trading range that we defined. The VIX, which shot higher last week, up and through all 3 trend lines, supported the idea of ongoing anxiety and valuation risk. This morning it's down 5% as markets celebrate any ceasefire news, right? It's sitting right on the edge between complacent and concerned and could go either way depending on the geopolitical headlines and/or the earnings headlines that we're going to see as the week progresses. This morning it's trading at 17.60. Last week's high was 20.30. Trendline supports down at 17.30. If we break that support, then look for the VIX to trade back down to the mid-16s. And if that happens, stocks will certainly trade up. Now, this week demands, um, absolutely demands your attention because it's not just another week. This is a big week, and this could very well be the week that determines whether last week's sell-off was nothing more than a healthy reset or the beginning of something more significant. We're about to hear from 150 S&P companies, including 4 of the most important companies on the planet. And they're all tech, right? It's Microsoft, it's Meta, it's Apple, and it's Amazon. Because investors want answers. They don't just want beats anymore. Last week, Alphabet raised its AI capital spending to $205 billion. Remember that? And it forced investors to ask whether the economics of AI are really beginning to become stretched. This week, Microsoft is going to have the first opportunity to answer that question. Can Azure continue growing at a pace that, that justifies all this spending? Is Copilot gaining enough traction to prove that AI can become a meaningful profit engine? Can Microsoft continue expanding margins while investing tens of billions of dollars into the AI infrastructure? Then comes Meta. Will Zuckey double down on AI spending? Can digital advertising continue to fund this investment cycle. On Thursday, the spotlight shifts to both Apple and Amazon after the bell. As usual, Apple is going to tell us about the health of the consumer and whether the AI— whether their AI strategy is beginning to resonate. Amazon is going to give us an update on AWS cloud demand and whether businesses continue investing aggressively into AI. Today, we're going to hear from a range of companies. This morning before the bell that represent, uh, yes, the tech industry, base materials, healthcare, financials, and real estate. But this week isn't just about earnings. Remember, tomorrow starts the July FOMC meeting, and the results will be announced on Wednesday at 2 PM. Now, will, will, uh, Kevin Walsh host a press conference or not? I would love to see no press right? I don't think that's going to happen, but I'd like to see no press conference. No one expects a rate move. The market is putting a 30% probability on it, but everyone is going to be listening for even the slightest change in tone, which is why I say I wish there wasn't a press conference. I wish you'd just come out and announce the way it used to be and let the markets figure it out the way we used to when Alan Greenspan was Fed chair. And comes Thursday, arguably the biggest macroeconomic day of the week. We're going to get our first look at second quarter GDP, expected to be up 2.1%. We're going to get the June PCE price index, the Fed's favorite inflation gauge, and that's expected to be better, right? Just like the CPI, PPI. We're also going to get personal income, personal spending, and weekly jobless claims. Friday wraps it all up with the employment cost index, the Chicago PMI, and the first reading of July consumer sentiment. University of Michigan consumer sentiment, which is expected to suggest that not everyone is happy. So make no mistake, this week isn't simply about who beat the earnings estimates. It's about, it's about whether corporate America can justify the massive spending. It's about whether the economy can remain strong enough to support premium valuations. It's about whether inflation continues moving in the right direction. And it's about whether the Fed believes it has room to remain patient. At the end of the week, we'll know a lot more than we do today. Now, overnight, Asian markets closed higher, uh, on Monday. European markets are all up this morning. Germany up 1.5%, Spain up 1.3%, Eurostock up 1.2%, Italy's up 0.7%, France is up 0.7%, and the UK is up 0.4%. Of a percent. US futures, as you might expect, are up fairly big. Dow up more than 500 points or 1.1%. The S&P's up 74 points or 1%. The NASDAQ up 460 points, 1.8%. The Russell's ahead by 38 points or 1.3%. The S&P closed at 7,411, up 4 points. We ended the week just below trendline resistance at 7,472. Right now it looks like we're going to slice right up and through that on the opening, leaving the July high of 7,580 right in sight. Before you— but before you call in, remember this. This is a big week on many fronts. Be methodical, not emotional. And don't forget that the midterms are now only 3 months away, and there's a lot to consider, and there could be more volatility ahead. Now, personally, I still believe that this has been a price reset rather than the beginning of a much broader bear market. The AI story hasn't changed, at least for me, the eco, the eco data remains robust and tensions in the Mideast, well, they seem to remain constant. They're not really blowing out. And while politics don't usually price stocks in the long term, it can create short-term chaos and that creates opportunity for a long-term investor. What has changed, though, is that investors are no longer willing to accept the story of AI. They want the proof, and that's exactly what this week is all about. Remember, markets climb the wall of worry, not the wall of certainty. Now, if you'd like to discuss your goals and evaluate the risk in your portfolio, um, or simply just get a second opinion, feel free to give me a call at 561-931-0190. I'm always happy to provide a complimentary portfolio review and risk— an overall risk assessment, uh, so that you understand. Okay, so what do we have at dinner tonight? This is one of my favorite dishes, and I It's a great summer dish because of the fresh arugula, the red onions, the cherry tomatoes. It's real capricciosa. It's colorful, it's hearty, it's easy to make. And you can easily, though, substitute chicken and even pork if you want, a pork cutlet. You can make it your own. So for this, you're going to need the veal cutlets, the flour, eggs, seasoned breadcrumbs, olive oil, butter, fresh arugula, ripe cherry tomatoes sliced in half, and you need a sliced red onion, lemon juice, and shaved Parmigiano-Reggiano cheese. Not grated, shaved, right? And in a bowl you want to beat 3 or 4 eggs. You're going to add a little splash of milk. In a separate plate you're going to put some of the flour. And on the third bowl you're going to place, um, on the third, on the third plate you're going to place the seasoned breadcrumbs. Now you're going to begin by pounding the cutlets thin, not too thin, but just pound them out a little bit. Then dredge the cutlet in flour, dip it in the egg wash, and then put it in the breadcrumbs, pressing it gently so that the breadcrumbs really stick to the cutlet and place those on a plate. Repeat until you've finished the whole thing. Next up, you're going to heat up a lot— you're going to turn your oven to broil and heat up a large roasting pan. Add— you're going to add both butter and oil to it, enough that's going to cover the bottom of the pan. And you're going to turn the broiler on high. You're going to put the pan under there, let the oil get hot. Once the oil is hot, you're going to add the cutlets to the oil, right? You're going to take it with a fork, going to dip it in and immediately flip it over. And then you're going to fill the— fill the plate, fill the roast pan, put it under the broiler. Once one side is broiled, you're going to take them out, flip them back to the other side. You're going to cook the cutlets the same way until they're crispy and brown, uh, on the other side. And you're going to remove it, put it on a warm plate. When you're going to serve it, you're going to serve it on a plate with, uh, with— you're going to top it with fresh arugula, sliced cherry tomatoes, the red onion. You're going to squeeze some fresh lemon juice. You're going to drizzle a little bit of olive oil. You're going to season it with salt and pepper and then top, top it with the shavings of the Parmigiano cheese. I would enjoy this in the summertime, especially with a chilled white versus a heavy red. In any event, it's a great dish. You're not going to go wrong. You can thank me later. Until tomorrow, take good care.