Good morning,

Very light mailbag today, so I’ll quickly use this space to let you know about a few other ways you can catch me over the next week.

First, I’m guest authoring the CMT Association’s Market Mosaic Daily this week. This morning email is authored by a different member of the CMT Association each week, and has been bringing some unique insights to my mailbox recently. It’s completely free, and you can subscribe at the link below (scroll down to the Research section if not prompted).

https://content.cmtassociation.org/hub

Next, I’ll be back on StockMarketTV with JC Parets and crew next Monday at 9:00 am ET.

There isn’t a direct link to the livestream yet, but you can find it when available on their YouTube page.

With that, let’s get to our questions and chart requests.

Questions

Can you discuss the Dispersion Index trade, and what contribution it may be having to recent mega cap outperformance?

At its core, the dispersion index trade is a bet on single stock volatility relative to index volatility. Because investors tend to hedge macro risk with index level hedges, that volatility tends to trade at a premium.

In the dispersion trade, hedge funds and sophisticated traders sell index volatility and buy single-stock volatility, often via options on individual names.

In recent years, some of the underlying mechanics have been blamed for the dominance of mega-cap growth stocks in cap-weighted indexes. When hedge funds purchase these options from dealers, the dealers turn around and buy the underlying shares to hedge their exposure. That persistent “non-fundamental” bid in the stocks of the largest index weights has been called a self-reinforcing loop.

I won’t pretend to be an expert on the internal plumbing of the market or even options, but I’ll note two issues with the conclusion that it has driven the rise of mega-cap stocks.

First, the Magnificent 7 haven’t been doing that well vs. the S&P 500. The Roundhill Magnificent 7 ETF (MAGS) peaked relative to the S&P 500 back on October 29. While we’ve seen some outperformance since the recent market bottom, that 7.3% of alpha hasn’t even gotten the ratio back to its 200-DMA.

The second is (gasp) a fundamental reason. The chart below comes from Matt Cerminaro (I told y’all to follow this kid) and shows net income vs. market cap by sector.

As you can see, the market cap share closely tracks the net income share, suggesting that the continued increase in tech stocks’ weighting is due to earnings, and not out of step or due to some detached-from-reality option dealer bid for the stocks.

Chart Requests

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The market (ex-semiconductors) finally took a week off last week, and that gives us some breathing room to zoom out and look at where the big picture stands four months into 2026.

We’ll review the technical picture and major trends for equity indexes, styles, fixed income markets, and more, but we can’t do that without talking about semiconductors.

And while that might seem like a tactical story (the current 18-day win streak is the longest in history), perspective and the big picture are more important than ever here.

As today’s report will show, semiconductors are experiencing a buyers frenzy that by some metrics even exceeds the madness of the dot-com bubble. That doesn’t mean they are a short or to sell all your holdings today. The title of last week’s report was literally, “We don’t fight trends.”

But recognizing the environment is paramount to our investment strategy, and risk needs to be managed amid any unsustainable advance.

This week’s sections include:

• Equity markets

• Fixed income and currency

• Semiconductor madness

• Oil and energy markets

• May seasonality

• Two keys to this week

• and more!

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Good morning,

I always try to have a few macro takeaways from doing the work for this report, and the biggest one this week is:

Aerospace and defense stocks are trading like we’re heading for world peace.

This rally’s lack of daily breadth remains a headscratcher, but our risk ratios have confirmed the move all the way up. And what better additional confirmation that the market couldn’t care less about the war, than selling aerospace and defense stocks straight down since it began.

Today, we’ll highlight four of the worst-looking charts to avoid, and also review:

• Stocks to play the crypto rally

• Energy stocks trying to make a stand

• All-cap long ideas

• Hot List updates

• Notable earnings reactions

• and more!

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Aerospace and defense acts terribly

L3Harris completes a H&S top yesterday

We sold this for a 19% gain on January 29, not too bad in hindsight. Now, LHX is completing a multi-month top and relative strength is falling off a cliff. The head and shoulders targets $294, or roughly the breakout point at the beginning of the year.

TransDigm Group was underperforming before it was cool

A two-year top has been completed here and investors shouldn’t be encouraged by the weak bounce above the neckline. This is hitting 3-year relative lows and trending outright lower while SPX is at all-time highs.

Kratos Defense & Security Solutions has lost the 200-day

This had been support all the way since it broke out as an $11 stock in early 2023. Still horizontal support from $61-$64, but the performance of this group wouldn’t have me waiting to sell it.

Even GE is breaking down

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Good morning,

This week’s Overtime is a review of the commodities landscape.

Energy and oil markets remain front and center for the current environment, and started this week with a big bounce.

Today, we’ll cover the technical outlook for:

• WTI and Brent oil

• Natural gas and gasoline

• Energy stocks

• Precious metals and miners

• Industrial metals

• and agricultural commodities and softs

Oil markets

WTI starts the week with a bounce, but the worst is behind us

Crude oil bounced yesterday, but as outlined in the Playbook, last week’s break of $95/bbl. was the most significant development. I think an elevated trading range makes a lot of sense here, and am currently neutral if prices are between $80-$95/bbl.

WTI futures curve remains in steep backwardation, declines mostly seen at the front end

Versus this time a month ago, the December contract is down less than $3, while the May contract has declined nearly $10. Whether it is with front-month declines or longer-dated tenors rising, this curve has a long way to go towards normalization as contango, or an upward-sloping curve from lower left to upper right, is the normal state of affairs.

Brent oil has broken below $100

The European benchmark for oil has a similar pattern to WTI, breaking below $100/bbl. before finding support at the 50-day. I also see a trading range here as likely, with $80 also as the potential floor.

Brent-WTI spread elevated, but well below spike highs

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It’s time for another mea culpa, my second in as many weeks, though we’ll hope this one doesn’t spark another contrarian trade.

The market has ripped to all-time highs in a truly historic fashion, something that was absolutely unexpected by me and what I was seeing, and unideal for our recommended positioning.

The old saying is: Stairs up, elevator down, but this has been the complete opposite, a steady, orderly decline, followed by a straight-line move higher.

I still believe in our process, and as I’ll show today, the breadth (or lack thereof) has been an anomaly for correction rebounds.

However, as Marty Zweig said, it’s unforgivable to stay wrong in this business, and we don’t fight trends. A market at all-time highs is certainly not in a downtrend, so for the most important question going forward (How to position?), my answer is what it always is:

Own the portfolio you should own today, today.

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Good morning,

Q1 earnings season is officially underway, and, as always, it’s not about the numbers, but the reaction to the numbers.

Today, we’ll review the reaction to the major financials that have already reported, as well as some other blue-chip names.

We’ll also cover:

• Large cap long ideas

• Hot List updates

• Software stocks

• and more!

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Earnings reactions: The financials

Goldman posts bullish reversal following initial drop

Goldman kicked things off Monday morning and was down nearly 5% early before reversing off the 50-DMA. We rallied Tuesday, but found resistance at the downtrend line from ATHs yesterday. The intraday high at $928 is now tactical resistance.

JPMorgan needs to stay above the 200-day

JPM was little changed Tuesday after earnings but fell 1.7% yesterday. We’re back above the neckline of a large top, but the relative chart still says this is a stock to avoid. Watch the 200-DMA ($303.47) the rest of this week.

Tough to be bullish BlockRock here

BlackRock is up more than 5% so far this week after reporting Tuesday before the open. Technically though, action below this resistance zone doesn’t mean much, it’s getting above that would change the chart. Color me skeptical for now.

Citigroup continues to lead

No skepticism here. Citi is a beast, breaking out Monday before earnings and adding to gains the last two days. Be careful chasing (RSI already over 76), but pullbacks and pauses are buyable.

Wells Fargo is another to avoid

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Good morning,

Today’s focus is on relative strength: Groups that have it, and groups that don’t.

We’ll be looking exclusively at ETF charts, so any idea is potentially actionable.

And while we recently raised some cash in our models, the primary way I believe in adding value to a portfolio is by overweighting stocks and industries with relative strength and underweighting those that don’t.

Today, we’ll feature those on an industry/sub-sector basis in the US and a country-specific basis for international markets.

Let’s get into it!

Relative strength: US equities

SOXX: iShares Semiconductor ETF

SOXX didn’t just hit new relative highs last week, it broke out to absolute highs. Taiwan Semi earnings (Thursday before the bell) will be important to how this group finishes the week, but the recent rotation from the memory names to the index heavy-weights like Broadcom and Nvidia certainly seems healthy.

QQQJ: Invesco NASDAQ NextGen 100 ETF

I think of the NASDAQ NextGen 100 ETF as having a lot of software names, but clearly that isn’t the case. Led by top holding Sandisk, QQQJ broke out to a 52-week relative high vs. the S&P 500 yesterday, and the base suggests more outperformance is on deck.

PSCT: Invesco S&P SmallCap Information Technology ETF

Want a fun fact almost nobody knows? How about small-cap technology closed at its highest level ever last week? PSCT hit fresh relative highs vs. SPX yesterday.

XBI: SPDR S&P Biotech ETF

We added XBI to our ETF models at the beginning of the month and it hit its highest level since 2021 yesterday. It has been a consistent leader for the past year, regardless of other market dynamics.

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The message of the market has become more mixed over the past two weeks, and it would be unwise to deny some of the real technical improvement we’ve seen.

However, it hasn’t been all good news, and today’s report will feature a “Pros and cons” section to help investors decipher which improvements matter for our near-term outlook, and which do not.

Heading into this week, there is a litany of stories for investors to track, including the software meltdown, oil prices remaining elevated, the start of Q1 earnings season, and more.

But the most important question for equity investors is, how does the market respond to its first internal overbought condition since the rally began?

The action late last week didn’t inspire confidence that things have changed, and that underlies a still cautious outlook, despite improvement in some areas.

This week’s report will review:

• Three key charts from last week

• Pros and cons

• The setup going into this week

• Relative improvement for the Mag 7

• A mea culpa on software

• and more!

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Good morning,

The news and magnitude of yesterday’s move mandate that we spend a little bit of time on the top-down call before we get into our normal bottom-up look at the market.

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Good morning,

March was a mixed month for our ETF portfolios. On one hand, our cautious top-down outlook proved correct, with stocks falling since the last trades.

However, defensive underperformance (primarily from the healthcare sector, but also consumer staples) offset correctly positioned underweights to sectors like communication services and consumer discretionary.

In the end, performance over the past month was just in-line with benchmarks (Ultra-Growth -0.14%; Balanced +0.01%) but I don’t believe significant changes are warranted.

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There’s nothing more seductive than a bear market rally.

Okay, that might seem a bit dramatic for a market that has only declined 9.8% from top to bottom, but I think the logic still applies.

The market has been steadily falling for two months, and last week we got our first real rally, with the best day for the S&P 500 (+2.9%) since last May.

Perhaps even more so for financial advisors, who are conditioned and trained in the ways and (very real) benefits of dollar-cost averaging, staying the course, etc., rallies in a downtrend can be hard to resist. If you’re a tactical investor, you don’t want to miss a great buying opportunity.

But the fact is, there is one key that almost always separates bear market rallies from real durable rallies after the low is in:

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Good morning,

March was another busy and volatile month for the Blue Chip Hot List, despite running with an abnormally low number of holdings.

We started last month with eight stocks, and five were removed over the course of the month, due to a combination of profit-taking, loss-cutting, and stop-loss violations.

However, the average of those five removals was a net positive, with +0.46% absolute gain, and +5.1% of outperformance vs. the S&P 500, thanks to a large gain in Keysight Technology, and only modest losses in the other four positions.

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Good morning,

Markets are volatile, and the people have questions.

We got some really timely ones this month; thanks to everybody who participated.

Let’s see what is on your fellow readers’ minds!

Questions

Do you have thoughts on why gold hasn’t held up the last few weeks?

My answer here is nothing more than sentiment. Gold was historically stretched above its 200-DMA, inflows into gold and gold miner ETFs were off the charts, and we saw bearish momentum divergences in GDX at the top. The fact is, it had a huge run, and there were simply no marginal buyers left for gold at the beginning of the month, no matter the news.

Now, much of that has changed in the 30 days since, with GLD seeing the most outflows ever. I think it can bounce, but what that bounce looks like will be telling for the gold trade for the rest of the year. A double-top has been completed, so I’m personally skeptical we will see it get above the 50-DMA (just below $5,000/oz.).

Are there any areas of international equities that are still working?

If by working, we mean immune from recent weakness, then no. The best we can really find is relative strength, and there isn’t a lot of that either, with former leaders like Taiwan forming possible tops.

If you were determined to invest outside the US, one country worth a look would be Canada:

It has fallen below the 50-DMA in absolute terms, but traded to fresh 52-week relative highs vs. SPX yesterday. There’s a clear connection to the energy trade, but the combination of relative strength before the oil/energy spike and recent outperformance is rare right now.

What are your thoughts on reflation vs. stagflation?

Common sense would tell me that stagflation is a bigger risk following an oil supply shock. Inflation is self-evidently higher, and consumers have less discretionary income, a negative for growth.

However, what I find interesting is that market-based inflation expectations aren’t moving up at all. In fact, the five-year, five-year forward rate has fallen since the oil spike, suggesting that the impact to inflation won’t be material, and perhaps even a net negative as slower growth and/or recessions tend to be deflationary.

Can you review the correction checklist?

Absolutely! Our correction checklist is:

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The Waiting Place…
…for people just waiting.
Waiting for a train to go or a bus to come, or a plane to go or the mail to come, or the rain to go or the phone to ring, or the snow to snow or waiting around for a
Yes or a No or waiting for their hair to grow.
Everyone is just waiting.
Waiting for the fish to bite or waiting for wind to fly a kite or waiting around for
Friday night or waiting, perhaps, for their Uncle Jake or a pot to boil, or a Better Break or a sting of pearls, or a pair of pants or a wig with curls, or Another Chance.
Everyone is just waiting.

Dr. Seuss - “Oh, The Places You’ll Go!”

Good morning,

Dr. Seuss wasn’t a fan of waiting, and when it comes to life and making our own opportunities, we shouldn’t be either.

But when it comes to markets, and especially this one, waiting is the only game in town.

Last week was more net bearish action, and as always, I’ll walk through exactly why.

But, the TLDR version is that this market remains in a steady downtrend, and our correction bottom checklist is no closer to being complete.

In addition, investors should recognize that this correction didn’t start from a place of strength. This wasn’t everything firing on all cylinders, and then oopsie, a little news-driven 10% correction.

This was a multi-month distributive top, preceded by months of risk-off leadership and warning signs. It raises the odds of a prolonged bear market and, at the very least, makes the bull case a wide trading range and choppy market well through the summer.

I say that not to scare anyone, but to set the expectation.

We could be waiting a long time.

Or we could be buying stocks by the end of April. As I said last week, I’m open to any possibility. But we wait for the signs of a market bottom before adding equity exposure, and last week didn’t give us any more reason to think we are there.

This week’s report will review:

• Last week’s most important charts

• Sentiment and signs of capitulation

• Bullish leadership divergences being blown up

• Why investors should keep the faith on defensives

• 4 divergences that are still in play

• and more!

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