The QQQ finally lost its uptrend this week. Going back to the war lows we had sustained this uptrend going back 6 months. This week, after multiple tests, we lost the trend. We had a huge rally on Thursday which tested the underside and then we reversed on friday. Does this mean doom? For the market, no, for tech stocks it means there will be weakness ahead. The issue with our market is it is so heavily skewed to tech that weakness in the QQQ is seen as market weakness when the reality is there are still plenty of places of strength.
Where are those places? You have to look through all the individual sector charts to find them. Below are 4 subsections that look fine now, these sectors typically don’t do well the majority of the time when tech stocks are working.
The overall market,below, doesn’t look too awful. Friday did form a bearish engulfing on the SPY closing below the 50 day but we’re just back in the same range we’ve been in for months. The overall weighting of tech stocks is pressuring this.
So what now? The ai trade has dominated the market for the last 3+ years. These sharp drawdowns have happened multiple times a year, we always resolve higher. We have earnings season coming up and if earnings and guidance are fine the market may be too. My guess is somebody big blew up this past week, the mechanical move down we saw yesterday with the vix spiking on no news just felt like we had another event like when Leopold blew up in the summer. Regardless of the why, the move happened, there is alot of leverage in the system today and when it unwinds you get these nasty moves down. I think people are so enamored with the ai trade that they forget other sectors of the market exist. I know these other names aren’t the sexiest, they don’t have that potential to triple and people always want to be in the most consensus names.
The problem with that is, the market is going to constantly punish the consensus names. Look at something like Amazon, every Christmas, 80% of analysts on the street makes Amazon the top pick for the year ahead and what do you get? 5% return last year underperforming the Nasdaq and 10% so far this year once again underperforming tech stocks. You have to really be in beaten up and washed out names if you’re going to see outperformance, you’re never going to get it being in the consensus long. Take this year, Apple is the only of the mag 7 outperforming the index and coming into the year it was the big loser as the 1 name not heavily investing in ai. Look at early 2026 MSFT sold off so hard it was down 30% at one point in late June and seen as a massive loser. Today, MSFT is the third best performing Mag 7 name year to date behind Apple and Nvidia. This market is flip flopping narratives so quickly these days you have things like Google from going as the consensus ai winner when the year began to a 6.8% year to date gain now as it is no longer seen as the big winner everyone thought it was.
This is one of the toughest markets you will ever face just on narrative alone. You are having this massive war of attrition from the world’s largest companies. Add in the geopolitical mess we have unfolding overseas and you have the chaos we’re seeing now. We all know the situation with Hormuz and Iran but now you have the Houthis bombing Saudi Arabia and their infrastructure daily to go along with Ukraine destroying multiple key pieces of infrastructure in Russia all leading to major disruptions and oil soaring over $100 yesterday. Until we can get all these situations under control, the appetite for tech stocks is just not there. Investors are rotating to more defensive things that is all. If and when these situations settle down, investors will rotate right back to tech, tech stocks are all we have, but in times of uncertainty people simply shift to more defensive value trades as their appetite for high beta names is non existent.
All I’m trying to say is this isn’t the ai bubble deflating, these names are all doing some incredible things, this is simply a world on fire with war and higher rates spooking investors who are now rotating to safer names. How long will all this last? Nobody has an answer and it sucks because if these wars weren’t causing all these issues, the ai trade would be driving us materially higher but they do exist and if I had to guess they’re going to ramp very soon. The Iranians have made Donald Trump look bad, they’ve given him none of what he wanted and my guess is if the polls are right and he loses mid terms, he will need some sort of face saving moment which probably includes a massive attack on Iran. The market seems to be pricing that in, why else would techs stocks breakdown? They’re not breaking down on fundamental issues, they’re breaking down on multiples compressing as markets price in higher rates for longer as a sustained war equals inflation that won’t subside. Just remember a P/E ratio is correlated to the risk free rate. A stock with a p/e of 20 is a name with a 5% earnings yield, well the risk free rate is over 5% now, so for the risk you take with stocks, the multiple has to decline and that is all that is happening.
Look at this tweet from Mike Zaccardi below showing the p/e of the SPY is now 18.7 so stocks are cheaper than they’ve been in a long time and that is because the earnings yield on S&P is now 5.35% mind you te the 20 year treasury offers almost 5.5% with no risk. So the high multiples we’ve been used to for years sound normal to investors but in reality, with where rates are, they’re expensive. 30x earnings is no longer cheap when growth is tepid and treasuries offer near 6%. We just spent a decade where rates were so low that things like 30x earnings were cheap but in today’s environment, everything is be repriced as we’re now hiking rates and if CPI this week was any indication, rates aren’t going lower anytime soon.
Bottom line, we have a mess geopolitically. There are other sectors besides tech, this week was your sign to exit tech. You can dabble in tech via selling puts, selling covered calls, etc but it won’t be easy being in these names. An instant recovery after a breakdown of a 6 month uptrend is not a high probability. I would simply look to other sectors for appreciation in the short term. You see where I’ve shifted my longs in my book it is all names that aren’t exactly consensus fintwit tech names. It takes time for markets to settle down and base before going up again and I suspect it will be another few weeks/months of weakness before tech names pick up again.
Have a good weekend, I will see you monday.