October 2026 Recap

Hi everybody. Good afternoon. Welcome to the October 2026 recap. And it has been a troubling market with the NASDAQ down 6.7% last month. We had quite a bit of turmoil and because of all of this volatility, I'm gonna drop off and I'm gonna let Blake run the meeting this week.

Just kidding. So here we go. We have a lot to talk about because we've had a lot of action. The long-term trend remains favorable. So our red line, you know, is still positive on the S&P. The NASDAQ also, even with a very bad month last month, the long-term trend is still favorable. Notice how we're still slightly above where we were in that leverage unwind in July, and that was a very severe leverage unwind in July. So, the fact that we're getting another one here recently has been concerning and I'm going to show you what happened in a minute, but I can tell you that leverage is coming down and that should bode well going forward. So, we'll see.

The momentum trend is as of today negative. And so we are looking at protection which as you are all probably well aware for the last couple weeks we've been looking at protection looking at reducing risk maintaining put exposure. So the momentum trend which we have a lot of emphasis on is negative as of today. So it looks like we have some wood to chop in this market specifically with the NASDAQ and the semiconductors which is where a lot of this leverage has been the short-term trends and the momentum factors we follow which currently lead us to want to be more conservative, want to have more cash, want to maintain put protection. Is also negative. Now, if you remember at last month's webcast, we were very optimistic and we had things lining up. We had our trends lining up and we have no regrets on our optimism and I'll show you why. Blake, do me a favor and put a trend line on that last momentum factor shift. So, this is what we're really looking for. This line that Blake just drew when we see the momentum like it was negative in July and then we see a rally then we see a you know two to you know 8-week consolidation and then we see this breakout this is what we call and you've heard me say this before this is what we call the rollup okay and when you get the rollup this is where you want your optimism to be very high you want your positioning to be very solid because you're typically going to see the markets perform well. Now, there's no guarantees in this business and unfortunately there is no protect or you know perfection. So, of course, this momentum trend, this short-term trend ended up failing a couple weeks ago and now we're back in the similar predicament where we were in July. So, it's a little disheartening, kind of a punch in the gut because things the setup was very good last month. But this trend on the short-term basis did fail. So, and as you know, this comes and goes much more frequently than the long-term trend. So, as long as the long-term trend is favorable, we're just going to be in more of a protective type mode and then we're going to wait this out. But like while we have this chart up, show them the last couple rollups and how they play out. And this year has been very choppy because we usually don't get this many, but go back to the rollup there from June at the end of August right there. That's exactly what we're looking for. And unfortunately in the August rollup, we really didn't get a ton of follow through. And then in the, you know, September rollup, we got a little follow through and then a failure. Go back to the rollup earlier this year. That's what we're really looking for, right? So, the next rollup that we get, we're going to remain optimistic. We're going to execute these rollups because although you know there's no perfection we have a high probability that these rollups have a tendency to lead to very powerful longer term rallies and trends in the market. So although our last rollup failed, we're still looking at a very favorable end to the year. And I'm going to tell you why.

Well, before I tell you why, let me tell you what happened.

So we literally have the worst drawdown on record from a momentum perspective. So this is from the from Morgan Stanley. They are tracking the US momentum index and this is a percent drawdown from a 52-week high and the speed of the drawdown. So, as you can see, their momentum index had a 62% drawdown or drop decline in a very short period of time. That was even worse than the momentum unwind in the tech bubble, believe it or not. So, this is very rare that you have this much of a momentum unwind. And this pertains to leverage. Okay? This is money that's being borrowed and put into the market and to enhance returns. We don't do that of course but the leverage in the system has been extremely high. Now you remember us talking about this in July when we had a massive leverage unwind as well. And because that leverage unwind in July was so massive, we had a tendency to believe that the major correction of leverage was over. And then of course we see this happening this month. And so now, as gut-wrenching as these kinds of leverage unwinds might be, you know, when you see like last Friday, the semiconductor index was down 9% in one day, right? You had the whole NASDAQ composite down almost 7% last month, you know, as you know, confusing and as nerve-wracking as these unwinds are, when leverage comes off the table, that typically is a very favorable setup going forward if conditions of earnings remain favorable. So in other words, as long as you don't have an event that is you know putting the global economy in recession, having leverage unwind is just future buying power when it starts to come back. So again, as nerve-wracking as this is, this has been an unprecedented type of leverage unwind that we've recently experienced. And again, we feel we're handling this just fine. You know, we have an excellent positioning right now. So even though typically when you see this big of an unwind, that's usually the end of it. But of course, no guarantees, but that's typically the case when you get this type of capitulation. So this is another chart on the semiconductor index relative to the S&P 500.

So why are we bringing up the semiconductor index again just like we did in July? The reason is the semiconductors are like the new industrials, right? The world does not operate without semiconductors. Without semiconductors, you can't drive your car. Without the semiconductors, none of your electronics work. Your iPhone doesn't work. Your iPad doesn't work. Your laptop doesn't work. Your business basically shuts down. Okay? So, semiconductors are without a doubt the most relied upon industrial out there in modern times. And what we just saw was a decline relative to the S&P 500 that goes back to the technology bubble in the year 2000. Now the reason that I think that this is so un you know unrealistic is because we have a different you know ball game today because semiconductors are so intertwined with the economy. This is not an emerging technology. This is what keeps the country going. And so let's look at where we are from an earnings perspective.

So when you see these leverage unwinds and you see these sharp reallocations of monies in the market, it appears to me to just be a plumbing issue. It's an issue of there's too much borrowed money. That borrowed money got margin calls. That borrowed money had to reallocate and the fact that this is happening while earnings growth in the S&P 500 continues to excel. That gives me confidence to think that this is a temporary event. Okay? Now, we don't bet on that. We're positioned conservatively at the moment because of course while the momentum trend is negative. So we are positioned conservatively but by the same token I just don't see this lasting very long when you have earnings growth that continues to accelerate and all the earnings that we've seen. So like circle that 85%. So 85% of the companies that have reported so far have beat their estimates. So they've had higher earnings than what we thought. So that's that's not that's not an environment where you would typically see recessionary activity or downtrending activity you know in the stock market. So we still have a very optimistic view of where we're going. We just have a hiccup in the plumbing that's kind of taking us to the sidelines.

And you hear on TV the media wants to, you know, you know, I tell you all the time, don't don't watch the news media, okay? Because it's they're just they're going to lose you money, right? Everybody wants to talk about the tech bubble and oh, you know, AI is in a bubble. So here's the way I see it. It's really hard to make a case for a bubble when you have continuously rising after tax profit margins and you have earnings growth without stock price growth, meaning you actually have a lower PE this year than you had last year. So that's not the definition of a bubble. So what this appears to me in my opinion is this market looks to me more like 1998 than it does 2000.

And here's why. In 1998, if you notice like if you can show them that July high, this is the S&P. So the July high and then you had a big correction going into August very similar to this year. Then you had a nice rally. No the one prior to that like Yep. So doesn't that look like what just happened? And we were optimistic last month and then you had one more failure. You had one more test, right? And what was happening in 1998? You still had the buildout of the internet going gangbusters, right? And so you had this big shakeout in the middle of the year. You had a failed breakout. You had one more decline and then the market went ballistic. It took off. This is where I see us. Again, this is not a prediction. This is just my thoughts on the on where we are in this particular cycle. Because when we look at the earnings reports and we see 85% of the company is exceeding expectations and we see earnings growth continuing to climb and we see the major hyperscalers continue to increase their capex budgets albeit I understand that's negative because that reduces their cash flow. I get that. But it's also a buildout that puts in incredible amounts of profits in the whole technology. You know system. So I see this as being a temporary break within a very substantial technology buildout. And of course we know what happened. You know the market was up what 50 60% over the next year after that second draw. It was massive. And I'm gonna and I want to point something else out too. So we all know the market peaked in 2000.

There was that the bubble. So when you have a bubble, you know, not to say that we won't have a bubble in certain stocks or certain industries, but you're going to have a hard time convincing me that the biggest, you know, the you know, Apple, you know, Google, Meta, Amazon, you know, Nvidia, you're going to have a really hard time convincing me that's a bubble when they're trading at price to earnings ratios below the S&P itself with continued earnings growth. Okay, that's not a bubble, okay? That's just massive earnings growth, okay? With incredible cash flow generation, right? That's not to say that there's not going to be some small groups of stocks that are in a bubble. Fine. But, you know, the bigger complex is a different ballgame than it was 20 years ago or, you know, 25 years ago. So even if we were to have another substantial rise, which I think is going to happen, I would still have a hard time, you know, calling that a bubble.

But the point is this is what this is what this current market resembles. And by the way, in that 1998 period, I don't think I mentioned you had two major events that led to those big drops in 98. The first was Long-Term Capital Management, which was the big hedge fund run by those guys from, you know, the two Nobel laureates in economics. Their hedge fund blew up very similar to what happened this year where you had Situational Awareness blow up in July and now the you've had you know rumors of other two other hedge funds blowing up you know last month and then you had a currency crisis in 1998 where now we have more of an you know we have oil going up and the election and the war right so you know you have these existential solvable problems that are creating a little bit more volatility to go along with it Right. So, this just reminds me of this and, you know, I mean, nothing, you know, nothing repeats itself exactly, but it sure does have a bit of a rhyme to me. So, you know, here's hoping, I guess.

Our macros the VIX as you can see we had a big spike Friday as you might expect with the semiconductor index dropping 9% in one day the VIX spike but you know lo and behold you know we're starting we've already pulled back you know from that level because really the biggest damage has really been you know the semiconductors in big cap tech which by the way just happens to be 35% of the market you know so you I think once this leverage unwind is over. I think we can maybe get back to normal. But let's look at the other two macros. The dollar's been fine. I mean, we haven't had anything escalating. I don't see any reason why there's going to be a major pull of liquidity. You know, so I mean, we would like to see this start to trend lower. But maybe we're already on that path because we've made a lower high already. We'll see. But, you know, so far so good. And then, of course, the 10-year yield. We've seen this yield drop fairly sharply, right? I told you a month ago that was the only real issue we had on the table where you had the 10-year was at five and a half percent and I told you that's very uncomfortable. And so now here we are at 4.9. You know, so the yields are moving in the right direction and that should be, you know, supportive. And then of course oil, you know, oil is stubborn. You see, you know, Friday you had a spike in oil. Today, oil's down four or 5% already, you know, so we're not making higher highs here. You know, I think it's pretty obvious we would rather see oil and, you know, start with a seven or eight versus a nine. But we got to have something done with the Iran war and it is what it is.

M5. Okay, we've got some changes. No surprise. Technology starting to struggle. So, we see Intel, AMD, Nvidia get kicked to the curb and we see Microsoft, Eli Lilly, and Exxon Mobil come in. Most likely placeholders, but, we, as we can see, from the previous charts, technology is struggling, okay? And that's okay, right? I mean, if we need to take a step back, that's okay. So these stocks are not off from our radar. They're still in our universe. And you know if we get the rollup you know don't you know we might expect to see these once again but between these five stocks we can see much bigger cap much more stability you know is where the momentum is going. I think that's pretty for obvious reasons considering the last month.

But do me a favor let's wrap it up. Go back to the NASDAQ charts. I just want to be clear about what are where I think we're you know what our next step is. So step one as this trend remains negative. We're going to be more conservative, right? We're going to keep our puts. Our puts are getting engaged, right? We have a much higher cash position between short-term treasuries and cash. It's fairly significant. And then we're going to wait for the rollup. Okay. So whether that takes two weeks or two months, you know, if we were to see another, you know, two to six week consolidation here and then the rollup, that would be, I think, a very a good situation going into the, you know, end of November, the December and January periods, which are typically very strong for the market. If we do get further weakness, we're prepared for it. We don't need to be a we don't need to be heroes. We don't need to defend stocks in a downtrend. It just when trends are negative, we're going to be a little bit more cautious and wait for the rollup.

So I think that's it. Feel free to give me a call. We can schedule teams call, go over some things together. If you'd like from more of a personal perspective, happy to do that anytime, but don't lose your optimism. Just understand we're being more conservative at the moment. So you have a great week and we look forward to some more positive updates soon.