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Stocks were up across the board last week, and weathered numerous headlines including a rate cut, a trade meeting between the U.S. and China, as well as earnings season. The Nasdaq led the way higher, closing up 2.24%. The Dow Jones Industrial Average followed, closing up 0.74%. The S&P 500 rallied 0.71%. Precious metals continued their correction, but I have the most attention now on crypto, which looks to be attempting to complete a bottom.
It was an eventful week filled with earnings, a rate cut from the Fed, and a formalized trade truce with China. Meanwhile, stocks climbed to new all-time highs again, but started exhibiting a bit of churn underneath the surface.
A lot of market commentators are pointing out the weak breadth, and how the Magnificent Seven names are carrying the indices higher. Well, that's what happens when these companies are as big as they are. The lagging breadth is only a worry of those other stocks fail to play catch up in the near-future.
The Fed raised some concerns last week about the next rate cut not being so certain, but I'm just not buying that right now. The job market continues to weaken, and inflation remains under control. This is the environment to cut rates.
The U.S. Dollar has been making quite the comeback over the past few weeks. It bottomed against the Euro back in mid-September, and bottomed against the Japanese Yen way back in April. The sustained rebound against the Yen begs the question – is the carry trade back?
The carry trade occurs when speculators short the lower-yielding currency to buy the higher-yielding currency. Despite recent rate cuts, the Dollar is still yielding notably more than both the Yen and the Euro, but the carry trade against the Yen is notorious for its secondary effects.
The carry trade in the Yen is often used to finance speculation in tech names. Thus, we could add this to the long list of reasons to be overweight the tech sector, although I still think that biotech will emerge as the next story on the AI front in 2026.
The market's sector internals continue to guide us in accordance with the money flows – the bulls just can't stop winning right now, as technology (XLK) solidifies its place as the leader in the pack.
There was a huge pop in consumer discretionary (XLY) last week because of Amazon too. This brought this additional growth sector into second place in the rankings going back to the start of the second quarter.
In last we still see consumer staples (XLP). This is bullish because you want to see defensive sectors underperforming, which is exactly what we see. I'm also starting to like the healthcare story more and more.
| 1 week | 3 Weeks | 13 Weeks | 26 Weeks |
| Technology | Technology | Technology | Technology |
Editor's Note: Tech continues to run the table.
We're fresh off a huge trade deal between the U.S. and China. But underneath the surface, the flow of capital between the two countries tells the bigger story. It's what makes it a great time to check back in on the ratio between Chinese large cap stocks (FXI) and U.S. large cap stocks (SPY).
I've been talking a lot about the mounting opportunities in the Chinese market, and I think we finally have a catalyst for this to materialize. As you can see FXI has quietly outperformed SPY since the start of 2024 – it's just not being covered in the headlines.
The ratio is still coiling within the rounding bottom formation. I'm looking for a break above the upper horizontal trendline of the pattern to confirm that the Chinese market is going to ignite to the upside. This could be a major theme of 2026.
It really pays to look to see what's going on underneath the surface. The truth always lies in the tape, and it pays handsomely to monitor it closely. I'm looking at the ratio between high beta stocks (SPHB) and low volatility stocks (SPLV).
Note how the ratio was dropping hard into the lows of April, but then, it formed a v-bottom and began a parabolic rise. It broke out from a broadening wedge formation back in late-June, and has never looked back since.
As look as this ratio continues to climb, the market is going to reward those that take risks. An uptrend in this ratio is very much a hallmark of a bull market in equities. If we start seeing it drop again, it would suggest that it's appropriate to dial back on the risk.
I want to shift gears in the bond market and update you on how junk bonds (HYG) are performing relative to 3-7 Year Treasuries (IEI). This is a key indicator that helps measure both liquidity and risk appetite for the overall market.
Junk bonds have a reputation of trading similar to stocks with respect to volatility. But Treasuries are considered to be the safe haven asset (for now). Thus, when HYG outperforms IEI, it's considered a risk-on signal. When IEI outperforms HYG, it signals caution.
The ratio continues to consolidate near its all-time highs. But more importantly, we continue to observe the massive saucer formation. This points to a massive increase in market liquidity – this makes sense given the recent actions of the Fed.
There's little reason to be concerned about a major market calamity as long as this ratio holds steady. Even less so if it starts to breakout from the saucer formation. Remember that credits tends to lead, and stocks then follow.
It's important to remember that all markets are connected – stocks, bonds, currencies, and commodities. Risks often present themselves in the "smarter" markets like currencies and bonds first, which is why, even if you're a stock trader, you need to be aware of what's going on elsewhere.
Time to pivot and look at Bitcoin again this week, which continues to consolidate within the broadening wedge formation highlighted previously. To be clear – this pattern supports the bullish case, but only if prices can exceed the upper horizontal trendline.
This puts Bitcoin in a "new all-time highs or bust" situation. The concern now is that we have a potential lower-high on October 27, and following the fact that the low of October 17 exceeded the August 30 low, there are some mounting issues with the trend.
Bitcoin needs to reclaim the technical resistance zone in the 110,000-113,000 area to regain bullish momentum. There's plenty of support in the 100,000-105,000 zone for now, but we really don't want to see Bitcoin drop below that area.
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