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Stocks dropped hard last week, but a late-day rally on Friday staved off the worst. The Dow Jones Industrial Average held up the best, only closing down 1.21%. The S&P 500 was down 1.63%, but the Nasdaq suffered the most, as it closed down 3.04%. Tech was routed hard as a massive rotation took place. Healthcare is still holding up nicely, and I'm watching for confirmation that crypto has bottomed here too.
There's chatter that the government is about to reopen again, as there are parts of the country whose air space could be getting shut down soon. In the meantime, markets have gone without numerous bits of economic data – for better or worse.
There is a growing sense of dread around the labor market specifically, but Fed Chair Powell hinted at another pause in rate cuts last week. Could it just be as simply as allowing the "price stability" metric of 2% annual inflation to rise to 3%?
Typically, labor market weakness leads to rate cuts. But over the past couple of weeks, there haven't been data releases due to the government shutdown. This week, we would be in store for a lot of inflation data, but we may have to deal with an even greater deluge of data at once if the government reopens here soon.
There's a big case at the Supreme Court worth keeping an eye on right now, and it has to do with the legality of the tariffs imposed by the Trump administration year-to-date. If it gets overturned, we may have to deal with a pretty serious fiscal issue – how does all of this money get refunded?
The U.S. has a major trade deficit. In theory, this weakens the dollar because every time we buy a good from overseas, we have to sell dollars to buy the currency of the country we're buying from. Despite this, the dollar remains comparatively strong.
Herein lies a major problem – the U.S. can't competitively export goods because of this dollar strength. But the other problem is that other countries abroad don't have safe financial markets like we do, and so all of the big money managers park their assets in dollars. It creates a real problem that we seemingly haven't figured out yet.
It's been a rather unusual market with respect to flows since the start of the third quarter. There are four of the eleven sectors of the S&P in negative territory since then. The only one that gives me some concern is financials (XLF).
There's been a lot of talk about weak breadth in the market. But take a look at the lagging sectors here. Aside from financials, none of these sectors are required to participate for stocks to continue higher. It's just math.
We keep seeing weakness in the defensive sectors like real estate (XLRE) and consumer staples (XLP). Tech (XLK) keeps leading. Consumer discretionary (XLY) is neck and neck with utilities (XLU), which is the only real defensive sector doing well right now.
| 1 week | 3 Weeks | 13 Weeks | 26 Weeks |
| Energy | Energy | Healthcare | Technology |
Editor's Note: Defensive rotation – let's see how long it last.
It's quite remarkable how every 2% pullback from the all-time highs in stocks leads bears to take a victory lap. But the money flows are still overwhelmingly favoring stocks as an asset class in general.
I'm looking at the ratio here between the S&P 500 (SPY) and long-term Treasuries (TLT). This is one of the most classical "risk-on" versus "risk-off" ratios out there. Simply put, when SPY outperforms TLT, it pays to take risks. When TLT outperforms SPY, it's time to be more cautious.
This ratio continues to climb higher, favoring the ownership of stocks over bonds. As long as it keeps making higher-highs and higher-lows, and it stays within the ascending channel, I expect this bull market to continue.
For all the attention tech gets (and rightfully so), we can't forget about the second-largest sector in the S&P 500 – healthcare. This chart looks at the ratio between healthcare (XLV) and technology (XLK).
It's no surprise to see a downtrend, and how tech has absolutely dominated healthcare over the past few years, but let's not forget that sector rotation is literally the life blood of bull markets. As a result, I'm looking for healthcare to make a comeback in 2026.
First thing's first – we need to start seeing higher-highs and higher-lows, versus lower-lows and lower-highs in this ratio. Then, I'd like to see the downward sloping trendline broken to the upside. That would be the setup for healthcare to run in 2026.
When it comes to inflation, let me start by saying that I understand the data has some serious issues. From changed formulas over the years, to creative statistical loopholes like "shrinkflation," but that's a conversation for another time.
There are two things that matter when it comes to how the market is pricing inflation: 1). The performance of commodities and 2). Interest rates and money flows within the bond market. I'm looking at the ratio between Treasury Inflation Protected Securities (TIP) and 7-10 Year Treasuries (IEF).
When this ratio is rising, it means that the bond market is pricing in higher inflation. When it's falling, it means that bonds aren't concerned about inflation. Over the past couple years, the ratio has more or less been going sideways.
It's crazy to think how inflation peaked way back in June 2022. This was actually the exact high in the ratio too. We have a symmetrical triangle formation on this chart now, which points to a continuation higher in time.
However, there's still room for this ratio to drop and stay consolidating within the pattern. Thus, I'm not expecting inflation to accelerate immediately, but I am looking for it to start accelerating sometime in 2026. This ratio will give us a good clue as to when.
With the recent flush in crypto markets, it's a good time to have a closer look at what's going on in Ethereum. Could we be on the verge of the biggest capitulation since April? The last time, it presented one of the best buying opportunities in the entire market of the year.
Despite the sharp selloff, Ethereum remains within the descending price channel. These are continuation patterns, which means they tend to resolve in the direction of the underlying trend. The longer-term trend in Ethereum is still up, but it's been correcting for almost three months now.
It's really key that Ethereum holds support in the 3200-3300 zone. So far, so good, but bulls can't say they have the upper hand in this market unless they're able to close it back above 4,000-4,200. It's a waiting game for now.
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