Since early August, we've maintained our view of the market as "choppy but leaning bullish," and that perspective remains valid today. Reviewing the seven historical U.S. economic periods where interest rate reductions successfully sidestepped recessions, six saw markets dip in the month following the initial cut, while the one outlier managed only a modest 1% increase.
In essence, past patterns serve as a caution: don't anticipate an immediate stock market surge right after easing begins.
That said, the last three weeks have been marked by intense market euphoria. The $Invesco QQQ(QQQ)$ has surged nearly 7% in a straight-line rally, with 11 of those trading days closing higher, and individual stocks displaying sharp, inverted trajectories that seem suspended in mid-air. Goldman Sachs' momentum portfolio rocketed 25% over the same stretch, with its RSI hitting 86—a level signaling severe overbought conditions.
The rally's primary catalysts stem from two fronts: investor optimism around an extended easing phase and the sizzling momentum in the AI sector. Last Friday's barrage of blockbuster announcements propelled the "AI summer" to a fever pitch: OpenAI revealed plans to pour $450 billion into computing infrastructure over the next four years, xAI's valuation soared to $200 billion after securing funding, and Oracle snagged a $20 billion AI deal from Meta.
Even with this backdrop, we're sticking to our "choppy" stance, favoring an aggressive posture while hedging via short-term put options. Our concern is that a 4%-5% pullback could easily shake out positions, clashing with our trading philosophy.
We see the final two weeks of September as the prime window for a "pre-liftoff correction." Three factors underpin this:
1. Markets typically underperform long-term averages in the wake of an initial rate cut.
2. Late September ranks as the year's weakest seasonal stretch.
3. The week after options expiration has historically tilted bearish, boasting just a 20% win rate over the past 40 years.
Coupled with many stocks already stretched thin on upside potential amid feverish sentiment, a brief "technical breather" feels all but inevitable in the near term.
Broadly speaking, while a dip may loom short-term, the overarching narrative stays intact: we're navigating a rate-cutting environment that sustains bullish momentum, with the AI supercycle gaining further steam. Holding long positions while buffering with near-term puts captures our current mindset.
Bubble or Fresh Cycle?
Talk of "bubbles" is heating up once more. Nearly every day brings word of another AI-themed startup smashing past a $1 billion valuation or stocks leaping over 20% in a single session.
Yet bubbles aren't monolithic—they come in two flavors:
- Constructive bubbles: Overinvestment in capacity by firms leads to cliff-edge drops when demand falters;
- Pricing bubbles: Valuations detach from fundamentals, fueled by hype narratives and abundant liquidity.
For the moment, we're nowhere near a constructive bubble. AI's growth trajectory diverges sharply from precedents. Generative AI lingers mostly at the chatbot level, multimodal models and agentic systems are in their infancy, and self-driving tech or humanoid robots remain distant prospects. The crux: AI deployment fuels an "ongoing escalation" in compute needs, not a one-off spike.
On token usage, projections peg 2025 at 50 trillion tokens, potentially exploding to 400-500 trillion by 2026. This surge draws from three engines: advances in multimodal capabilities, a boom in B2B paying users, and shifts in token economics from emerging applications like video synthesis. Demand-side expansion shows no signs of tapering soon.
Supply remains strained too. The U.S. is on track to add 10 GW of data center capacity this year, yet vacancy rates hover below 2.5%—a record low. When pressed on overbuilding risks during its investor day, Brookfield Asset Management countered with three points: counterparties are blue-chip names, deals lock in 20+ years, and tech deployments tie firmly to proven performance. Put simply, they dismiss parallels to the "fiber-optic folly."
Oracle's earnings, however, drop a intriguing hint: it's leveraging debt to scale AI infrastructure. Historically, what reassured investors was that AI behemoths funded capex from free cash flow. Now, with negative-cash-flow rivalries emerging, a "debt-fueled arms race" could be unfolding.
If prior contests were disciplined and cash-backed, the next chapter might embrace "no-holds-barred" growth.
Speculative Frenzy Among Nimble Players
Beyond the titans, a swarm of small-cap names is whipping up wild swings. This week alone, fuel cell outfits like Ballard Power and Plug Power notched 50%+ gains, while nuclear plays drew equal fervor. The quantum computing arena erupted across the board, with some firms clocking daily volumes north of $1 billion.
What's more compelling: these "frothy price antics" aren't standalone quirks but harbingers of pent-up market vigor. Should retail inflows surge back en masse in October and November, risk assets could ignite a broader rally.
Targeting Cyclical AI Plays: Favoring HDD Space, with Valuations Poised to Stay Elevated Longer
Lately, storage and memory leaders like Sandisk, Micron, and Western Digital have powered ahead, and we assess that these "cyclical AI proxies" will command premiums beyond expectations—and hold them extendedly—thanks to accelerating compute hunger unshackled from prior-cycle scars. We lean toward HDD (hard disk drive) options with clearer supply dynamics, ranking preferences as: $Western Digital(WDC)$ > $SanDisk Corp.(SNDK)$ > $Seagate Technology PLC(STX)$ > $Micron Solutions, Inc.(MICRD)$ . We also rate Samsung ahead of Micron, given its sharper "turnaround tale."
Quantum Computing Picks: Low-Risk Entry Points Emerging, Eye High-Upside Names
Quantum stocks stand out as a spotlighted growth pocket, flashing "attractive low-vol entry" signals right now: RGTI and QBTS notched fresh peaks this week, with average daily turnover topping $1 billion (ensuring solid liquidity). Catalysts span chart breakouts, Nvidia chief Jensen Huang's ramped-up quantum bets, and rising buzz around IBM's quantum commercialization timeline. For those tolerant of added volatility, keep tabs on LAES and ARQQ down the line.
Quantum's buzz transcends tech milestones, weaving in ecosystem cues like Nvidia's deepened stakes and market thirst for IBM's quantum wares. Retail chasers piling in during a "seasonal trough" underscores the speculative pulse. Engaging these demands self-awareness of the game and pinpointing viable risk-reward sweet spots.
Wrap-Up
Short-term, ingredients for a late-September pullback are aligning: seasonal softness, expiration aftershocks, and overbought froth piling on. Yet the long-game thesis endures: easing injects liquidity tailwinds, the AI supercycle keeps innovating, and while pricing may bubble up, it heralds the overture to fresh capital waves.
Strategically, we hold to "advance with safeguards." Deploying short-dated puts to blunt turbulence means the downside caps at a premium forfeit, while the upside preserves long exposure—and primes us to scale in when the real ascent kicks off.
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