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BONDS TAKE THE WHEEL
Corporate vs Treasury Spreads & S&P 500, Thinkorswim
The adults are back in charge of the market, as the spreads between corporate bonds and the 10-year yield is now spiking at the most aggressive pace since 2022.
Consequently, this rapid rise in spreads ended up challenging equities directly, especially as the 10y-2y yield curve underwent a bearish flattener.
A similar pattern is showing up in the yield curve today, though this one is more “dangerous” per se compared to previous episodes.
The reason is that the move in bond yields is now driven by term-premiums alone rather than inflation, which makes stabilizing the stock market (and the economy) a lot more difficult.
Inflation can be fixed, the Fed can shift around its passive-aggressive language, and bonds will probably remain above 5% for a while longer.
Now let’s get an update on what the market likes and dislikes:
Growth and Momentum.
These were the only factors that pushed higher on the week while everything else declined.
Interestingly enough, these are the same factors that are not supposed to benefit from rising bond yields, and considering they are now made up of the AI complex altogether, a few things are worth mentioning.
The only way that momentum and growth stocks benefit from rising yields is if they begin having carry exposure (interest income.)
As we know, companies like NVIDIA have turned their balance sheets into a portfolio of AI loans and equity stakes, so the bond market can kill chip production and demand while still not affecting NVIDIA at first.
However,
Eventually the effect on chips and data centers will begin to hurt the value of these equity stakes and loan portfolios.
One such event was experienced this week in the Oracle “Force Majeure” for its New Mexico data center.
Who picks up the tab?
For now, I remain interested in the rotation back to breadth, value, and quality stocks for the biggest opportunities.
While I wait for that rotation, the portfolio can still profit from the sporadic runs in AI through a long/short strategy.
CHART OF THE DAY
Whichever way you look at it, the AI complex has gone on an unsustainable investment binge.
As mentioned plenty of times before, the capital cycle is one of the most powerful forces in the financial markets.
With AI infrastructure spend reaching record levels relative to GDP, my expectation is that a wave of oversupply is sure to hit the market.
When and how it does it is the issue.
Nobody knows…
ARE YOU COVERED? —>
What I can tell you is that the memory complex is the one area of the AI trade that seems most exposed to this capital cycle.
Especially as capacity is set to double (even triple) as more competitors come into the scene.
IMPORTANT GAUGES
Daily S&P vs Daily VIX, Offside Capital
My usual read on the commitment of traders (COT) report has been extremely quiet as of late…
So I decided to create a new gauge and begin covering it until the futures market provides a reliable signal once again.
This measure represents the spread between daily VIX implied moves versus S&P 500 daily realized moves through time.
As you can see, each time we reach a 1-2 standard deviation, it creates a fantastic dip buying event, especially if you start playing options portfolios.
Right now, things are quiet and supportive of a continued breakout in the S&P especially now that we’ve reclaimed $7,700.
However,
This also means volatility spikes could show up unannounced.
Note: Whenever this spread widens, it means current market conditions and assumptions have changed enough to correct the options market, and consequently the VIX (which is priced upon these option expectations.)
No such expectation corrections coming about.
Now let’s cover some items for this coming week:
New Earnings:
Boy do we have a big earnings drop coming in this week...
Micron (MU) will report on Wednesday after the bell, where some (if not most) of my thesis on memory supply will come to light.
I expect the events of this past quarter to affect Micron’s operations and their reported finances.
Especially the introduction of Chinese chips, lost contracts from Apple and other hardware users, and most importantly the data center project delays happening now.
It’s recommended that you read my previous quarterly analysis on the company, so that you understand all of the good, bad, and ugly factors I am watching out for in this week’s report.
GDP & PCE - Wednesday:
PCE Inflation Tracker, Offside Capital
There’s going to be a great deal of focus around this coming PCE print, especially as the bond market decouples from inflation and Trump attempts to get fuel prices under control by November’s midterm elections.
I have no expectations going into the print, as plenty of manipulation has been present through export bans, tariff adjustments, and trade controls during the month.
By the way the S&P has behaved recently, I believe nobody really has an idea of where the print will swing either.
From GDP, we’ll get an update on the levers that are pulling the economy forward/backward.
This is the beginning filter for our top-down analysis and idea generation process, which our members in the Offside Analyst Program are well versed in.
A proper macro review and breakdown will be provided for you as data begins to come out.
Manufacturing PMI - Thursday:
Manufacturing PMI Tracker, Offside Capital
The PMI reports are responsible for 80% of my trade ideas, some of which you’ve had exposure to during the past quarter to make a decent amount of money.
Manufacturing comes out on Thursday, pointing us to the current state of the cyclical economy in the U.S.
I am especially interested in getting an update on the coiled springs awaiting a breakout (such as consumer, transport, and retail.)
For now though, I believe a continuation of the electrical equipment and primary metals complex will bring a new round of upside to the AAON vs JCI trade.
Non Farm Payrolls - Friday:
One of the least important measures for the Fed right now, per Warsh’s language recently.
I will be most interested in seeing the effects of rates, yields, and AI adoption reflected in the NFP.
Especially so after most of the industries where AI was supposed to disrupt jobs are showing zero evidence for that being the case.
Let’s see what’s in store for us.
A Final Note
COMING UP NEXT (Reminder for This Week)
Next week’s PMI data will provide a fresh look into the economy, and more importantly the industries we are interested in trading.
GDP data will cement what is happening at the consumer, AI investment, and government expenditure level.
Ideas will be generated and populated into the pipeline for you to trade with me, and squeeze the most out of the rest of 2026.
Meanwhile, here’s an interview with Mark Zuckerberg talking about the real world uses of Meta’s new AI “Muse.”
Compare it with the other available models in the market and be your own judge of its potential success:
Until next time,
OFFSIDE RESEARCH
Against the Tape, Ahead of the Curve.