A New Week 10/11

One of the best ways to gauge the health of the market (and the economy) is to check on how the banking stocks are doing relative to each other.

In one particular measure, I’ve always followed J.P. Morgan Chase (JPM) against Goldman Sachs (GS) to get a feel for this exact read.

JPM is less involved with the financial economy and markets compared to Goldman Sachs, an exposure that comes from its involvement with commercial banking and simpler financial products like mortgages and credit cards.

So when JPM begins to outperform GS, it means the market’s preference shifts toward the real economy and away from the financial market excess.

It also leads to periods where:

All decline and the banking industry becomes more reliant on issuing these more commercial products instead to everyday people.

As a result, this vote has a direct effect on risk-taking across the market.

This matters now more than ever because the AI complex has become the market, and these companies are all dependent on equity/debt financing to keep their projects above water.

JPM/GS is trending higher, warning you that the financing availability may tighten up soon.

Here’s how that affects the S&P 500…

With a negative 0.22 beta, a 1% move in the JPM/GS ratio represents roughly 0.22% for the S&P in the opposite direction.

That’s with a three-month lag on average.

Because the ratio bottomed and turned higher in May 2026, I believe we are soon to experience a market downturn when the VIX is ripe for one too.

GDP and PMI data have confirmed there are better areas to make money now in the market, and that’s why I’ve chosen to consider some of these stocks for the portfolio.

Click here to read my analysis on a real economy play with 90% upside potential.

Now let’s get an update on what the market likes and dislikes:

Value and Breadth.

This goes back to what I just broke down about the JPM/GS ratio and its relationship to the S&P 500.

Perhaps that is already beginning to take effect in the factors underneath the index, as the rotation back to a real economy often will be carried through these two areas (value and breadth.)

Specifically, the rotation is being made even clearer as the factors behind the AI trade gave up ground to allow for these leaders to show up.

I’m talking about Momentum and Growth.

Since the last downturn in the 2022 bear market, these real economy factors have fallen to an even lower relative performance spread as seen in the chart above, which also means they are the ones most likely to deliver outsized returns on a continued rotation.

That’s why I’m more focused on the signals being given by the GDP and PMI data pointing me toward the industries already breaking out from here.

You can access my current PMI watchlist here.

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 $7,800.

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:

Earnings Season is back.

We begin on Tuesday after the holiday and kick off with the big banks before the bell:

Obviously, these results warrant a specific deep dive into what the masters of the universe are doing and how their businesses are running in the current market.

Later results also include Bank of America on Wednesday, where I’m mostly interested to see if they report anything about their GPU-backed loan holdings.

Be on the lookout for those results, which I will deliver to Premium members.

Domino’s Pizza also reports as part of our value portfolio, and I will send over any changes to the company/thesis so long as they are material enough to warrant an individual post.

Then on Wednesday and Thursday, we get a red-hot gauge out of the AI complex:

These are important enough to also warrant an individual deep dive, so be prepared to receive tons of thematic and company-specific updates on the AI race.

Existing Homes Sales - Tuesday:

This is one of the important reports I’m looking forward to, as it is connected to my mortgages and wood products thesis.

I don’t expect much to happen from this one report, as there hasn’t been much change in mortgage rates or home values so far into the quarter.

However,

Any positive surprises may end up being very well absorbed by the holdings we currently have on housing themes.

CPI, PPI Inflation - Wednesday, Thursday:

This is what has the Fed and part of the bond market walking on a tightrope…

While term premiums and the contagion effect of AI-related debt defaults will continue to pressure bond yields, I believe inflation (and its second-order effects) will begin to have more of an influence.

Why?

If inflation begins to ease again - which I doubt - then interest rate hikes will be less likely, and that creates a better, more accommodative environment for these AI companies to continue taking on debt load after debt load.

We shall see what these prints bring us.

Retail Sales - Thursday:

Consumer sentiment is still at an all-time low, and credit card plus auto loan defaults continue to spike toward decade highs.

Not a great, look.

Especially as retail sales data shows consumers shifting to more defensive areas of their spending budget, which can signal further stress and household recessions.

I would like to see this turn around as the manufacturing PMI (representing the cyclical economy) looks up from here.

However,

I don’t believe real wage growth and/or savings rates in the United States are strong enough right now to deliver a more optimistic retail sales report.

We’ll see, hopefully it does confirm the release of some of my “coiled springs.”

Meanwhile, here is the latest from Goldman Sachs covering what is next on the AI race agenda.

We’ve sort of tried moving into the robotics story, and that has failed to take off thus far. It seems the story is now moving back into agentic AI volumes, and tokenization of assets as pitched by Robinhood Markets:

Until next time,

OFFSIDE RESEARCH

Against the Tape, Ahead of the Curve.