OVERVIEW
Morning Update

• Monday: The S&P 500 gained 1.49%, Nasdaq 2.26% and Dow 0.71%. The Nasdaq closed at a record, while the S&P finished around 0.4% below its August high.

• AI and semiconductors: The Philadelphia Semiconductor Index jumped 4.3%. Intel gained 12.2%, Arm 17%, AMD around 10%, and Meta 11.4% as enthusiasm around its Muse AI assistant brought buyers back into the theme.

• Breadth: Eight of the 11 S&P 500 sectors advanced Monday, while advancing S&P stocks outnumbered decliners by roughly 1.4 to 1. This was stronger underneath than several of the large-cap rallies we saw earlier this month.

• SPY: Closed at 773.50, up 1.55%, after reaching 774.89 intraday. Resistance around 775.30 is now immediately overhead.

• QQQ: Closed at 741.47, up 2.78%, after reaching 743.22. QQQ has broken well clear of the range that contained it through August and early September.

• MDY and IWM: Both gained Monday, but neither has repaired its medium-term trend. MDY closed at 668.33 and remains roughly 3% below its 50 day, while IWM closed at 285.58, also around 3% below trend.

• Premarket: At 7:12 a.m. ET, Dow futures were +0.21%, S&P 500 futures +0.03% and Nasdaq 100 futures +0.05%. After Monday’s rally, futures are essentially pausing rather than extending aggressively.

• Oil: Brent has fallen below $100, trading around $97.60 earlier this morning. Iran has signalled that Hormuz could reopen within seven days if U.S. pressure eases, while Saudi Arabia has restarted its East-West pipeline.

• Rates: The 10 year Treasury yield is around 4.90% to 4.93%, down from the levels above 5% reached last week.

• Fed: Markets currently put the probability of another 25 basis point hike in October at around 51%. Philip Jefferson, John Williams and Thomas Barkin are among the Fed speakers scheduled today.

• Diplomacy: Possible U.S.-Iran talks at the UN are in focus today, followed by the Trump-Xi meeting on Thursday. Both have implications for oil, trade and AI policy.

MARKET ANALYSIS
Monday Was More Than a Narrow AI Rally

The headline numbers were impressive enough on their own as the S&P 500 gained 1.49%, Nasdaq 2.26% and Dow 0.71%. The Nasdaq finished at a record, while the S&P moved back to within half a percent of its August high.

Technology did most of the heavy lifting, but the tape underneath was not particularly narrow and eight of 11 S&P sectors rose. Communication Services gained 4.16% and Technology 2.4%, but advancing S&P 500 stocks also outnumbered decliners by around 1.4 to 1. U.S. exchange volume reached 16.5 billion shares versus a recent 20 day average of 16.2 billion.

That is worth distinguishing from some of the rallies earlier this month, when the headline indexes improved but participation remained much more questionable.

Monday had proper buying behind it but there is still a gap between the large-cap indexes and the lower-cap parts of the market, but we would not describe Monday itself as an unconfirmed or purely concentrated move.

SPY Is Almost Back at the Highs

SPY closed Monday at 773.50, its strongest close of September, after trading as high as 774.89.

The immediate level is 775.30, which was the August 28 high in the ETF and that is close enough to be relevant from the open.

SPY also remains comfortably above its 50 day average. Monday’s internal data put the cushion around 1.8%, with relative volume above the recent norm.

The index therefore enters today in a much healthier position than it did a week ago. We are not especially concerned if SPY pauses underneath 775 after a 1.5% session. Consolidation near the high would be perfectly normal.

A clean move through the area would put the ETF back into breakout territory and leave the August highs behind.

What we would not want to see is Monday’s move immediately rejected back into the mid 760s as that would not break the larger trend, but it would make the breakout attempt less convincing. For now, SPY is doing what we would want a leading index to do.

QQQ Has Already Broken Out

QQQ’s move was stronger and the ETF closed at 741.47, up 2.78%, after trading as high as 743.22. Volume reached almost 47 million shares.

The old resistance area around 724 has been left well behind. QQQ now sits more than 4% above its 50 day average, so there is no useful reason to keep describing Nasdaq as damaged or waiting for a reclaim.

It has reclaimed and now the better question is how well the breakout holds after such a large move.

Monday’s strength was supported by the semiconductor complex. Intel gained 12.2%, Arm 17% and AMD around 10%, while the semiconductor index jumped 4.3%. AMD also became the latest chipmaker to cross $1 trillion in market value.

This morning is quieter. Nvidia is slightly lower and U.S.-listed shares of TSMC and SK Hynix are down around 1%, while Alphabet, Amazon and Microsoft are modestly higher. Meta is giving back around 0.5% after Monday’s 11% surge.

That looks more like digestion after a very strong session than evidence that the AI move has already failed.

The AI Trade Has Found Another Catalyst

Monday’s rally was driven in large part by Meta’s new Muse AI assistant. Muse attracted more downloads during its first 13 days than ChatGPT did over the equivalent period following its launch, according to analysts cited by Reuters. That helped push Meta up 11.4% and revived confidence that consumer AI products can produce very large user bases outside the enterprise market.

The relevance extends beyond Meta as if consumer AI adoption grows quickly, demand for inference compute, semiconductors, cloud capacity and supporting infrastructure rises with it. That gives investors a new angle on the AI spending story after the safety concerns that hit the sector earlier this month.

There is also harder demand data supporting the move. South Korean exports during the first 20 days of September rose 78.3% year on year, with semiconductor exports up 259.4%. Those numbers make it difficult to argue that current semiconductor demand has suddenly weakened.

The more reasonable debate remains around valuation and how long the current spending growth can continue. Monday’s move shows investors are still prepared to pay for that growth when the incoming demand data support it.

Mid Caps Still Have Not Joined In

The weaker part of the market remains MDY and the ETF closed Monday at 668.33.

That was an improvement on the day, but MDY remains roughly 3% below its 50 day average based on Swingly’s technical data which is a significant difference from SPY and QQQ.

We would not call the mid-cap chart broken beyond repair. Price has stabilised above the lows from last week and Monday participated in the broader market rebound.

It has not recovered enough to become a source of confirmation and the 50 day is still roughly around the low 690s, so there is plenty of distance to make up before the medium-term trend turns healthy again.

We would rather see several sessions of relative improvement than assume MDY must catch up simply because large caps are making new highs. Until then, mid-cap exposure remains selective.

Small Caps Are Telling the Same Story

IWM closed at 285.58, up 0.52% on Monday. The ETF remains about 3% below its 50 day average, which should be somewhere around the mid 290s based on the current distance from trend.

Small caps did not participate nearly as aggressively in Monday’s rally as QQQ or SPY and falling oil and lower Treasury yields are normally a reasonably friendly combination for smaller domestic businesses, yet IWM managed only a modest gain while large technology stocks surged.

We would like to see that change before treating Monday as the start of a fully broad market move.

A recovery through the high 280s would improve the short-term chart. Getting back toward the 50 day around 295 would be much more meaningful.

For now, IWM is stable enough that it does not undermine the large-cap rally, but it is not confirming it either.

Oil Below $100 Is a Meaningful Improvement

Brent fell as much as 3% this morning and traded around $97.60, its lowest level in roughly two weeks.

There are several reasons for the move. A senior Iranian official told Reuters that Tehran could reopen the Strait of Hormuz within seven days if the United States eases military pressure and lifts its blockade of Iranian ports. Saudi Arabia has also restarted operations at the East-West pipeline and may resume exports from the Red Sea port of Yanbu today.

None of that ends the conflict and the U.S.-Iran talks are only expected to begin on the sidelines of the UN General Assembly, and there is no agreement yet on Hormuz.

The physical supply picture has nevertheless improved enough for the oil market to remove some of the premium that pushed Brent above $108 last week.

That helps equities through both inflation and rates. Brent below $100 is still expensive by pre-war standards, but the direction has changed substantially.

For a market that has spent much of September reacting to every move in oil and the 10 year yield, that matters.

Treasury Yields Are Moving With Oil

The U.S. 10 year Treasury yield is around 4.90% to 4.93% this morning, down roughly three basis points on the day.

That continues the retreat from the levels above 5% seen around last week’s Fed meeting.

The move has tracked oil fairly closely. As crude has fallen from the high $100s into the upper $90s, some of the near-term inflation pressure embedded in longer dated Treasury yields has come out as well.

We would not take that to mean the rate problem has disappeared as the Fed raised rates last week and explicitly left the door open to further tightening. Markets still see roughly a 51% probability of another 25 basis point increase in October.

Several Fed officials are speaking today, including Philip Jefferson, John Williams and Thomas Barkin.

With little meaningful U.S. economic data on the calendar, their comments could move rate expectations more than the scheduled releases.

The backdrop is simply less restrictive than it was a week ago, when Brent was above $107 and the 10 year had moved through 5%.

Diplomacy Is Back in the Market

The next few days carry two large geopolitical events. U.S.-Iran talks are expected around the UN General Assembly in New York. Iran’s willingness to discuss reopening Hormuz has already been enough to move oil materially lower.

The second event is Thursday’s meeting between Donald Trump and Xi Jinping. Markets are looking for an extension of the U.S.-China trade truce and potentially more clarity around technology and AI restrictions. Xi is due in Washington on Wednesday ahead of the meeting.

Both meetings can move markets without any change in the domestic economic data. An improvement in U.S.-Iran relations would primarily work through oil and inflation expectations.

Progress with China would matter more directly for semiconductors, AI supply chains and broader business confidence. There is nothing to position heavily around before we know the outcome, but both are relevant given where leadership currently sits.