OVERVIEW
Morning Update

• Wednesday: SPY fell 0.24% to 777.22 after reaching 779.10. QQQ slipped 0.25% to 757.73 after trading as high as 758.30. Both came off record territory without giving back much of the previous advance.

• Underneath: MDY fell 1.64% to 663.94 and IWM lost 1.29% to 277.70. The Russell has now fallen for two consecutive sessions after Monday’s rebound.

• Equal weight: RSP declined 0.95% and QQQE fell 0.85%, considerably more than SPY and QQQ. Wednesday’s weakness was therefore much broader than the headline index moves suggested.

• Breadth: Decliners outnumbered advancers 3.34 to 1 on the NYSE and 2.37 to 1 on Nasdaq. Nasdaq recorded 250 new 52 week lows against only 32 new highs.

• Premarket: At 7:24 a.m. ET, Dow futures were down 0.9%, S&P 500 futures 0.5% and Nasdaq 100 futures 0.73%. Nvidia, Amazon and Tesla were each down around 1%, with several chip stocks off closer to 2%.

• Oil: Brent is up almost 5% above $105, while WTI is around $92.75. Attacks on Gulf shipping and U.S. production shut-ins ahead of Hurricane Isaias have pushed supply concerns back to the front of the market.

• Rates: The 10 year Treasury yield is around 5.34%, near its highest level since 2002.

• Fed: Christopher Waller said more tightening will probably still be needed, but the Fed has flexibility over timing. Markets continue to expect a pause in October, with December still open.

• Today: Weekly jobless claims arrive at 8:30 a.m. ET, with consensus around 200,000. The Treasury sells 30 year bonds at 1:00 p.m. ET, an auction worth watching given the pressure at the long end of the curve.

• Tomorrow: Preliminary October University of Michigan sentiment is due Friday at 10:00 a.m. ET.

MARKET ANALYSIS
Wednesday Was Much Worse Than It Seems

The S&P 500 lost only 0.22% and Nasdaq finished down the same amount. After several strong sessions and new highs on Tuesday, those numbers look more like an ordinary pause than anything especially concerning.

The internals were less comfortable.

Declining stocks outnumbered advancers by more than three to one on the NYSE. Nasdaq was not much better, with more than twice as many stocks falling as rising. Small caps dropped 1.3%, Industrials were the weakest S&P sector and housing stocks came under pressure as mortgage rates moved higher.

RSP fell almost 1% while SPY lost only a quarter of that. QQQE showed a similar gap against QQQ. That is a clean same-session comparison, and it tells us that the weakness reached much further through the market than the S&P and Nasdaq closes suggest.

Volume was actually below its recent average, at 16.2 billion shares against a 20 day average closer to 17.6 billion. We would not describe Wednesday as a heavy distribution day. It was still a meaningful reminder that the recent move to records has not repaired every part of the market.

SPY Is Still in Good Shape

SPY closed at 777.22 after reaching 779.10 during the session. It had closed at 779.09 the day before, so Wednesday mostly amounted to a quiet pullback from the highs.

The recent breakout area around 775 is now useful from the other side. SPY cleared that level at the start of the week and has spent the last three sessions above it.

If buyers continue defending the mid 770s, there is little reason to call the large-cap chart damaged.

This morning complicates things because futures are pointing to a lower open. A gap back into the old range would put the recent breakout under its first real pressure since it occurred.

We would watch how SPY behaves around 773 to 775 rather than make a decision from the opening futures move alone. Holding that area after a difficult overnight session would be constructive. A weak open followed by another leg lower would make the breakout less convincing.

Above, Tuesday’s high around 781.60 remains the obvious reference if buyers return.

QQQ Has More Room

QQQ also came off its highs without doing much damage on Wednesday. It closed at 757.73, only 0.25% lower, after reaching 758.30 during the day.

That followed five consecutive positive sessions before Wednesday.

The recent area around 749 to 751 is the one we care about on a deeper pullback. That is where QQQ was trading before Monday and Tuesday pushed the index into a new range.

There is plenty of room between current price and that area, even after this morning’s weaker futures.

The concern is less about QQQ itself and more about what is happening around it. QQQE fell 0.85% yesterday, the semiconductor index lost 1.2%, and smaller companies were considerably weaker.

The large technology companies have been strong enough to keep Nasdaq near the highs despite that weakness. We are comfortable owning leaders that continue to act well, but we would not use the strength in QQQ as evidence that the whole market is healthy.

Mid Caps Gave Back Most of the Week’s Progress

MDY had finally started to improve last week, then continued higher on Monday and Tuesday.

Wednesday reversed a large part of that and the ETF fell 1.64% to 663.94, closing near the bottom of its range after trading as high as 669.13. That takes MDY back below Friday’s close and almost back to where the rebound started.

The 661 to 664 area is now the immediate test. It was part of the base MDY built before last week’s rebound and is close enough that we should know fairly quickly whether buyers are still interested.

The recent highs around 675 to 678 remain overhead and we would not make the mistake of treating Wednesday’s decline as a buying opportunity simply because MDY is cheaper than it was two days ago. The fund needs to stop giving back entire rebounds before we become more aggressive in the group.

Small Caps Are Back Near the Bottom of the Range

IWM has now lost ground on both Tuesday and Wednesday as it closed at 277.70 yesterday after trading as low as 276.95. That leaves it only a couple of dollars above last week’s low around 275.45.

The Russell briefly looked as though it might work back through the mid 280s when it reached 284.64 on Tuesday. Less than two sessions later, most of that move has disappeared.

That is the sort of behaviour we have been trying to avoid buying into. The area around 275 to 277 is now where we would look for evidence of demand. A recovery back through 280 to 281 would at least put IWM back into the middle of its recent range.

Until then, small caps remain considerably less reliable than the large growth names.

Oil Is Back Above $105

The biggest change overnight is crude as Brent is up almost 5% above $105, its highest level since late September, while WTI is around $92.75.

There are several things happening at once. Attacks on tankers in and around the Strait of Hormuz have increased, with shipping through the area now at its lowest level in more than two months. Another tanker was struck north of Qatar this week. Around 20% of global oil normally moves through the strait, so even partial disruption keeps a meaningful premium in the market.

The United States is dealing with its own supply issue as well. Shell and Chevron have shut offshore Gulf production ahead of Hurricane Isaias. U.S. crude and diesel inventories have also come in below expectations.

We had started to get some relief when Brent moved back toward $100. That relief has disappeared quickly.

At $105 plus, oil is once again high enough to matter for inflation expectations, transport costs and the bond market.

The Bond Market Is the Bigger Problem

The 10 year Treasury yield has climbed to around 5.34%, close to its highest level since 2002.

Wednesday already showed what rising long-term yields can do to the weaker parts of the market. Homebuilders sold off, housing stocks fell and small caps underperformed.

The problem is that markets put the chance of another October hike at only about 17% after Wednesday’s Fed minutes, and Waller’s comments this morning were consistent with the idea that policymakers can wait before moving again.

Long-term rates are being driven by more than overnight Fed expectations. Inflation risk, Treasury supply and the amount of debt being raised to fund large AI infrastructure programmes are all part of the discussion.

That last point has become more visible this week. Broadcom is reportedly lining up around $50 billion of financing for OpenAI, while Oracle is also looking at additional borrowing. Investors are beginning to ask how much capital the AI buildout will absorb and what that means when government borrowing is already heavy.

A pause from the Fed in October would help. It does not automatically bring the 10 year yield back below 5%.

AI Demand Is Still Strong

The other side of the market is that corporate demand around AI remains difficult to dismiss.

Samsung expects a huge increase in quarterly profit, helped by strong demand for memory chips. That was not enough to lift semiconductor stocks overnight, but the underlying earnings picture remains strong.

Applied Digital reported quarterly revenue of $341.9 million, more than four times the prior year’s level, as new AI data centre capacity came online. The company remains loss-making and carries substantial debt, so this is not a clean profitability story, but the revenue growth gives us another piece of evidence that infrastructure demand is real.

Wolfspeed is also up sharply before the open after receiving a conditional commitment for up to $1.5 billion from the Department of Defense to expand U.S. silicon carbide production.

This is why we are not treating higher yields as an automatic reason to abandon technology. Demand remains strong enough that the best companies can continue working even in a difficult rates environment.

The question is price. We would much rather buy those names from proper consolidations than pay up after vertical moves while bond yields are rising.

Pepsi Gives Us a Read on the Consumer

PepsiCo reported better than expected quarterly revenue and earnings this morning, but cut its full-year profit outlook.

Revenue increased 5.6% to $25.27 billion, helped by international demand. North America remains the weaker part of the business, with beverage volumes down 2% and the company dealing with higher input costs across the portfolio.

Management now expects core earnings growth of only 1% to 2% for the year and plans further cost reductions.

The stock is nevertheless modestly higher before the open because the quarter itself came in ahead of expectations.

It is a useful read on the consumer. Demand has not collapsed, but companies are having to work harder on price, product mix and costs. That becomes more difficult if gasoline and food inflation pick up again.

Claims and the Treasury Auction Matter Today

Weekly jobless claims arrive at 8:30 a.m. ET, with economists looking for roughly 200,000 new claims after 197,000 previously.

After last week’s weak payroll report, another subdued claims number would reinforce the idea that hiring has slowed without producing widespread layoffs.

The larger market event may come later with the Treasury auctions 30 year bonds at 1:00 p.m. ET. With long-term yields already under pressure and concerns around government and corporate issuance rising, demand at the auction will be watched closely.

Tomorrow brings the preliminary October University of Michigan survey. September sentiment finished at 48.1, and the next preliminary reading is scheduled for Friday at 10 a.m. ET.