The Famous Philosophical Thought Experiment That Suggests The Market Is Topping Out

Before starting Top Gun in 2006, I was in the Philosophy Phd program at UC – Davis. In a class on Analytic Philosophy, we read Nelson Goodman’s Fact, Fiction, Forecast (1954). The most interesting part of the book, at least in my opinion, is the discussion of counterfactuals.

The argument goes like this. Imagine you want to light a match. You pull out a matchbook and scratch the match against the side of the box. What happens? The match lights, right? Not necessarily. Under normal conditions, the match will light. However, consider this: What if the matchbox is soaking wet? Well, then the match will fail to light.

What is Goodman’s point? His point is that an event is the function of a catalyst plus initial conditions. While scratching the match against the side of the box will cause it to light under normal conditions, there are other initial conditions in which it will not.

What does this have to do with the stock market? Everything.

For example, consider what happens when a stock reports a good earnings report? It goes up, right? Not necessarily. If the stock ran up hard into the print based on high expectations, it sometimes sells off even on a good report. The catalyst (i.e. the earnings report) isn’t the only thing that matters. The state of the market (i.e. initial conditions) matters too in determining what happens.

Now let’s apply this framework to the current market. News broke after the close that Nvidia CEO Jensen Huang was involved in a second affair with a company employee. We already knew he was having an affair with a Chinese spy which has been hitting the stock and the market as a whole in recent days.

While I made fun earlier today on Twitter by calling this the “Double Huang Dong Top”, this news is fundamentally bearish. Perhaps the most important supplier to the AI buildout being manipulated by our biggest enemy is a genuine national security concern. Further, that the CEO of one the largest and most important companies in the American market would act so recklessly is concerning. In Nelson Goodman’s terms, this is a negative catalyst that, assuming normal conditions, would result in a bearish reaction by the stock market.

The Jensen Huang scandal isn’t the only bearish catalyst in play. Last week’s midterms that swept the Democrats into power is another bearish force in play. While we’ve all seen the charts about the party in power not mattering for the performance of the stock market, many of these Democrats are extreme Leftists with very hostile views toward business. It’s a clear negative. Apply Goodman once again.

Consider a third bearish catalyst: the hotter than expected October CPI Report on Tuesday morning. This has caused investors to lock in on a 25 point Fed rate hike on Wednesday December 9. There is even some probability of a 50 point hike according to Fed Futures Probabilities. Once again: a negative catalyst that, given normal initial conditions, you would expect to be a negative force in play in the market.

Consider a fourth: The Anthropic IPO next week selling a large amount of stock into an already weak market.

Now let’s ask the next question: What are the initial conditions? What is the current state of the stock market?

Using Howard Marks’s idea that macro is about “calibrating” where one is in the economic cycle, I would argue that we are quite late in the cycle. Combining 18 years of a relentlessly higher market with persistent inflation as well the enormous amount of investment to build out AI and the uncertain return the hyperscalers will get on that, there are a lot of reasons to be concerned about the overall market in my opinion. When I see a market at this stage of the cycle, I start looking for catalysts that will cause it to roll over. Now that we have the ones mentioned above, my bias is that market will in fact top out and rollover.

Let’s look at levels. 24,500 looks to me to be an important level on the NASDAQ. If it fails to hold, all of the gains for that index for 2026 are likely in jeopardy. If they do get given back, I think the case that the bull market is over is mostly a fait accompli.

While most technicians wait to see if certain levels hold or get taken out and don’t worry much about the news or the why, because I believe fundamentals, what the great Jesse Livermore called “general conditions”, drive price, my bias here is that these levels will in fact be taken out and the market will roll over into a bear market. I would like to think Nelson Goodman would agree with me.