Yesterday morning, OpenAI announced a massive $38 billion strategic partnership with Amazon Web Services (AWS). This deal highlights OpenAI’s diversification strategy amid explosive growth and capacity demands for training advanced models like ChatGPT. Before the deal, OpenAI relied 100% on Microsoft for its cloud infrastructure. In addition to diversifying its cloud servers, the deal may also benefit OpenAI, as it will likely introduce pricing competition among Microsoft, Amazon, and other cloud services. The other beneficiary is Nvidia. Per an Amazon statement on the deal:

Under this new $38 billion agreement, which will have continued growth over the next seven years, OpenAI is accessing AWS compute comprising hundreds of thousands of state-of-the-art NVIDIA GPUs, with the ability to expand to tens of millions of CPUs to rapidly scale agentic workloads

What To Watch Today

Earnings
 

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Economy
 

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Market Trading Update

Yesterday, we discussed the technical market backdrop, focusing on the deteriorating breadth of the move. A critical consideration for investors is that the market has just completed a 6-month straight run of advances. As noted by @TopDownCharts yesterday:

“Speaking of streaks, we made it past the 5-months-in-a-row mark (which has been a common stopping point in the past). But it gets better: you might argue based on the data since 2009 [i.e. each time we reached 6 you’re more likely to just keep going to 7(+) in a row (4 times out of 5) vs stopping at 6 (1 time out of 5)] —the odds are in our favor on this one.”

In other words, while the market doesn’t usually push higher six months consecutively, when it does, it tends to go to seven months. Looking back further, one thing to consider is that when the market is pushing higher in consecutively monthly streaks, when monthly relative strength reaches overbought levels, the streaks typically end.
 

It is worth noting, however, that in most cases, six-month win streaks tend to lead to higher prices over the next 12-months. However, between today and then, volatility tends to rise, even when you are in the six-strongest months of year historically. In other words, while momentum could well carry the market higher in November, a correction in December or January would be unsurprising.
 

As noted below, the increase in poor market breadth certainly doesn’t provide a clear signal of market strength. Therefore, while momentum may carry the market higher over the next few weeks, some risk management and rebalancing may well be worth the effort to provide some capital to “buy the next dip.”
 

Bad Breadth On Full Display

It’s not hard to see the bad breadth in today’s market. As you look at the following SimpleVisor graphs, consider that the S&P 500 is sitting just a few points from a record high, yet almost all sectors and factors, including the equal-weighted S&P 500 (RSP), are oversold and not at record highs.

• The first graphic shows that the technology sector is grossly overbought relative to the S&P 500, while every other sector is oversold, and many are very oversold.
• Large growth-oriented companies handily beat the S&P 500 last week, while every other stock factor underperformed. The small, more value-oriented factors underperformed the most.
• Same theme in the third graphic: large growth-oriented companies are doing well, everything else is lagging.
• In the fourth graphic, note the graphs on the right side. The number of stocks above key moving averages is plummeting. Similarly, the number of stocks listed as strong oversold is rising rapidly.

Investor Dilemma: Pavlov Rings The Bell

Classical conditioning teaches us a valuable lesson regarding the current investor dilemma. Pavlov’s research discovered a basic psychological rule: when a neutral stimulus is repeatedly paired with a reward‑stimulus, eventually it will trigger the same response even when the reward is absent. The famed experiment by Ivan Pavlov illustrated that dogs would salivate at the sound of a bell after the bell was repeatedly paired with food. The pattern is simple: bell becomes signal, trigger leads to reflex, behavior becomes automatic.

The concept translates directly into the investor dilemma in financial markets. As Steve Sosnick of Interactive Brokers recently noted:

“The other morning, someone asked me why we were trading higher.  I made the flippant comment, “they rang the opening bell, that’s why.”  Taking that a step further, on a morning when stocks are higher on a rally that began modestly in the pre-market but accelerated rapidly after the regular session opened, it is reasonable to wonder whether there is indeed a Pavlovian quality to the current market environment.”

That really should be unsurprising. Over the past 15 years, the markets were repeatedly bailed out of more serious corrections by either fiscal or monetary policy. That neutral stimulus (the interventions) was repeatedly paired with a reward-stimulus of markets going higher. As such, investors were “conditioned” to expect rescue whenever issues arise, to buy stocks on every decline, and to believe that this cycle will indefinitely continue. Such was the point we made recently with respect to “moral hazard.”

“The Federal Reserve’s well-intentioned interventions have created one of modern finance’s most powerful behavioral distortions: the conviction that there is always a safety net. After the Global Financial Crisis, zero interest rates and repeated rounds of quantitative easing conditioned investors to expect that policy support would always return during volatility. Over time, that conditioning hardened into a reflex: buy every dip, because the Fed will not allow markets to fail. What exactly is the definition of ‘moral hazard?’ 

Noun – ECONOMICS: The lack of incentive to guard against risk where one is protected from its consequences, e.g., by insurance.

However, the Pavolovian experiment is complete, as investors are chasing asset prices in the companies with the worst fundamentals, assuming that the Federal Reserve will “insure” them against losses.
 

In other words, just as Pavlov’s dogs would start salivating at the “ringing of the bell,” investors are “chasing speculative assets” simply on the assumption that the “food” will arrive.

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