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Kashyap's Rosy September Market Outlook

Let's talk market breadth. This shows the YTD returns of most of my sector and country watchlist.

There are 16 ETFs ahead of the S&P 500 and 5 that are ahead of the Nasdaq 100. Of these, the semiconductor ETF which ranks up top is insanely concentrated in Nvidia and Taiwan Semiconductor. You all know what I think of Nvidia. TSM is seeing declining revenues and is up a mere 21.4% ytd, or less than half of SMH's performance. Broadcom (AVGO) is up 54.2% but that ytd gain should again be taken with a pinch of salt.

Broadcom is acquiring VMWare and that insane spike that began mid-May is merger arb traders getting taken behind the woodshed and shot to death. Typically, arb traders short the acquiring company and go long the target, in order to capture the arb premium when the deal closes. Why did they get killed on this trade? Because that's when Nvidia spiked, taking the whole semiconductor ETF along with it. The inflows drove up the share price of AVGO, forcing them to cover.

I'm seeing a lot of TA focused traders on FinTwit remark about how strong the semis are, based on a chart of the SMH ETF. Let's break it down:


up 209.2% ytd

Taiwan Semiconductor

up 21.4%


up 54.2%


up 48.1%

Lam Research

up 58.4%

Applied Materials

up 49.7%

Texas Instruments

up 1.8%


up 15.3%


up 61.4%

Analog Devices

up 9.3%


up 1.6%

Micron Tech

up 40.1%


up 44.6%


up 31.9%

Cadence Design

up 51.4%


up 29.4%


up 13.8%


up 52.2%


up 56.5%


up 25.1%


up 37.8%


up 8.8%


up 12.8%


up 7.2%


up 46.7%

Of the 25 total holdings in the ETF, a mere 9 are up more than the ETF itself. The top 5 of these 9 account for 40.73% of the SMH ETF.

When someone says semiconductors are strong, this is a new bull market, what they really mean is 5 stocks in an ETF comprising 25 stocks are holding up the entire market, and that's bullish for market breadth. Better yet, the market looks good because of this insane outlier that's clearly in a bubble, but what do valuations matter when I can just draw lines on a chart and consider it a macro outlook. If you can see how ridiculous the bulls arguments look, broken down like this, you can begin to understand why this is the most bearish I've ever been in my entire trading career. Window dressing cannot hold up a market permanently, even if it does temporarily offer a sense of calm and lull investors into thinking they have nothing to be afraid of.

This is when you have to be most afraid...

...because volatility is ALWAYS mean reverting. No free lunch in the markets.

For a refresher course, check this out: The Day The Vix Doubled: Tales of ‘Volmageddon’

Let's go down the watchlist. Bitcoin is up over 40% ytd, sure, but it is still down 64% from its November 2021 peak. It's a bloodbath in the altcoins. And trading volumes are way down. There are rumours Binance may be going down. I don't have an opinion on that, although I do note that their BNB coin looks really ugly. And note the steep drop in volumes (this is a 3-day chart).

The remaining 3 ETFs that have outperformed the Nasdaq 100 hold a subset of the Nasdaq 100. So much for that.

Down the list, it gets more interesting. You have these uncorrelated (to the S&P 500) trades like uranium, Vietnam, Argentina, etc putting up a decent performance. Energy is making a comeback. Other than maybe the homebuilders, nothing stands out. The XLY, the consumer discretionary ETF, is as top heavy as SMH, with Tesla and Amazon accounting for 43.2%. What you and I would actually consider discretionary spending, like say on your car, counts for zilch in that ETF. O'Reilly Automotive (up 11.7% ytd) gets a 1.8% weight in the consumer discretionary ETF.

As for homebuilders, they were strong going into the 2008 financial crisis. Here's a blast from the past.

Investors made the same mistake back then, confusing strong gains in stock prices with a strong economy. Just like the present time, investors thought the Fed cutting rates would stave off the recession.

"The subprime crisis is contained."

- Ben Bernanke, May 2007

History doesn't repeat but it does rhyme. With everyone fooled by the indices into thinking we are in a new bull market, that all the problems that surfaced along with last year's decline in stock prices have somehow gone away because the semiconductors are up or AI is going to save humanity and lead us into the promised Metaverse land.

Meanwhile, the equal weighted S&P (RSP) is up 5.1% ytd, treasuries (TLT) are down 4.2%, and biotech (which is a bet on the long-term) is down 5%. Regional banks have been drawn and quartered but investors pretend that it doesn't matter.

Transportation is in a confirmed downtrend.

Dry bulk shipping is in the toilet. Utilities and staples are having a tough year. Food and energy inflation is making a comeback. Consumers are getting squeezed on interest on the mounting credit card debt. Student loan payments have resumed. The Fed continues to drain liquidity with quantitative tightening. But of course, none of these things matter anymore because the Nasdaq is up and semiconductors are strong. That's really all you need to look at to form a macro thesis these days. The more sophisticated TA guys throw in a chart of the dollar and point to its recent strength as a sign that investor confidence in the US economy is back.

On a longer term timeframe, the dollar has peaked.

Same goes for most stocks, with the Nasdaq new highs - new lows index now below zero.

At some point, the data will start to matter. That's the thing about fundamentals - you can ignore them until they whack you in the face. I believe that whacking is coming soon. After missing out on the AI bubble, I have repeatedly asked myself whether I'm bearish because I missed it, or bearish because the fundamentals kept deteriorating. I have made the case for why it is the latter. With the CPI report coming out on Wednesday this week and the FOMC decision next week, this may just end up being the well-deserved whack in the face for the bubble chasers. If you haven't picked up OTM puts already, volatility is still cheap but likely won't stay that way if I'm right in my analysis. So this is the time to act.

Good morning and good day!

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