This edition is coming out a little late because I ran the Long Beach Marathon this weekend. However, a week of quiet headlines does not always represent a quiet week in the market.
Weekly Recap
The broad market held up this week, but leadership moved away from AI hardware. SPY gained 1.2% to $778.57 after a record close on Tuesday. QQQ rose just 0.2% to $751.27, and IWM fell 0.9% to $278.94. Thursday did the damage. The Financial Times reported that OpenAI's annualized revenue was near $50B, about $20B below the figure investors had been using. QQQ fell 1.3% that day and semiconductors dropped 3.4%. Arm Holdings (NASDAQ: ARM) lost 13.4% on the week and Intel (NASDAQ: INTC) fell 12.3%. Money rotated into defensives instead. Utilities rose about 4%, led by Constellation Energy (NASDAQ: CEG), which jumped 15.8% after signing a 20-year nuclear power deal with Alphabet's Google (NASDAQ: GOOGL). On Friday, T-Mobile (NASDAQ: TMUS), AT&T (NYSE: T) and Verizon (NYSE: VZ) each fell about 9% after SpaceX agreed to buy spectrum. On earnings, Delta Air Lines (NYSE: DAL) posted record revenue, but adjusted EPS of $1.72 missed the $1.75 consensus. Fuel costs rose 62%, and Delta cut its full-year EPS guide to $5.10 to $5.60 from $6.50 to $7.50. The stock fell about 3%. PepsiCo (NASDAQ: PEP) beat with $2.34 in EPS and $25.27B in revenue. It still cut its full-year core EPS growth outlook to 2.5% to 3.5% as North America stayed weak.
Rates were steadier than the week before. Monday's ISM Services came in at 54.9, slightly below expectations and down from 55.4. Prices paid rose to 74.0, the highest since July 2022. The 10-year Treasury yield touched 5.36% on Wednesday, the highest since 2002, before buyers stepped in. It closed Friday at 5.24%, down from 5.28%. The 2-year ended at 4.80% and the 30-year at 5.60%. Supply went better than feared. The 10-year auction cleared at 5.30% with a 2.77 bid-to-cover, and the 30-year cleared at 5.62%. Wednesday's FOMC minutes showed all 19 officials backed the September hike to 3.75% to 4.00%. Most expect one more hike by year end. That was largely priced, and futures still put October hike odds near 20%. Friday's preliminary Michigan sentiment fell to 46.3, below expectations. One-year inflation expectations rose to 4.7% from 4.6%. Abroad, the Reserve Bank of India hiked 25bps to 5.50%, its first hike since February 2023. Oil was choppy. Brent eased toward $100 midweek after the IEA sped up emergency stock releases. It jumped 4% on Thursday as tanker attacks in the Strait of Hormuz picked up. On Friday, President Trump said the US would not attack Iran before the midterm elections. Brent ended the week near $105 and WTI near $92.
What I'm Watching Next Week
With October hike odds near 20%, Wednesday's September CPI is the release that matters most. Headline CPI is expected at 3.7% year over year after 3.4%. Core is expected to rise 0.2% month over month after 0.3%. A hot core print, with ISM services prices already at 74.0, would pull hike bets back toward the October 27 to 28 meeting and lift front-end yields. Thursday brings PPI, expected up 0.5% after 0.4%, and retail sales, expected up 0.3% after 1.2%. A strong consumer alongside hot prices would make it harder for the Fed to wait. Fed Chair Warsh speaks with the IMF's Georgieva late Thursday, and any comment on the hike path will move rates. Abroad, China's September CPI on Wednesday is expected at 1.0% after 0.8%, and a firmer print would add to the global inflation theme. UK monthly GDP on Thursday is expected to fall 0.1% after a 0.4% gain, and a weak reading would ease pressure on the Bank of England. ECB President Lagarde speaks twice on Wednesday, and hawkish comments would firm up pricing for an ECB hike.
On earnings, the one I am most focused on is Taiwan Semiconductor (NYSE: TSM), which reports early Thursday with consensus near $4.40 in EPS and $45.7B in revenue. Monthly sales already showed record quarterly revenue of about $46.7B, above its own guidance, so the revenue beat is known. The focus is gross margin against the 65% to 67% guide and the fourth-quarter outlook. That will show whether Thursday's OpenAI headline changed anything about AI demand. ASML (NASDAQ: ASML) reports Wednesday before the open, with consensus near $12.50 in EPS and $13.2B in revenue. Bookings matter more than the quarter, since orders are the clearest read on how much chipmakers still plan to spend.
Research
QQQ finished the week up 0.2%. Looking only at that number, it was a quiet week for technology. It was not. Inside the same fund, semiconductors (SMH) fell 4.3% and software (IGV) rose 3.9%. Arm Holdings (NASDAQ: ARM) lost 13.4% while Zscaler (NASDAQ: ZS) gained 18.9%. The big moves happened, but they pointed in opposite directions and cancelled out. An index can sit still while everything inside it moves.
How much an index moves depends on two things. The first is how volatile each stock is. The second is how closely the stocks move together. Take an index made of two stocks, equally weighted, each with 30% volatility. If they move in perfect lockstep, the index also has 30% volatility. If they are completely uncorrelated, index volatility falls to about 21%. Each stock is just as risky in both cases. The only thing that changed is correlation. That is why a basket can look calm even when every name in it is having a big week.
Options let you see this in prices. Index options and single stock options trade separately, so each has its own implied volatility. Put the index vol next to the vols of its members and you can back out the correlation the market is pricing. Cboe publishes this for the S&P 500 as its one-month implied correlation index, COR1M. It hit an extreme low of 5.86 in early June and was near 10 at the end of August. This week QQQ implied vol sat at 17.8%, while XLK was at 23.1% and IGV at 30.6%. The pieces were priced as more volatile than the whole, which is what low correlation looks like.
Dispersion trading is the way to trade that gap. A dispersion trader sells index volatility, buys volatility on the individual stocks, and hedges the delta on both sides. The position makes money when stocks move a lot but in different directions, which is exactly what happened inside QQQ this week. There is also a structural reason it often works. Most investors hedge with index puts, not single stock options, so index vol tends to carry extra premium. Implied correlation usually sits above the correlation that actually shows up. It is the same insurance idea from The Price of Fear, applied to the index instead of the tail.
The risk is the day everything moves together. In a selloff, correlation jumps toward one, the index falls as hard as its members, and the short index vol side loses. Thursday was a small version of this. One revenue headline hit the whole chip group at once, and the semiconductor index fell 3.4% in a day. The practical takeaway is that a low VIX does not always mean low risk. Sometimes the stocks are calm. Sometimes they are moving hard and simply cancelling each other out. Before reading a quiet index as a quiet market, check which one it is.
Personal
I ran the Long Beach Marathon this weekend. I enjoyed the whole experience, but I blew up at mile 18 and finished in 4:40. Compared to my previous time it is a huge improvement, but I am still chasing 4 hours. Like the research above, the final number hides what happened underneath. The first 18 miles and the last 8 were two different races, and the finishing time does not show where it went wrong. That is the part I want to work on.
On a different note, this will be the last of the regular weekly posts for now. With midterms starting, I cannot give each edition the time it deserves. I would rather write fewer posts that are worth reading than rush one out every Sunday. I will still update regularly, so keep checking back.
Disclaimer: Everything here reflects my own opinions and is shared for informational purposes only. It is not financial advice, and nothing in this report is a recommendation to buy or sell any security.