Transcription
Hello and welcome back to Braavos Research. This is your host Peter and this is a 4-hour chart of the S&P 500. It's the chart that we've been paying attention to for the last few weeks now with this upwards price channel that seems to be holding here, price bouncing off of it as I'm making this video. As you can see, we're quite close to this key level of support and we have the Fed minutes today that are a potential market impacting event. So, we're going to take a look at the factors that are suggesting a breakdown is at risk, the factors that are suggesting that we should be making new highs right now, what our strategy is right now, and what our approaches heading into the Fed minutes. So, without further ado, let's get right into it.
Let me bring a little bit of context into this. First of all, add the percentage of stocks within the S&P 500 that are trending above their 50-day moving average. And you can see this is the same picture that we've been talking about for months now. Is during this rally. Yes, it's been very powerful. Yes, it's been extremely resilient, but the average stock in the S&P 500 has not really been as excited about the future as the index. So, it's really been a handful of stocks dragging the index higher, which is not the most favorable environment to trade in. This is not our bread and butter when it comes to our style of trading. We want an environment where there's lots of participation, where most stocks are moving higher and breaking out. That increases the odds that the trades that we initiate on particular stocks and particular setups actually play out and actually move higher. So this kind of environment is tough to trade in, right? It's not been catastrophic because we have had generally low volatility which helps the VIX, the volatility index of the S&P 500 has been very low here, which does increase the success rate of our trades and we have had more recently a little bit of a pickup in small caps. You can see here that have caught up a bit. They generally lagged behind in the initial stages but they did move higher here. The US 2000, the Russell 2000 did a little bit of a catch-up move and it's been making new all-time highs here. So, generally more favorable environment than let's say end of 2024 that was catastrophic where rep was deteriorating. Yes, the stock market was making new all-time highs again, right? In February of '25, we had a new all-time high, but the rest of the market was moving down and volatility was picking up, which is not what you typically want to see. And when you have that kind of environment, you want to be stepping back, reducing your exposure because the success rate of your trades is going to drop off. Your trades are going to be much more susceptible to making false breakouts and just failing. So, we're not quite in this environment right now. As you can see, the Russell 2000 is ramping up. And as opposed to late 2024 where you had multiple spikes in volatility that really created tough conditions to trade in and ultimately led to the liberation day spike in volatility where the entire market was falling. Today we've been in a relatively stable environment in regards to volatility. It's not been all bad.
And you can see if we dive in closer to the short-term picture of the S&P 500, we're generally seeing the market seeing upside forces as this theme of large caps getting bit up, continues. And we do have a solid proof of this. Nvidia, which is one of the trades that we have right now, continues to hold its breakout here. So, this is one of the things that's not pointing to short-term downside in the market. Is one of the largest stocks, I believe the largest stock within the S&P 500 index right now, is breaking out to new all-time highs and just retested its breakout. So, this could continue to lift the index higher despite the average stock in the S&P not necessarily thriving. And we have along with that Microsoft that's also seemingly staging a breakout. Although it's a little bit less obvious than the Nvidia one, we do have a breakout here and it's currently being retested with a broader basing pattern on Microsoft right here that could be poised for a breakout. So that's 15% of the index. Microsoft and Nvidia together make up around 15% of the S&P 500. Absolutely crazy to think about, but that's the reality of the market that we're in. 15% of the index right now is breaking out, right? So, and yes, it could turn into a false breakout. That would be something that to note and that would be dangerous for the S&P 500 index. If we see a false breakout on Microsoft, if we see a false breakout on Nvidia slicing back down through these levels of support, that would be very worrying. For now, the technical picture that we have in front of us is not pointing to that.
Now, as I mentioned earlier, we do have the Fed minutes today that could move the market and that could put a dent in this rally that we're seeing today and this new breakout that we've had to new all-time highs. Could put a dent in that and cause a breakdown, a short-term breakdown that would probably be accompanied by a reversal on Nvidia and Microsoft and other tech stocks. If we see that, we're probably going to be scaling back our exposure a little bit because, you know, as I was mentioning earlier, we hate volatility. We want to be long on the market and aggressive on the market when conditions are favorable. When there's participation, where volatility is low and when the market is in a strong uptrend, that's our bread and butter. It's not been perfect here, but we've certainly had a few successful trades as we've been exposed to the right parts of the market. Some semiconductor trades that performed well and now exposed to a couple of large-cap stocks that seem to be breaking out along with Amazon that still I believe could be poised for a breakout and a catch-up trade to the S&P that's been of course performing much, much better here in this recovery than Amazon. Amazon has been lagging behind especially since mid-July. We've had Amazon basically level off here while the index has surged to new all-time highs. It kind of reminds me of the setup that we had on Google a while back. Google was lagging behind. It ended up catching up in a huge way. There's somewhat of a similar fundamental structure with Amazon because Amazon has been ramping up its earnings per share in a huge way in recent quarters and yet the stock's price is flat. So this is one of the mega-cap stocks that's not at all reflecting the underlying growth that's taking place. I believe Amazon is trading at a forward PE ratio today that's the cheapest it's been since 2010. So this is a pretty big deal. Now of course, you know, we want confirmation and if we have confirmation, this is for just a starter position for now that we took in a little bit too early on this breakout that ended up being a false breakout. But if we see further evidence here, we'll be adding to Amazon if it shows enough strength to actually break out above this near-term downtrend.
A long story short, if the S&P were to break down here for reason X, Y, and Z, and we'll take a look at a few charts that are for and against this type of breakdown happening, we would want to stay away. We would want to cut our exposure back, cut our exposure to the more vulnerable bets that we have, such as semiconductor stocks that we have today. Probably cut out our exposure to crypto that's been so far less successful than we had hoped and perhaps even go as far as initiating a short bet on the S&P 500 index upon this kind of breakdown. Right? So that's the way we're looking at this because the reality is that if the S&P breaks down, we'll have seen a spike in volatility here. And that's, you know, volatility can always come back down, but we don't want to be doubling down in an environment where volatility is picking up. And so far, it's been curling up. It hasn't been picking up in a big way, but we could see a more substantial breakout in volatility here if the S&P were to break down.
So, now let's take a look at a few arguments for and against a breakdown. Now, obviously the resumption, the technical picture that we have right now is in favor of the S&P moving higher here, right? We're making higher lows. We're making higher highs. This is a clear uptrend. We have just seen the S&P tag this level of support potentially showing signs of resuming higher. So, from a technical standpoint, there's no reason to expect a short-term downtrend. However, we're seeing a little bit of warning signs underneath the surface that are not too constructive. One of them is homebuilders that have been underperforming significantly here. This is a key sector, a key leading sector of the economy. So, homebuilders, you want to see them outperforming. If you're bullish on the market, you want to see them really lead the market higher in a healthy bull market. In a healthy economy, homebuilders do well. And that's just not the case right now. So we're seeing in fact quite a bit of a breakdown in homebuilders suggesting that the economy could actually be more rate-sensitive than what the market is currently pricing in or what the Fed is currently planning on doing. Right? The homebuilders are basically reacting to the current interest rate structure. This is a highly rate-sensitive sector and it can thrive even if interest rates are high if there's a strong economy. But if the economy is weakening, then homebuilders are going to perceive that underlying weakness as being dangerous even if interest rates are stable. And that's kind of what's happening right now because interest rates are very, very stable. They're not really doing much. And yet homebuilders are moving down, which is not the greatest type of thing you want to see. So it could be that here in the Fed minutes, I'm just speculating here. I don't want to get ahead of myself, but it could be the market gets disappointed by the Fed not being dovish enough, right? That causes a breakdown that forces us to flip to a more bearish stance. That's really the big risk factor in the near term that we see for that could cause a little bit of a panic in the market, a four, 5% correction on the back of this kind of economic weakness.
And what are the catalysts that we could see for that? And again, just putting the pieces of the puzzle in front of us and then we're going to talk about how all of this actually fits in. But the US dollar is breaking out right now as we suspected it would above this downtrend line here. And so this is a little bit of a stress on the market, right? We know that a weak dollar is something that's generally a tailwind for the market for S&P 500 earnings, right? For the economy as well. A weak dollar generally stimulates manufacturing activity and local economic growth. And so when the dollar strengthens, that tends to be accompanied by generally S&P 500 weakness. You can see that by overlaying the S&P 500 here. That generally falls when the dollar is rising. Falls when the dollar is rising. Here that was not the case. Here that was not the case. But one of the things that has been propelling the market higher here has been the persistently weak dollar. We know, for example, that the S&P 500 priced in euros is barely at new all-time highs. Let me show you that chart. That's a fascinating one. This is the S&P 500 priced in euros. It's not even at new all-time highs. Still below its highs from February of 2025. So very, very substantially different picture to the one that we're seeing on the dollar-based index. So those are the two risks, right? That the economy is quite rate-sensitive in the near term and that we're susceptible to seeing a little bit of a panic from the market and the fact that the US dollar is breaking out right now.
The counterarguments to this is that the US dollar currently is breaking out without the confirmation of the bond market, which could put a dent in how much upside this dollar rally actually has because what we typically have seen over the last couple of years in the dollar is that it's been correlated to interest rates, to long-term interest rates. And one of the reasons why the dollar has been quite weak here is because bond yields have generally been quite weak, as have been trending down, and it's been a substantially different environment to let's say end of 2024 where bond yields were spiking and the dollar was spiking along with bond yields. Today bond yields are still kind of rolling over and heading downwards while the dollar seems to be trying to break out. So, not really the type of setup that's making me extremely worried about a lot of dollar strength. If we were seeing this kind of move on bond yields, I would be a little bit more worried. But this is not really a big tightening of financial conditions. And by the way, oil is also highly correlated to the dollar, especially in recent years. Oil prices that have a huge impact on inflation expectations and that have likely been dragging the dollar down during this period. Well, they're still hovering near their lows. Yes, the dollar can rise, but without yields and oil confirming the move, it's hard to see a substantial move up in the dollar. I would say kind of keeps the dollar anchored. Perhaps that's also why gold is not at all reacting to the dollar strength right now. It's just continuing to ramp up.
Gold, by the way, is overextended on all time frames. Now, RSI is at 87, which is absolutely crazy. This is the levels that were barely reached in the blow-off top in 2020 right here. Barely reached and we're still going on gold, by the way, so it's not yet done. 87 was not reached in 2016 during this huge kind of melt-up move during Brexit. And it wasn't even reached in this final blow-off top in 2011. So on the daily chart, we're extremely overextended on gold. Not to mention the weekly chart that's also highly overextended, right? That's typically associated with moments where gold sees periods of consolidation like right here. Let me just show you some of these weekly readings that were similar to today. 2009 right here. Gold pulls back for around or to say exactly from here, but around 15% move down. And by the way, this is during a very, very strong bull market on gold, right? So don't think just because there's a little bit of a pullback, 15% pullback on gold doesn't mean you can't see gold continue to move higher here. In 2006, that was a 25% pullback after this huge overextension. And not to mention the monthly chart on gold that is also highly, highly overextended here at 91 on the monthly chart, which is as high as it was in 1980, right at the top of the blow-off top, and then we had a couple of readings here in the 1970 blow-off top. But this has been one of the most resilient gold bull markets ever, right? Which is quite something to say about today's macroeconomic environment. But we're inching towards some of the levels that we had highlighted here. Our approach right now on gold is really wait and see. It's in a blow-off top clearly and there's speculative price action that's taking place. These types of moves don't last forever. There's going to be opportunities coming out of this and I would definitely not be trying to go long on gold. And I would also not be necessarily too keen on trying to go short on gold. I could consider a short trade if we started to see a breakdown. Although that's not necessarily our trading style, but that would be a breakdown below a well-defined price trend line like this one could set off a steeper move down on gold. Let's say back down to $3,700. That would be one of the targets. Or $3,600 would be a possible target. By the way, that's already a 10% correction. Just back to $3,600 will be a 10% correction. So huge, huge gains that we've had on gold here.
So long story short, what is our specific strategy heading into the Fed minutes? We may dial back some exposure. The bets that we're the most disappointed with recently are Ethereum and Solana, especially Ethereum that made this breakout here and immediately reversed after it. This is called a false breakout. Not necessarily what you want to see. You want to see follow-through on this kind of move. We would have wanted to see Ethereum thrive and make new all-time highs, which is the opposite of what we got. It's not even performing particularly well during today's stock market rally. So, this is quite disappointing. We initiated a trade here. We ramped up our exposure here. So, we're I would say above our break-even point. We could leave it a little bit more room, but we'll be very quick if there's weakness on the market as a whole. We'll be very quick to cut our exposure to Ethereum and Solana. The two other bets that are a little bit more at risk of us cutting them, especially based on near-term price action, is Applied Materials. Applied Materials still looks okay. By the way, this is the broader picture on Applied Materials. Very strong breakout here of a large bottoming pattern that occurred here. We picked up the stock at about $200 right here. It had a good run. It's retraced a little bit. And now unfortunately it's already hanging at this level of support, this price channel that we're looking at by a thread. And so it's possible that if there is any kind of market volatility, if there is volatility around Fed minutes, that this level gets broken down and that forces us to cut our exposure to that before this trade completely reverses and turns into a loss, which we of course want to avoid. So we're watching this level. We want to see Applied Materials protected at all costs. If it does, that leaves the door open for another big, big rally on Applied Materials potentially to tag the top of this channel again. That would be potentially taking us all the way to $240, which is 15% away from current level. So, we'll see. Applied Materials is definitely at a pivotal moment where it's make or break.
ASML is another one. I believe we're up around 15% on ASML. What we want to see get held on the 2-hour time frame. And the reason I'm picking two-hour time frame here is because these are very volatile stocks. And so we want to have confirmation by having a solid close below the level that we're looking at. Right? So we want to see either a 2-hour, 4-hour, and 8-hour close below the level that we're looking at as a stop-loss. But for more volatile stocks or periods of volatility, looking at the 2-hour is probably what you want to do. And so here we're at a pivotal moment where we have this potential price channel that's reasonably well-defined, capturing these highs and capturing these reactions right here and that seems to be holding as support right now. There's also this level here at $970 on ASML that was broken here. Price hovered right below it and then broke and then it had that nice move up. We're retesting that right now. And so what we don't want to see is a close below this. $970 would be our line in the sand. We don't want to see a 2-hour close below that on ASML.
Now, the final thing to consider in regards to everything that's happening right now and one of the reasons for why we could potentially see another thrust up in the market despite how insane this chart already looks and how aggressive this rally and how resilient this rally has already been. One of the reasons why you could actually see another thrust up is because the AI bull ratio is still at around 50. So on average, most investors are still bearish on the market right now. We had a bare market in stocks in 2025 that reached extremely pessimistic levels as you typically see at the bottom of a bare market. But what you typically see is when the market makes a new all-time high, you see a burst of optimism. And so that tells me that you still have a lot of people that are out of the market right now. A lot of pessimism despite the extreme strength, despite the index surging. You have a lot of skepticism regarding the lasting power of this rally. This is something that you also had to a great degree in 2020 where sentiment reached extremely low levels. First in March of 2020 during the decline and then you can see what happened here. The pessimism stayed strong. Most people stayed bearish on the market until November of 2020. So this entire segment of the rally from the bottom of the market all the way through much past new all-time highs, sentiment was generally bearish, overwhelmingly bearish. So we haven't had that moment of recognition yet where people capitulate back into the market and flip bullish. We haven't had that yet in this market. Now, by the way, I do want to nuance this because you did have corrections before this bullish capitulation in November 2020. You did have corrections, right? In September of 2020 and all the way till October of 2020, you had a 10% correction on the S&P 500. And in June of 2020 as well, so you can have corrections even when sentiment is bearish. But this chart basically just tells me that the pain trade is still probably to the upside. That people don't want to see the market continuing to move higher because they're out of the market right now.
If you guys enjoyed this video, make sure to let us know in the comment section down below. Your feedback is very much appreciated. If you have any questions, comments, also don't hesitate to drop them in the comment section down below. I hope that you all found this update useful. In the meantime, I wish you good luck on your trading and see you next.