Thursday’s nascent short squeeze fizzled at the open, and the weakness spread beyond tech. Both major indices broke below Thursday’s lows, prompting questions about whether the heavy volume was capitulative and whether breadth metrics confirm it. Risk appetite was further tested by renewed anxiety around the AI trade: higher financing costs, uncertainty over revenue trajectories, and the prospect of fresh capital raises. The debate is also shifting towards whether capex growth can stay elevated and what valuation multiples the market will continue to pay for semiconductors, including DRAM-linked names, given questions over future profitability.
Conflicting Macro Signals
Macro signals are mixed. Hot CPI and PPI have not stopped bond yields from retreating, while the implied probability of an October rate hike has fallen to 15%, raising the issue of what slower yields are discounting if earnings expectations and recession probabilities are not rolling over. Energy and diesel costs are feeding into sector rotations: XLI has weakened, while XLU, XLY and XLRE have started to edge higher. On Friday, breadth failed to improve and the attempted squeeze towards 775 faded, with XLI and XLY both lower; volatility dynamics add uncertainty, as VIX and VVIX spikes often precede rebounds, yet futures look constrained after an inside-day-style close near the lows.
