The session began with more gusto than I expected. Still, you could see knees begin to wobble as we approached the Federal Open Market Committee (FOMC) decision and question-and-answer period. The old script of hardware up and software (IGV) down lifted Technology (XLK) to the top sector position, but yesterday’s session was a reminder - we are a nervous bunch these days.  

Perpetual Campaign of Fear 

Well, we are now in “extreme fear,” which means the market is vulnerable but also oversold. Yes, we could become more oversold, but the market is compressing enough for a monster bounce-back move that will catch a lot of investors off guard and send many to the nearest pub when they realize they took unnecessary losses. 

On October 30, 1938 (Halloween Eve) at 8:00 PM EST, CBS aired Orson Welles and the Mercury Theatre's adaptation of HG Wells’ The War of the Worlds. Most listeners did not know it was a reading of the book because the station added breaking-news cut-ins that made it feel like a live event.

Today’s artificial intelligence (AI) hysteria feels the same. Sure, there was the ‘Hugging Face’ incident, and recursive self-improvement (RSI) is on the doorstep, but these things have been blown way out of proportion. Artificial Superintelligence (ASI), which is the “superintelligence” phase, is years away. The same companies arguing to “pace” development are galloping ahead at full speed. 

We are on the cusp of something monumental, and I think it will happen. It will happen; the question is: do we want to lead the AI Revolution or take a backseat?

Things You Never Do

The first time I went gambling in Atlantic City, New Jersey, I chose Blackjack. Soon after I took my seat, I was dealt two queens.

Lady Luck, I thought, let me split them.

The other players let out a collective groan, and one told me, “You never split queens!”

I was young and hard-headed, so I didn’t take the advice too well. Turns out I not only lost, but the dealer somehow hit her hand twice and came up with a total of 20.  Everyone lost. 

For the record, this is when you should split in Blackjack.

Warsh Split Queens

A universal rule known to most old-timers and Fed watchers: never hike rates into an energy supply shock. It’s like splitting queens – everyone loses. But Warsh did so anyway, perhaps. 

Warsh was asked whether a rate hike could increase oil production. He replied that there were lots of things the hike couldn’t change, but he was worried about the second- and third-order effects on prices – other stuff that maybe the Fed could help tamp down. 

Never Hook with a Hooker

The Risk: Trying to exchange blow-for-blow in a hook-on-hook battle leaves little margin for error. If their hook is faster or tighter, you will likely get knocked out.

Yesterday,  Fed Chair Kevin Warsh nonchalantly said:

"We removed a dose of accommodation so that financial and credit conditions would be more consistent with our ultimate objectives." 

Old-school Fed watchers took that as tacit guidance that at least two more rate hikes are coming. Essentially, Warsh was trying to be cute, but the phrase landed like a hook to the body, and the market gave up all its gains. Warsh tried to explain he was using the term differently, but in the future, he should avoid verbiage the market will take a certain way. 

Economic Projections

The new Summary of Economic Projections (SEP), an exercise Warsh didn’t participate in, as he reminded us several times during his Q&A session, shows the economy strengthening next year, with inflation still at 2.5%, but no rate hikes. It leaves the door open for one more hike this year, possibly in December.

Powering the AI Boom

Yes, the AI Revolution will continue even though it endures the climate change campaign on steroids. It's too important to give up, and neither Anthropic nor OpenAI has slowed one iota. That suggests real power demand, and after the close, Amazon (AMZN) inked a deal with Generac Holdings (GNRC) that sent its shares soaring. 

But Wait, There’s More

Also, after the close, Nebius Group (NBIS) announced it will hike its prices. The premier Neocloud name is offering up hefty increases for some of the oldest graphics processing units (GPUs). 

This matters as compute becomes tradable, like energy and other commodities. 

A Decade of Demand

These after-hours events happened the same day GE Vernova's (GEV) CEO suggested demand could be even better for their products in the 2030-2040 decade than in recent years.

Moral of the Story and Key to Successful Investing

All the stocks just mentioned are high-Beta names – that means they trade in ranges much wider than the broad market.

The S&P 500 (SPX) could be down 2%, and any of these names could be down 5%. If you set an automatic stop loss, you will often be shaken out of such names, and often at a loss.

The key is to be positioned and deal with day-to-day declines, not focus on share price, but on fundamentals: macro growth potential (where the industry is heading), market share gains, pricing power, etc. You would rather be long than find yourself trying to chase these once they get going – they move quickly.  

Hold the potential grand slams when it seems that they are only getting slammed.  This is how you make big money.

Risk Appetite

Right now, overall ‘risk appetite’ is low, which means the stuff you buy and position in now must move higher before the crowd jumps on board – that’s the idea. That should happen soon. 

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