Transition to calm or middle of the storm?
Markets continue to transition from a geopolitical inflation scare toward a liquidity-driven expansion as falling energy prices, stabilizing inflation expectations, resilient credit markets and improving global breadth offset growing questions surrounding AI leadership and crowded leveraged positioning. Is this a transition to calm or the middle of the storm?
There is a focus below on China based AI tech companies with all of the companies now as strong buys.
Macro Scorecard
Instead of Bulls vs Bears at the end… let’s look at it from the start. Probabilities shown at the end of the note.
| Theme | Current View |
|---|---|
| Growth | Positive yet skewed in AI tech, semis |
| Inflation | Improving with crude drop but will it drop enough? |
| Rates | Drop from highs yet starting to rise again |
| Liquidity | Positive |
| Credit | Positive |
| AI Spending | Positive but slowing? |
| Commodities | Mixed after a significant drop, re-emergence? |
| China | Bottoming |
| Europe | Strong to new highs |
| US Tech | Losing momentum with semi leadership |
Biggest Changes This Month
Bullish
• Oil collapsed back toward pre-war levels
• Treasury yields likely peaked
• Credit spreads remain remarkably tight
• European equities continue making new highs
• Chinese equities are down hard and stabilizing
Bearish
• AI leadership fractured
• Semiconductor momentum rolling over
• Magnificent Seven momentum slowing with mixed YTD gains
• Tariff uncertainty and US-Iran conflict still with flare-ups
• Positioning remains crowded and levered in semiconductors
Inflation is moderating
Oil collapsing is the largest catalyst. But watch out if this lifts off the 200-day.
Gold has been wiggling around the range that I suggested scaling into on the long side. New Sequential buy Countdown 13 today.
Copper has cooled, but if it can hold the 600 level, the 200-day comes into play. This also could be just correcting ahead of a higher level.
The Bloomberg Commodity Index has pulled back significantly, reflecting the calm after the de-escalation between the US and Iran and the Strait being open. Bounce off the 200-day could be starting a corrective lower high wave 2 of 5 bounce. Upside Setup on day 4 of 9. TDST resistance at 136.11
10-Year yield has moved off 4.70% levels and still is holding the 50 day with 4.60% as a risk level
The 30-year yield is well off the highs but is reemerging above 5%. A lower high or a new wave pattern up?
US Dollar Index continues upside trend, holding 20-day in upside wave 3 of 5
The market removed most of the geopolitical inflation premium. Crude has retraced sharply while positioning has become excessively bearish. Treasury yields have yet to fully reflect the improvement in inflation expectations, suggesting duration still has room to outperform if labor data softens. Gold is beginning to stabilize following a substantial correction despite sentiment remaining washed out.
Credit Remains the Green Light
I said last month credit spreads remain the most important charts in the market. Still stable for now. I am a little surprised. Credit never confirmed the equity weakness. Conclusion: No systemic stress.
High Yield with little response after recent 13’s
Investment Grade same story
Equity Leadership continuation?
Europe
Europe continues broadening leadership. The DAX is approaching its Wave 5 objective while Italy and Spain remain firmly above rising intermediate-term moving averages. Leadership has broadened well beyond a handful of large-cap exporters, suggesting institutional flows continue to rotate toward European cyclicals despite elevated momentum readings.
DAX
Spain
Italy
UK FTSE 100 improved but still below February highs.
Euro Stoxx 50 at upside wave 5 of 5 and Setup could cancel without an upside bounce
Euro Stoxx 600 has a Combo pending on day 11 of 13 and would need a new high to qualify the Combo sell Countdown 13.
United States
The Nasdaq Composite Index has completed fresh Sequential and Combo 13 sell signals while the Bloomberg Magnificent Seven Index has been weak YTD with a recent bounce – a possible lower high wave 2 of 5 bounce. At the same time, the one-month implied correlation has fallen to fresh lows, suggesting that market participation continues to broaden beneath the surface. Rather than signaling deterioration, the current correction appears increasingly isolated to the largest AI beneficiaries while the average stock has improved.
S&P still with Setup count but that might not last if market drops on new US Iran risks
Nasdaq 100 testing the important TDST Setup Trend support at 29,040
Nasdaq Composite did get the Sequential and Combo’s at the late May highs
Russell 2000
Mag 7 topped in early May with sell Countdown 13’s and sell Setup 9. Corrective lower high bounce?
Correlation: 1 month implied correlation is extremely low with ‘stock pickers’ market. Expansion would likely see more broad sell off
Asia
Markets in Asia look very different.
Japan and Korea have been strong
USDJPY Yen with new Sequential sell Countdown 13 follows two versions of the Combo. Yen weakness is putting Japanese policy makers under pressure again.
Nikkei stalling while recently trending firmly higher
Korea has been basically two memory stocks as I have discussed. The key for this chart is the TDST support being tested
Is China/Hong Kong about to re-emerge?
and lead with AI?
Hang Seng Index shows Hong Kong bottom with recent Sequential and Combo buy Countdown 13’s and reversal up
Shanghai Composite has not turned and hit a 3 week low overnight
FXI China/Hong Kong ETF I already have added this as a long idea, and it’s starting to turn up after buy Countdown 13’s, Setup 9
Chinese technology continues to exhibit widespread DeMark buy Countdown signals across both indices and individual leaders. While trend confirmation is still lacking, it is moving up in the right direction. Combined with improving Chinese PMIs, this region deserves increased attention after months of persistent underperformance. The markets have punished these stocks even as they aggressively invest in multiple AI models, not picking one but being part of all of them. The story could have China with several advantages. First, they have power available to power data centers, which can be built faster than in the US with no local government hurdles. Second, China’s open-source models are increasing in global use and are competitive with top US models, especially given token prices. The companies are also sourcing Nvidia chips with Chinese memory, which is a cost advantage. As seen too often China can operate at a cost level lower than anywhere in the world while offering token prices lower that will take share from US models. It’s at a time when US models need revenue to pay for the huge capex spending.
LLM token expenditure index shows price pullback – this is not good for US models but might be for China AI
For investors, the bigger picture is that China now has several credible frontier AI developers, not just DeepSeek. The companies to watch are:
| Company | Major Backers | Primary Focus |
|---|---|---|
| Z.ai (Zhipu AI) | Alibaba, Tencent, Xiaomi, Meituan, Qiming, government funds | Foundation models, enterprise AI, agentic AI |
| DeepSeek | Founder-funded plus recent strategic investors including Alibaba | Open-weight frontier models |
| Moonshot AI | Alibaba and major VCs | Consumer AI (Kimi) |
| MiniMax | Alibaba, Tencent and others | Multimodal AI |
Tencent is a game maker company that is just massive. One of the largest online companies in the world and has huge AI investments. The stock is a buy.
Alibaba is trading up 9% in the premarket this morning, as improving earnings expectations, optimism around artificial intelligence, and several company developments have boosted investor sentiment. They are playing the long game, investing in every aspect with AI – several of their own highly touted models as well as investments in some of the best LLMs. They also have a huge cloud business like AWS and online retail like Amazon. This stock has some risk as Anthropic accused them of copying AI code, appealing to the White House. I don’t think Alibaba will face a delisting or major problems from the US, as President Xi could also turn the screws on many US companies in retaliation. It’s down 50% from the highs and is a strong buy here.
Baidu has a broad business starting with a search model – similar to Google but also has been rolling out a large presence with autonomous taxis in China.
BYD is the best selling EV auto maker now in the world surpassing Tesla. They have vehicles that are extremely cheap to buy but have a very high quality product. They are moving upmarket with a new vehicle that recently received 65k orders. There is a clear reason why the US does not want to allow BYD in the US. They are now in Canada and Mexico so you might see one soon.
Xiaomi is a broad based company that is #3 in phones behind Samsung and Apple. They also have a huge consumer appliance business. They have started in the last few years a new EV auto business with incredible reviews and huge backlog. Watch any of the reviews and ask yourself if the European automakers are in trouble as well Tesla who they compete with in China. The stock is a buy.
JD is also one I would buy today as it trades in the US
Almost every major Chinese technology company has fresh Sequential or Combo Buy 13s. KWEB China internet also one I have been adding to as a new long is starting to turn after recent DeMark Sequential buy Countdown 13’s. If you can buy the local Hong trades shares of some that are not listed in the US, I would buy them all aggressively now. If not, buy KWEB in the US.
AI leadership in the US has been with semis
The last Big Picture interim note focused on US AI and its risks from last month. One of the risks was the concentration in memory price-sensitive stocks. This is the SMH-to-SPY ratio that shows extraordinary outperformance and now a reversal.
Tactical Watch List
Stuff we need to watch
| Theme | Trigger |
|---|---|
| Treasury Rally | Weak payrolls, cooler inflation |
| Oil Bounce | Hormuz escalation |
| Europe | Consolidation or continuation |
| China | Hang Seng confirms higher low |
| AI | SOX pulls back, regains leadership |
| Credit | HY and IG CDX spread breakout |
| Dollar | Yen intervention watch or Dollar strength continuation |
| Nasdaq | DeMark 13 resolves with decent pullback holding TDST |
Hedge Fund Telemetry Playbook
Let’s discuss probabilities. In recent days, I lowered the base case to 50% and set the bull and bear cases at 25% each, with Treasury rates rising, US-Iran hostilities continuing, and Crude prices increasing.
Base Case (50%)
Oil remains contained.
Treasury yields gradually decline.
European leadership continues.
US breadth broadens.
China stabilizes.
Bull Case (25%)
Treasuries rally sharply.
Fed turns more dovish.
China surprises positively.
AI spending reaccelerates.
Semis recover.
Bear Case (25%)
Oil rebounds on renewed geopolitical tensions.
Treasury yields remain elevated.
AI spending disappoints or slows.
Credit spreads widen.
Tariffs weigh on global growth again.
As always, I appreciate all the feedback and views.