Episode summary
Bond Market About To Flip: A Major Shakeup Is Coming | Jim Welsh
The David Lin Report
· · 43 min · Hosts: David Lin · Guests: Jim Welsh
Summary
Jim Welsh argued that the market’s rebound on October 19 looks more like a dead-cat bounce than a durable recovery, because breadth remains weak and leadership is still concentrated in semiconductors and the MAG 7. He said the selling in chips reflects an unwind of an overowned but still fundamentally strong AI trade, and he expects SMH to eventually break below its prior low near 503, even if it can bounce first toward 7750 to 7800 on the S&P 500.
Welsh also said bond yields are nearing a top, even though he would not buy bonds aggressively right now. He expects Treasury yields to decline over the coming months, but he warned that a near-term higher high in the 10-year could still pressure equities. His view is built on technicals, sentiment, and the idea that magazine-cover level bearishness in bonds often appears late in a trend.
On the Fed, Welsh said he does not expect a hike in October but thinks a December move is more likely. He argued that AI spending and AI-related earnings are real, yet the adoption curve is slower than the market expects, creating a mismatch between capital outlays and near-term productivity gains.
Key takeaways
- Welsh thinks the current stock rebound is likely a dead-cat bounce because market breadth is weak and the equal-weight S&P is still soft.
- He expects semiconductors to remain volatile and ultimately believes SMH will trade below 503 again after its recent bounce.
- Welsh said Treasury yields are probably near a top, but the 10-year could still make a higher high before bonds finally turn up.
- He does not expect the Fed to hike in October, though he thinks a December hike is more likely.
- Welsh sees AI spending as real but says the productivity payoff will likely lag, making the AI trade vulnerable to disappointment.
Notable quotes
“I think so. If you look at market breath, which is one of the things I really focus on now, how many stocks are up versus down”
“I still believe we'll see SMH below the 503 level”
“for me the 10-year and the 30-year are nearing a high”
“I think one has to be more cautious”
How the episode opens
It's Monday, October 19th, and exactly 39 years ago today was another Monday of momentous importance. It was 1987, and on this day, 39 years ago, the Dow Jones crashed 22% in what was later cataloged in the analysts of financial markets as the 1987 Black Monday crash. Now, there is no market crash today, and in fact, stocks are up, rebounding from the losses last week.
The NASDAQ is up 1.4% intraday while yields rose. But so many of the market conditions today look yearly similar to what led to the 1987 Black Monday crash that it's hard not to make parallels. AI stocks look overvalued by many traditional valuation metrics and surging yields have lured many equities investors into bonds, which is why bonds have been catching a bit all throughout October.
Recently, these AI boom fears are back in the headlines as chip stocks crack. The Philadelphia Semiconductor Index or SOX ETF had its longest losing streak since October 2008. So, is today's market bounce a sign of a recovery or is the AI trade already breaking?
It all hinges on interest rates, says our next guest, Jim Welsh, founder of Macro Tides. Right now on Koshi, traders are predicting a 14% chance that the Fed will hike rates by 25 basis points next week in October. A $50 trade could yield $336 if you're right and you agree with those odds.
Our next guest will give his outlook, so stay tuned. This video is sponsored by Cowi, the largest prediction market in the US. Unlike a sports book, you're trading peer-to-peer on real world events from economic data to political outcomes and the price moves based on public opinion, not a house.
Go to the link in the description down below or scan the QR code here and use my code lin.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- bond market reversal
- semiconductor stocks weakness
- federal reserve inflation battle
- ai boom risks
- global bond selloff
Watch the episode
Watch “Bond Market About To Flip: A Major Shakeup Is Coming | Jim Welsh” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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