To The Moon

The congressional midterm elections, the biggest political event in the United States this year, finally go to a vote this week. Trump has gone to extraordinary lengths ahead of the election, first capturing Venezuela's president and then assassinating Iran's supreme leader. He had hoped that these unconventional measures would free up more crude oil supply, push oil prices down and bring inflation under control. Instead, Iran closed the strait, which remains shut. Oil prices surged, and inflation began rising again.

Current market forecasts suggest a significant chance that Republicans will lose control of both the House and the Senate. If that happens, Trump will find it difficult to implement his policies over the remaining two years of his term, or will once again be drawn into protracted bargaining. That could reduce some of the uncertainty his readiness to act abruptly brings to world affairs and make markets more stable.

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How the Midterm Elections Could Affect US Stock Indexes

Recent reports that heavy AI spending has hurt the earnings of America's technology giants are hardly surprising. The Federal Reserve's rate hike has heightened concerns about their ability to service their debt. For now, though, these are concerns that can trigger a correction in richly valued stocks, rather than signs that their debt has become unmanageable.

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Today's AI bubble differs substantially from the dot-com bubble of 2000. Back then, few of the large technology companies were profitable, and many had little revenue to support the market's enthusiasm. Today's technology giants, by contrast, are investing in AI from a base of substantial revenue. As long as their core businesses remain healthy, they should be able to meet their interest payments. That makes a wave of simultaneous debt crises less likely and should limit the impact on US stock indexes. Technology companies in other markets that have little meaningful revenue are much more volatile, including those listed on China's A-share STAR Market.

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On the technical side, October's reputation for market trouble has lived up to its name again. The Nasdaq broke below the middle band of its Bollinger Bands two weeks ago, a level I had highlighted repeatedly. Readers who have followed my articles should have had time to put appropriate hedges in place. Nasdaq futures appear poised for further declines, but the fundamentals discussed above suggest that volatility remains manageable.

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The 20-month moving average, near 26,000, is a key support level for the Nasdaq. A sustained break below it would interrupt the long-term uptrend in US stock indexes and could even mark the start of a bear market. If that support holds and the index rebounds strongly, however, the uptrend would remain intact, creating an opportunity to buy at lower levels.

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The Search for a Bottom After Gold Breaks Support

On the final day of October, gold broke below the key 4,000 level and then fell sharply. The move went somewhat beyond my expectations. Although selling short-dated put options can still be profitable, the break below such an important level suggests that gold may have further to fall.

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Gold is currently being driven entirely by expectations for Federal Reserve rate hikes. If those expectations reverse this month and markets no longer expect a hike in December, gold could still stage a strong rebound. If expectations do not change, it is best to avoid becoming overly optimistic.