Tech is stretched. Market Review

A Note From Hans

Quick review of the day: the market is still leaning hard on technology leadership. That is not automatically bad. Strong leadership can persist longer than people think. But when the rubber band gets this stretched, you stop pretending it is business as usual.

DataTrek flagged the chart below: XLK’s 100-day trailing relative return versus the S&P 500 is now around +26.7 percentage points. That is above their 3-standard-deviation line and one of the more extreme tech leadership readings since 1999.

The only bigger spike on this chart was March 2000 at +42.3 points. No, that does not mean tomorrow is March 2000. Markets are not lazy enough to repeat on command. But it does mean tech is doing a massive amount of the index’s heavy lifting.

That matters for options traders because concentration cuts both ways. When leadership is narrow, albeit not as much as 2 weeks ago, premium can look friendly right up until one crowded trade starts moving against everyone at the same time.

Today’s market wrap added the missing piece: this was not just a “tech is extended” day. It was a rates day. Warsh’s first Fed decision landed hawkish, with the market hearing the renewed focus on price stability loud and clear. Hawkish isn't super surprising, but it was not what the market wanted to hear nonetheless — it means a higher likelihood that we could be looking at a rate hike this year. Remember when cuts were a foregone conclusion, including by yours truly? Iran and the AI buildout happened.

That is the more important read-through for tomorrow. Concentrated tech leadership can keep the index levitated, but if rates start leaning on duration again, the same crowded leadership can turn from support into air pocket. Add triple/quad witching into the mix and you have the kind of tape where round numbers become magnets, then trap doors.

One more thing I am watching: open-source models keep getting better. At some point, that starts to challenge the clean “model maker wins everything” formula. I am seriously starting to wonder what happens to OpenAI-style economics if the market keeps racing toward cheaper and cheaper compute.

To be clear, that is not bearish on AI. It may be bearish on the simplistic version of the AI trade. If model capability commoditizes and compute costs fall, the value may keep spreading outward — into infrastructure, power, industrials, financials, energy, cooling, capital equipment, and the companies that use AI to widen margins.

That is more fuel for the broadening trade. Look at industrials and financials today: both acted like they are trying to break out, not roll over. That is exactly the kind of market behavior I want to see if leadership is expanding beyond the usual narrow tech complex.

So the playbook is simple:

• Respect the trend. Tech leadership is still leadership.

• Respect the stretch. A 3-standard-deviation move is not where you start getting heroic with size.

• Watch rates first. If front-end yields and the dollar keep rising, tech leadership gets harder to trust intraday.

• Watch the broadening. Industrials and financials breaking out would say this is not just a one-lane AI trade anymore. I did pick up some low Delta QQQ puts today...haven't done that in some time.

• Let the Stability Gauge do its job. Green means participate. Yellow means tighten up. Red means stop being the Thanksgiving turkey.

Trade smart, stay hedged.Hans

The Chart

Hans’s Take

This is not a “sell everything” chart. It is a “stop pretending concentration risk is invisible — and stop assuming AI value only accrues to model makers” chart.

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