The Market Outlook for the Week Ahead, or The Dog Days of Summer

What was the most important news event last week?

No, it doesn’t have anything to do with Jeffrey Epstein, the President’s visit to the Federal Reserve, or the Tesla (TSLA) earnings.

It was the market reaction to the earnings of homebuilder DH Horton (DHI) that took the shares up 20%. The earnings were good in this sector, beleaguered by high interest rates, slack demand, and sky-high tariffs for imported materials. But they weren’t that good. I had a LEAPS all written up to send on the announcement, but the stock ran away too fast.

It was the opening shot of the next leg in this bull market. Although the Federal Reserve is not likely to cut interest rates until year-end, or even next May, once the tariff mess becomes more transparent. But sectors will front-run fundamental developments six to nine months in advance, i.e., right now. That opens up a long-shut door for all the myriad interest rate plays, including not only the homebuilders, but also bonds, financials, small caps, REITs, and the ecosystem of all the downstream real estate plays like carpet Mohawk Industries (MHK), paint Sherwin-Williams (SHW), and Home Depot (HD).

The Fed has been tight and interest rates high for this entire post-pandemic 40-month bull market. This is about to end. Such a new leg could take the bull market well into 2026.

Not that the market isn’t clamoring for some type of summer correction. The Volatility Index hitting the $14 handle says it all. It’s a good rule of thumb that when ($VIX) gets this low, you want to ring the cash register and cut all your short-term risk to the bone.

Not only is the market currently dead as a doorknob, but there’s absolutely nothing you want to do. The risk/reward of entering a new position here is very high. Look at my own Mad Hedge AI Market Timing Index at 77, and it tells you that the probability of losing money on your next trade is a nosebleed 77%.

You know that when money-losing tech companies rise by 10X, it’s time to start edging towards the exit. Margin loans have rocketed by an incredible 20% in only two months. Robinhood (HOOD) clients have led the charge. High net worth individuals and institutions are hugging 90-day T-bills. I saw it all in 1999. Parabolic moves never correct by moving sideways.

In some ways, this time it’s different. It’s worse. In the year 2000, the top ten stocks accounted for 20% of total stock market capitalization. This time, it’s 40%. We haven’t reached the stage where secretaries are raising $50 million on a one-page business plan…yet. Give it time.

Yet, with trillions of dollars of borrowed government money for economic stimulus and stock buy-backs about to hit the market, it is not exactly a market you want to sell short, either. It’s the kind of spending you normally only saw during the Great Financial Crisis or the Great Depression, except that this time there’s no Depression or Crisis.

AI companies, especially, are receiving massive subsidies, even though they never asked for them and don’t need them. Expensing of capital spending in the year it is incurred, a creation of the new budget bill, is the gift of the century for big tech. About 46% of all US. Capital spending is by AI companies. No wonder their stocks have gone straight up!

What is next? Are we going to bail out the banks again, too?

Goldman Sachs (GS) put out an interesting report last week telling us that speculation is approaching a 24-year, Dotcom Bubble top (see chart). Can speculation continue? Absolutely, it can and did for years during the 1990s. Woe to the hedge fund that sold into speculative bubbles too early.

Long-term, AI is still the driver. In that respect, it feels like it is 1995 all over again. Well, maybe 1996.

 

If the Stock Market Keeps Going Up, This is Why

 

My July performance is running hot again with a +5.89% gain, taking us to new all-time highs on all metrics. That takes us to a year-to-date profit of +51.06%. My trailing one-year return rose to +101.88%. That takes my average annualized return to +51.53%, and my performance since inception finally topped +802.95%. These are all non-compounded numbers.

It was another dead week of desultory summer trading. I am keeping my positions at a minimum, keeping lots of dry powder for the next market selloff.

That leaves me 70% cash, 10% short, and 20% long. With the Volatility Index hugging the $15 handle, we may be entering a trade drought. My only trade for the week occurred when I used a rally in Tesla (TSLA) to add a short position there. It’s been a good week to sit and wait for the profits to come to you on your existing positions.

Some 63 of my 70 round trips in 2023, or 90%, were profitable. Some 74 of 94 trades were profitable in 2024, and several of those losses were really break-evens. That is a success rate of +78.72%.

Try beating that anywhere.

Speculative Activity Hits the Highest Level in History, greater than the Dotcom Bubble and the pre–Great Financial Crisis crash, says Goldman Sachs. But the latest advance for equities has come with another meme stock frenzy, causing many observers to worry it signals a blowout top is near. That’s why I am running 70% cash in my trading portfolio.

Stock Market Momentum is Stalling. U.S. stocks are trading near record highs heading into the thick of the second-quarter earnings season, but with markets historically expensive and reliant on the performance of tech stocks, some investors are starting to embrace a more cautious outlook.

The Largest Railroad in History may be the result of the Union Pacific (UNP)/Norfolk Southern (NCS) merger, worth $200 billion.  A merger would enable companies to ship coast to coast without having to interchange and could lead to more efficient loads and greater profit. It’s a distillation of 200 years of M&A that took the US down from 5,000 railroads to one. It will also be America’s first true Transcontinental railroad company.

US Fertility Hits All-Time Low, according to the CDC, at 1.66 children per couple, well below the 2.18 replacement rate. This bodes ill for the economy and financial markets as it means fewer future consumers and investors. But the hit won’t come for two decades. Here’s the proof: My mother had 20 grandchildren, while I have only two.

Tesla Drops a Bomb, with Q2 earnings out, and it couldn’t have been worse. On September 30, the company lost most of the green credit it sells to other car companies, the source of $2.7 billion in revenues over the last decade, thanks to the new Tax Bill. Tesla posted the worst quarterly sales decline in more than a decade. Almost every metric posted large YOY declines. Revenue fell to $22.5 billion for the April-June quarter from $25.50 billion a year earlier. Adjusted profit per share of 40 cents lagged the consensus of 43 cents per share. Avoid (TSLA).

New Home Sales Come in Weak, as builders’ heavier use of sales incentives failed to motivate buyers put off by high costs. Contract signings on new single-family homes increased 0.6% to an annualized rate of 627,000 last month. June’s results show US homebuilders are struggling to offset an ugly mix of high prices and borrowing costs by offering incentives and subsidizing customers’ mortgage rates, which risk eroding profit margins.

DH Horton Rockets 20% on Earnings Beat, as buyer incentives sustained home sales amid high interest rates and rising costs, sending shares of the homebuilder up more than 20%. The sector is grappling with weakening consumer sentiment, prompting builders to offer incentives such as mortgage rate buydowns and smaller, more affordable homes to stimulate demand. Interest rate plays are moving. Buy (DHI) on dips.

Existing Home Sales Drop 2.7% in June to an annualized rate of 3.93 million units. Sales are unchanged YOY on a closing basis. Some 1.35 million units are for sale, up 15.9% in a year, a 4.7-month supply.  The median price of a home sold is $435,000, up 2% YOY. Houses are spending 27 days on the market, with first-time buyers at 30%. All cash buyers are at 29%. High mortgage rates are still killing this market. Some 87% of current mortgage holders have interest rates lower than current levels.

Weekly Jobless Claims Drop to Three-Month Low, down 4,000 to 217,000. The lack of material labor market deterioration likely gives the Federal Reserve cover to keep interest rates unchanged next week amid signs that aggressive tariffs on imports were starting to lift inflation.

Meme Stocks are Back! OpenDoor rocketed 235% in a week and Kohl’s (KSS) 38% today. Traders are targeting the most heavily shorted stocks in the market, with Kohl’s at 49% of open interest. This is a GameStop (GME) replay from 2021. Watch, don’t play.

Nikkei Rockets on Japan Trade Deal, which dropped tariffs on Japanese cars to 15%. The index rose by 4% and Toyota (TM) popped 15%. Detroit says the US gave away the farm, allowing 100% Japanese content cars into the US too cheaply. (GM) dropped 10%. Avoid US car companies.

 

My Ten-Year View – A Reassessment

We have to substantially downsize our expectations of equity returns in view of the election outcome. My new American Golden Age, or the next Roaring Twenties, is now looking at multiple gale-force headwinds. The economy will completely stop decarbonizing. Technology innovation will slow. Trade wars will exact a high price. Inflation will return. The Dow Average will rise by 600% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old. My Dow 240,000 target has been pushed back to 2035.


On Monday, July 28, at 8:30 AM EST, the Dallas Fed Manufacturing Index takes place.

On Tuesday, July 29, at 7:30 AM, the JOLTS Job Openings Report is announced. Two days of the Fed meeting begin.

On Wednesday, July 30, at 7:00 AM, we get the Federal Reserve Interest Rate Decision. We also get the advanced read for Q2 GDP.

On Thursday, July 31, we get Weekly Jobless Claims. We also get the Core PCE Price Index and inflation indicator.

On Friday, August 1, at 8:30 AM, we get the Nonfarm Payroll Report for July.

As for me, I was recently in Los Angeles visiting old friends, and I am reminded of one of the weirdest chapters of my life.

There were not a lot of jobs in the summer of 1971, but Thomas Noguchi, the LA County Coroner, was hiring. The famed USC student jobs board had delivered! Better yet, the job included hours at night and free housing at the coroner’s department.

I got the graveyard shift, from midnight to 8:00 AM. All I had to do was buy a black suit from Robert Halls for $25.

Noguchi was known as the “coroner to the stars,” having famously done the autopsies on Marilyn Monroe and Jane Mansfield. He did not disappoint.

For three months, whenever there was a death from unnatural causes, I was there to pick up the bodies. If there was a suicide, gangland shooting, or horrific car accident, I was your man.

Charles Manson had recently been arrested, and I was tasked with digging up the victims. One, cowboy stuntman Shorty Shay, had his head cut off and neatly placed between his ankles.

The first time I ever saw a full set of women’s underclothing, a girdle and pantyhose, was when I excavated a desert roadside grave that the coyotes had dug up. She was pretty far gone.

Once, another driver and I were sent to pick up a teenage boy who had committed suicide in Beverly Hills. The father came out and asked us to take the mattress as well. I regretted that we were not allowed to do favors on city time. He then said, “Can you take it for $200?”, then an astronomical sum.

A few minutes later found a hearse driving down the Santa Monica Freeway on the way to the dump with a double mattress expertly tied on the roof with Boy Scout knots with a giant blood spot in the middle.

Once, I was sent to a cheap motel where a drug deal gone wrong had produced several shootings. I found $10,000 in a brown paper bag under the bed. The other driver found another ten grand and a bag of drugs and kept them. He went to jail. I didn’t.

The worst pickup of the summer was also the most disgusting and even made the old veterans sick. A 300-pound man had died of a heart attack and was not discovered for a month. We decided to each grab an arm or leg and all tug on the count of three. One, two, three, and all four limbs came off!

Eventually, I figured out that handling dead bodies could be hazardous to your health, so I asked for rubber gloves. I was fired.

Still, I ended up with some of the best summer job stories ever.

Good luck and Good Trading,

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader