CIO reveals two WILDCARDS that could impact the market

Key Concepts

• Deleveraging: The process of reducing debt.
• Race to the Bottom: A situation where prices or quality are driven down to the lowest possible level.
• Computer-Driven Trading: High-frequency trading executed by algorithms.
• AI Trade: Investment strategies focused on artificial intelligence companies.
• Santa Claus Rally: A historical tendency for the stock market to rise in the last week of December and the first two days of January.
• Snapback Rally: A rapid increase in prices after a significant decline.
• Liquidity Crunch: A situation where there is a shortage of cash or easily convertible assets.

Market Outlook and Wildcards

Keith Fitz-Gerald identifies two primary "wildcards" impacting the current market:

1. Unknown Deleveraging: The extent to which deleveraging (debt reduction) is still occurring within the financial system remains an unknown factor. This uncertainty is linked to the potential for computers to drive prices "to the bottom."
2. Federal Reserve (Fed) Commentary: There is a significant risk of a Federal Reserve official making an ill-advised statement, particularly during a shortened holiday week, which could negatively impact market sentiment.

Computer-Driven Trading and "Race to the Bottom"

Fitz-Gerald explains the "race to the bottom" in technology companies as a phenomenon driven by sophisticated, highly leveraged computer trading. He notes that in recent weeks, a substantial portion of trading volume (70-90%) has been computer-driven. This creates a "ping pong" effect at high speeds. While he believes this trend is nearing its end, the exact amount of leveraged positions still in the system is unclear.

Microsoft as a Buying Opportunity

Regarding Microsoft, Fitz-Gerald views its recent price movement as a "large-scale doubt" and a potential buying opportunity. He argues that investors are making a mistake by backing away from the AI trade, similar to how they reacted to concerns about server capacity in the past. He highlights that Microsoft has historically "sourced all of the shorts," implying it has the ability to overcome negative sentiment and price pressure.

Santa Claus Rally and Market Behavior

Fitz-Gerald believes the current market behavior is consistent with the conditions for a "Santa Claus Rally." He anticipates a run-up in prices towards the end of the year, potentially seeing an 8-10% "snapback rally." He advocates for an offensive investment strategy given this outlook.

Stock Recommendations and Watchlist

• Alibaba: Fitz-Gerald currently owns Alibaba and likes the stock.
• Zelenskyy and Zscaler: He also likes these companies.
• Dell: He is watching Dell most carefully. If Michael Dell continues to guide earnings higher into 2026 and 2027, it would affirm the demand for chips, datasets, and servers, reigniting positive market sentiment.

Liquidity Crunch Between Big Tech and Cryptos

Fitz-Gerald agrees with the concern that money flowing out of cryptocurrencies could create a "liquidity crunch" that impacts big tech companies. This suggests a potential interconnectedness where a downturn in one asset class could negatively affect another.