I have been a little absent from the article writing as I have been trying to get projects done on the ranch before the scorching Texas heat arrived (and it has) and before I began some needed parts replacement on myself which included a new right hip. A buddy told me that I am like the 6 million dollar man with my new parts but unfortunately I put them into a $20 dollar body!

Listening to podcasts while riding around on the tractor or reading a financial post while recovering from surgery I couldn’t escape some mention of the word “Bubble.”

So lets talk bubbles…. According to Lawrence McDonald back in 1999 it was mentioned 6,800 times before the DotCom crash and 6,850 times before the Global Financial Crisis of 2007. Strangely, the best AI could tell me for 2026 is that it has appeared in roughly 50 to 70 major headlines and newsletters. My gut says if I were to include 2025 we are probably as close as 1999. Interesting trivia, but what do we do with that information….

I have followed Jeff deGraaf from Renaissance Macro since his days at Lehman. I think I gravitate towards Jeff’s analysis because 1.) its probability based 2.) it’s usually clear and concise and 3.) he usually defines some tenet where the risk probability changes an expected outcome which is similar to my approach. In a recent podcast Jeff outlined 12 characteristics of Bubbles….

There is some sage advice packed in there and too much for me to cover in a single note but let’s start with #5 - Bubble Signals calibrate risk budgets and #4- Signal is for sizing not shorting . The great Bernadette Murphy once said in a meeting if I recall correctly… Calling tops may be a fools errand but having a clear exit and risk-management strategy is the hallmark of a resilient portfolio. When signals begin to show themselves it is time review the risk management plan and determine now before conditions deteriorate (and emotions become elevated) the signals could potentially change your exposure. That could be adjusting portfolio/system/asset allocations, (however you manage your portfolios,) changing bet sizing etc.. If you have already built your risk management into your trading/investing then a quick wellness check is never a bad idea to confirm or NOT as James Tolkan aka “Stinger” from TopGun said…”“Your ego is writing checks your body can’t cash.”

Am I boldly calling a Top? No, I am not that good…. I am however looking at the weight of the evidence… If I look at my cloudy crystal ball it is telling me that the patient finally has some symptoms of a fever. One of my clues is that some of my trading systems (variations of mean reversion) that were doing well last year are not performing well this year even though the conditions in which those system have historically done well are still in place. Some of those conditions are Earnings & Revenue Surprises (FactSet: For Q1 2026 (with 91% of S&P 500 companies reporting actual results), 84% of S&P 500 companies have reported a positive EPS surprise and 80% of S&P 500 companies has reported a positive revenue surprise.) In previous markets when we had price action like this and the systems waned for more than a quarter - the market corrected more than 13% in the following 90-120 day time frame.

How about trading activity - The Semiconductor group has been on fire. I heard pundits saying this weekend that they are rolling over… Maybe….

But who is to say that can’t go higher…. Here they were in ‘99 into 2000

This brings us to the # 7 - The asymmetry that destroys early shorts inverts in 6-12 month window and #11 - The win is in the derisking sequence, not calling the top.

If Semi’s do even half as well as they did in 1999 then there is still a lot of meat on the bone. However, if this leadership rolls over and there is nothing rising up to take its place then having a plan (that you have confidence executing) in place can help reduce the noise.

I think Jeff’s #9 - 1. Scale, don’t flip: Binary positioning gets punished in these tapes - is the way to play both the long and the short side. There is not asymmetric risk yet on the shorts. Yes, if something is breaking down in the market - the market is punishing it beyond the normal range (Factset: Companies that have reported negative earnings surprises for Q1 2026 have seen an average price decrease of 4.9% two days before the earnings release through two days after the earnings. This percentage decrease is much larger than the 5-year average price decrease of 2.9% during this same window for companies reporting negative earnings surprises.) However, until that risk/reward changes scaling some shorts or using some optionality to adjust risk is prudent.

Remember #8 - Exit on the tape, not valuation.

Unfortunately, that biased and inaccurate perception can bleed into other areas of our lives for example, like our perception when reviewing markets. We can go from Euphoric to Despondent quickly based on our portfolio’s performance in blink of an eye especially when the runway of returns is getting shorter over our lifetime.

So, being in a reflective mood I turn to my now almost daily task manager (my favorite AI Du Jour) and ask it summarize February to see if I have missed any major events outside of news that could be affecting markets. According to AI…

In 2026, “the Age of Aquarius reaches a significant milestone with a major, intense Solar Eclipse in Aquarius on February 17, 2026. Following Pluto's move into Aquarius (2023-2044), this year acts as a critical turning point for collective, technological, and personal transformation. The period emphasizes breaking old paradigms, embracing innovation emphasizing, networking, scientific breakthroughs, environmental awareness, and breaking down traditional structures in favor of community.”

Of course, how could I miss the Age of Aquarius and Solar Activity! I love many aspects of AI but I think I am going to stick to the data on this one… While AI has certainly been breaking some paradigms and some of the other themes have certainly been true the last few years, perhaps the ides of March have turned the tides so to speak in the short term.

The market has been rotating back and forth between High and Low Beta since early February. The chart below is a take on Gary Anderson’s Janus Factor (https://cmtassociation.org/wp-content/uploads/2025/08/2003DowAward.pdf)

The data is broken into two categories those stocks that exhibit strong offense (those stocks perform well in rising markets and strong defense (those stocks that perform well in falling markets.)

The lighter green line is Strong Offense. You can see it has been struggling to advance where as the dark green line Strong Defense has been rising suggesting that at least for now the market is more inclined to rotate to or lean into defensive stocks even though their valuations are high and their earnings have been lackluster. While on the surface that doesn’t sound great it is actually a good sign considering the hand the market has been delt with i.e. Middle East Conflicts, rising Oil, and rising unemployment.

With valuations at these levels and that kind of news it would have been a reasonable guess to suspect the market would be down 10-12% off its highs and its not…. Now, that not to say it won’t be but if you started to play a little defense back in February as Growth to Value reached another extreme as it did back in late 2021 early 2022 discussed previously if would have muted the volatility substantially in your portfolio.

Most of the risk off lately has come from the leaders i.e. Mid/Small Cap, EM, and EAFE

Again, not surprising considering the current news basket. The percent of G7 countries trading above their 200DMA is in normal correction territory.

The G20 which is more volatile is worth keeping an eye on because if this doesn’t lead in a market rebound then it would suggest more risk off still to come.

Employment is my biggest concern so far as bonds seem to be suggesting is a continued rise in unemployment is on the horizon. So far the market is looking past this but February’s number was not encouraging and the length of trend could suggest a cycle end in late Q3 which would give some additional downward pressure to the normal seasonal weakness.

The other market that has been in stress is the private credit market and it has reached some critical junctures in both the price of the big players as well as the underlying credit. This market has locked up and if the pressure to unwind continues this will have a greater impact on the market over the next quarter.

So where do we stand…. Moxie (original below) is one of my earliest trend models that I made. Prior to 1997 most everything I looked at was a fundamental or economic based model in my desire to put rules, constraints and/or parameters around portfolio risk. Pure momentum was more of an afterthought then an actual input. This simple model was the impetus in my quest to build robust quantitative models that could help me measure not only the fundamental risks of the market but the technical risks as well. It has been an adventure that I continue today and Moxie has been modified over the years. There are no perfect models and AI wont change that either but they can be a more consistent way to measure and quantify risk and return. The original model below is currently Neutral.

Circling back to biases… Much of my investing or trading is now done systematically so the rules are the rules and consistency is the key. However, if you are a discretionary trader or investor, when a market becomes trendless, at an inflection point or deemed neutral at best when looking at the data, I make it force my hand. Most of my models are neutral which means I stay on defense and look for the market to force me to buy or raise additional cash if the risk to reward has changed dramatically. At the market level it could be by reaching a predetermined level both up and down. On a stock level it could be at a valuation that my Buffet inspired “margin of safety” is too compelling not to buy. For now, none of those conditions exist so patience becomes the order of the day. That can be hard for some because if you use the market as your proxy for Vegas (excitement) you will learn you are not the house the hard way.

But what if it is….

For almost a hundred years they said that no one could ever break the 4 minute mile until Roger Bannister did it in 1954 with a 3:59.4. Its been 25 years since the last world record was broken with a time of 3:43:13 by 26 year old Moroccan runner Hicham El Guerrouj in the 2000 Olympics. However, on February 1st, a 16 year old New Zealander Sam Ruthe just set the U18 world record with a time of 3:48:88.

What does this have to do with markets? Stay with me I am getting there… Profit margins of the market from basically the 1700’s to the late 1970’s ranged around 4-6 percent over time. Its been postulated that the 10% annual average of the S&P 500 comes from 6% earnings growth, 2% dividends and 2% in risk premium. Like running the mile, for many years it was assumed that the only important factors was miles production, how many more miles can you run in your training. Changes to the equipment, types of training and diet were minimal and assumed to be factors that were secondary. Then comes along Bannister a med student who began to utilize a scientific method of testing and training. He initiated both low volume and high-intensity interval training method which was different than the status quo of high-mileage training. He optimized his training times and used his team mates to learn how to manage and pace his energy expenditures. Each of those he attributed along with changing technological advances to helping overcome an obstacle presumed to be fixed in stone…. much like S&P profit margins… to wit…

Like the mile world record, the pace of improvements in the Profit Margins where basically stagnant until the early 1990’s. Then this little thing called the World Wide Web comes along and not only does it create efficiency, increases in productivity, it creates businesses that are less capital intensive and faster growing. One measure from the BEA is TFP - Total Factor Productivity and they estimate that there has been e a 35% increase in labor productivity and a 45% increase in total factor productivity since adoption into the workforce. The U.S. service sector has grown from less than half of GDP after World War II to over three-quarters of the economy today. Private service-producing industries' share of GDP increased from 47.8% in 1947 to 61.2% by 1987. By 2021, the services sector contributed approximately 77.6% to the U.S. GDP, representing a dominant share of economic activity.

Do those increase in profit margins reflect higher valuations? At the end of 2025 the average P/E ratio for Communication Services was around 19.9, 28.5 for Consumer Discretionary and 35.4 for Broad Business & Consumer Services companies. Where as the Manufacturing sector sans Semiconductors ranged between 19 to 23. The average profit margin of services sectors in the S&P 500 were between 10-12% (with a much larger range) and manufacturing were 9-11%. So, if those sectors with the highest margins, fastest growth and now contributing a larger share of our GDP make small incremental changes, does make sense to use the same scale of valuation we have used for the last 100 years?

What if we convert the metric from PE to PEG and look at the Mag 7. Not as egregious as we might think. Now in fairness the rate of growth is slowing for the Mag 7 but is still much higher than the average and the scale is incredibly large.

So how do we reconcile or perhaps now value a market that has a median CAPE Ratio that before 1992 averaged 14 and spent 19% of months in recession with one that averaged a CAPE Ratio of 27 and 8% of months in recession.

Well, we have to acknowledge the activity and changes in governmental spending as well as the level of Fed intervention but even accounting for those, the level of the plateau has shifted so therefore our level of expectations needs to evolve. Does it mean that stocks avoid gravity and the business cycle - no but the level of the floor and ceiling have changed with a changing architecture. So, do I think we throw out the wise words of Sir John, no I do not because there are behaviors like fear and greed that have not changed but I do think we have to acknowledge when the conditions of the field in which we play have changed and are different this time.

Yes, Markets are not cheap…. and looking at GMO’s 7Y Asset forecasts it says we should steer clear of US Large and Small and focus purely on Value with an emphasis on Deep Value.

However, These same expectations in 2020 would have left a lot of money on the table over the last 5 years. I am not knocking GMO as long-term valuations do matter and as an input can be helpful but…..structural changes do happen to business which is then reflected ultimately in the market.

Same goes with S&P Forward P/E Ratios and the markets subsequent returns. Looking at a single point in time has its issues as well. However, think of it like in the football analogy of the market being in the Red Zone. You can still score but it is more difficult and might take new players or new plays. Think of these indicators as useful to let you know that you have to start planning for when to use your special teams!

Another Headline - The market is too concentrated

And yet according to Barclays:

When you break out the data: when EPS is rising and expectations are positive the forward returns are inline with historical averages. Currently on a global basis expectations are still positive.

A key item to watch then is how does the market react to revisions as so far the market as not paid attention….

Another Headline: International Markets are cheaper so move out of the US…. Yes International markets are cheaper but look at the difference in earnings contribution is in the US versus other markets.

Sell Strong performing Assets:

Maybe not so fast… this take from Citi:

“Many of the best performing assets continuously trade at a premium valuation for years as they scale, grow, and compound into their previously lofty expectations that come to life through high multiples. Alternatively, assets perceived as “cheap” can remain at a discount for years due to broken business models and out-of-favor industries. In fact, if an individual began investing 15 years ago in the three lowest multiple sectors of the S&P 500 at the start of every year just to “buy low,” that investor would have underperformed the owner of the three highest multiple sectors nearly every year and by a cumulative 105% by the end of 2025. Investing for “value” in discounted companies or sectors has not worked sustainably since before the Global Financial Crisis.” Citi-2026 Q1 Macro Investment View

Another sports analogy: I think we are in the late innings of a baseball game and the returns of the last few years have put us ahead so its wise to start to at least plan on how you will play some defense. In my case, I am starting (key point - starting) to shift to my Will Rogers Defense which is that “I am more concerned about the return of my money and less about the return on my money.“

“Tip of the Week”

I have been getting questions about tips or “tricks” I use to monitor the markets for changes so I thought I would include a brief idea or technique I use in my process.

First there are no Holy Grails in market techniques but as Mark Twain said ““History Doesn’t Repeat Itself, but It Often Rhymes” so we look for evidence that we can measure to give us a heads up or clue that things may be changing. While I like subjective analysis I try and find tools that allow me set parameters that can alert me to when conditions change.

So, the last question I received which I thought was very relevant to the current market situation was “How do you know if the outperformance of the MSCI EAFE this last year will last?”

Lets look at the past first… The last major outperformance of the EAFE over the S&P 500 (substantially more than a year) was from the Tech lows in 2002 to the middle of 2008 (there was a brief small run in from late 2012-2013 and late 2016 to early 2018 but the relative performance over rolling 3 year periods was marginal.)

Below is the weekly EFA-ETF chart with a relative strength line vs. the S&P 500 and a measure of that 26 week momentum (Stochastic Momentum.) When the Relative Index Comparison (RS Line) is rising the EFA is outperforming and vice versa heading lower underperforming. Also included is a 26 Week RSI (Relative Strength Index) which is just an internal measure the price action of EFA itself not compared to another security or index. I use the RSI not as a measure of “Overbought or Oversold” but as a measure of the markets temperament or disposition. A market that remains above 50 in pullbacks tends to continue its dominance.

How can we use these two simple tools to give us some guidance: 1.) The comparative relative Strength is now rising 2.) RSI is showing some tenacity and 3.) SM is still rising where as previous peaks in stochastic momentum usually coincided with peaks in relative strength. Both of these can be coded to alert to changes in their conditions.

I recently saw a version of the chart below (with apologies to the original poster for no attribution as don’t have the original to do an image search) that shows the consecutive positive years of Price returns since 1926. The story suggested that we were entering the danger zone as we were entering the 4th year of positive returns so far….

However, when we look at the Total Returns of the index we see that the runs can be much longer. If you have ever played red/black in roulette you know that those runs can go a long time before they reverse. It also usually doesn’t pay to Martingale the bet size - I don’t care what the recent episode of Landman showed where Ali Larter’s character takes the Casino for a few hundred grand after a run of losses!

So, the warning is 1.) momentum runs can go further than you think - remember Keynes “The market can remain irrational longer than you can remain solvent” and 2. ) stay in the game but perhaps adjust your weightings (betsize) on positions where their relative momentum begins to fade. This is the time when you better a.) measure and know your overall risk exposure and b.) have a plan or mechanism to reduce risk and exposure. Don’t wait to find out where the exit door is to the movie theater after its already on fire…

What does that have to do with an overweight index….? Meb Faber posted on Linkedin the annual Spread of differential between the S&P 500 Cap Weight vs the Equal Weight and I thought it would be interesting to see where we where not in consecutive runs but in relative extremes. If you believe in mean reversion (and you had better say yes if your are a fan of Markowitz’s efficient frontier) than perhaps we have reached an extreme in the relative underperformance of the Equal Weight index. https://www.linkedin.com/in/mebanefaber/

Why pay attention to the spread? Well the Mag 7 are showing some signs of weakness relative to the S&P 500. It may be temporary but history shows that after three years of outsized returns and institutional overweight’s the out flows are becoming increasing larger as they move to market weights.

And the performance weakness relative to the Equal Weight index is even more punctuated. From an allocation and position standpoint it may not be the end of the MAG7 run but it does suggest based on flows that risk/return profile of being overweight is no longer favorable and suggests at most being equal weight to the benchmark.

Asset Allocations

In this note I am introducing one of the Asset Allocations that I ran managed previously for advisors who wanted an “all-in-one” low cost option. This is the Size & Style portfolio which consists primarily of Vanguard ETF’s because of their low cost and low tracking error. The portfolio allocations are broken out into 6 risk allocations (excluding the all fixed income) from Conservative to All Equity.

Benchmarks:

The benchmarks are fixed to the middle of each of the risk profile ranges for equity and fixed income weights. This allows attribution comparisons to see if changes to the asset allocation (i.e. over/underweights) were positive or detrimental to the over all portfolio returns and risk expectancy.

Here is my CYA….These allocations are for educational purposes only!!

Size & Style Allocations:

The changes from last quarter are as follows:

Reduced exposure of Large Cap broad market and Large Cap Growth with some of the reasons cited previously.

Increased exposure to Large Cap Value and International ex US.

Reduced Tactical Gold Exposure.

In future notes I will cover some of the process I use to rank and weight the holdings within the allocation including what I call VARS which is a volatility adjusted relative strength rank which differs from the usual Alpha calculation.

And…. since I paraphrased the title, I have to give credit to Frankie Vali and the Four Seasons “December 63 - Oh What a Night” which came out in 1975 which was also a great year for the S&P 500 (+31.5%.) However, lets not skip the original title (not version) of “Oh What a Night” by The Dells which came out in 1955 which was also another great year of the market (S&P 500 +26.4%.)

While some may not be impressed with the 17.9% return of the S&P 500 for 2025 it comes on the heels of 25.02% in ‘24 and 26.29% in ‘23. If that didn’t impress or surprise you how about the fact that for the first time in a long time the majority of Wall Street Analysts were correct/close in their forecasts! It definitely surprised me!

The following chart is more the norm… For example, most strategists expecting a lackluster 2023 only for it to rise as forementioned 26.29% in 2023

Or like their forecasts for 2022…. where they were quite bullish in a year that ended down -18.11%

So what do Strategists think about 2026?

When I see them all agree it makes me think about Bob Farrell’s rule #9…

9. When all the experts and forecasts agree – something else is going to happen.

This doesn’t necessarily mean the market will go down but it does suggest the path will not be as expected.

Bob Farrell's 10 Rules

The moral of the story is that while it is entertaining to read the Strategists forecasts their predictive ability as the chart below shows…. is marginal at best.

So as the Jerry Maguire movie quote goes…”Show me the money” or in our case follow the money!

Contrary to most pundits it was not just an “AI” market but a fairly broad based rally with most of those non AI (but many who benefitted from AI) returns played catch up in the second half of the year. AI did play a big part as can be seen in the returns of the Tech Sector but most sectors participated as well except for the usual yield plays of Staples and Real Estate.

The question I have been getting asked most often is AI in a bubble… and if we use the ‘94-2000 Tech Bubble period as our definition than I would lean towards no but I will delve more into that in another note. I can tell you AI is continuing to surprise me in some unusual ways…. I can take an image from the internet, dump it into GroK or Gemini and within a minute or two have a 95% ready to go GCode to 3D print or run a CNC Plasma. This can cut hours/days off of design and fabrication time. We are just beginning to scratch the surface of capabilities not just for business but for the average person. AI can also be rather philosophic as I got this quote recently when asking about travel destinations…”without knowing your starting point (past), choosing a destination (future) is difficult, but reflecting on your journey helps you make intentional choices and create a meaningful path forward.” So lets reflect a little on where we have been…to see where we may be heading….

So…. What worked this year… Almost everything… with Silver & Gold - pun intended…the shiny spots of the market.

International markets in aggregate had their best returns in almost a decade in both absolute and relative terms to the U.S. and even fixed income came to the party!

The Seasonality of the market changed…with the spring correction and strong May & September returns being the notable distinctions from average of the year.

Outside of “AI” themes it was a fairly broad based distribution of returns with most of those returns playing catch up in the second half of the year. AI did play a big part as can be seen in the returns of Tech Sector but most sectors participated as well except for the usual yield plays of Staples and Real Estate.

The average return of constituents of each sector

Over the course of the next month I will delve into some of things to keep an eye on but lets start with some of things raising eyebrows now by other analysts I have seen so far….

What are some signs that the market could have a little more than a normal pause or correction this year… Earnings expectations are extended. Historically, even with strong EPS growth (estimates are 15%+ according to Factset) the market is already pricing that in and becoming extended relative to its EPS trajectory. If this number falters the correction could be similar or inline to the one in the Spring of last year -quick and painful but probably not lasting.

However, from a profit margin to multiple basis it is not extended as much of the main stream financial press would lead you to believe which suggests to me that a recessionary or more extreme market reaction has a lower probability for this year. I thought this chart from Duality Research was good at illustrating that while its not a Goldilocks scenario its also not as elevated from trend as some research would have you believe……

Duality Research

Bullish, With Eyes Wide Open

2025 is officially in the books — and it wasn’t just a good year for returns, it was a pretty eventful one too…

Read more

7 months ago · 16 likes · Duality Research

Another positive note is that inflation breakevens are contracting and becoming range bound which is another positive for both bonds and equities. I will post some charts of this in an upcoming commentary. Next post I will cover more items to watch and roll out the ETF asset allocations for the first quarter.

Who am I?

Hello, I am Duke Jones a retired Portfolio Manager with over 40 years of experience in the stock market, where I managed a variety of discretionary portfolios and funds for investment firms like BlackRock and Merrill. I have navigated numerous economic cycles through bull and bear markets focusing on managing risk. Throughout my career I have concentrated on rigorous analysis and disciplined investment strategies, and now I’m sharing that knowledge directly with you.

Why a Substack page…?

I have wanted to share research about the markets for quite a while but unfortunately Wall St. firms today are run by their compliance departments which means muted and uninspiring commentary usually from someone who never managed real money. I can’t guarantee my commentary will be inspiring but it will come from a perspective of having real money at risk in the market. Therefore, the intent of this page is twofold: 1.) To inform and perhaps educate those who have an interest or passion in the markets like I have had over my four decades in the investment business and 2.) keep a routine since I still have “skin in the game” with my own investments.

What to expect…

Topics of the page will include the following:

A.) Current market conditions viewed from a quantitative perspective where I combine statistical, fundamental and technical disciplines.

B.) Overall economic backdrop highlighting economic indicators that I have found to be statistically significant to subsequent market action and

C.) highlight Individual equities and Sectors that I think have interesting risk to reward story.

D.) Provide thoughts on Asset Allocation where I will publish my suggestions for a simple Size and Style allocation that could be implemented using ETF’s (Exchange Traded Funds.)

E.) Use a plethora of charts to convey what I am seeing in the market…

If you have an interest in the markets and would like to see another perspective, I invite you to subscribe.