August 14, 2026
Knox Ridley
Portfolio Manager
In our last broad market report on June 18th, we presented a case for caution, presenting numerous warning signs that we tend to see before a correction, ranging from institutional positioning to numerous divergences within the broad market. The one data point that concerned us most had last appeared in 2024, just before the AI trade saw its biggest correction since the uptrend began in 2022:
“The economically sensitive Transportation sector is also flashing the same warning. It’s down about 10% while semiconductors are up 43%. The only other time these two sectors diverged this sharply was July 2024. That divergence marked a one-year top in semis and gave way to a 40% drawdown into the April 2025 low.”
Semiconductors gained 36% and 40% during two highlighted periods while transportation stocks fell 8% and 12%. Both divergences were followed by semiconductor corrections of 39% and 25%, suggesting transportation weakness may signal broader market risk.
Semiconductors topped four days later and began a 25% drop into late July, as rumbles that the AI bubble has finally popped are, again, reemerging. But unlike the consensus, the same analysis that had us defensive in May–June now suggests the more bullish path, presented in our last broad report, is gaining odds. If it plays out, we could see higher prices in the coming months than most think is possible right now.
This report lays out the argument for why the broad market could move much higher into the fall. We'll give the two levels that must hold on any further weakness and the targets if we do break out. We'll also flag the one major macro risk within the bond market that must stay contained for this rally to continue.
As always, our goal is to filter out the emotional noise that tends to put retail investors on the wrong side of the trade. We don't want to dismiss the global risks in the headlines, but unless a risk can cause a structural break in the trend, we remain cautiously positioned for higher prices.
Global Liquidity Remains the Market's Key Tailwind #
At its core, liquidity refers to the availability of capital in the system, specifically how easily businesses, consumers, and financial institutions can access cash or credit. In our last report, we showed how global liquidity was one of the primary forces underpinning the equity bull market. More importantly, we argued that the reason the Iran War did not meaningfully affect equity markets is because it was ultimately unable to disrupt the ongoing liquidity trend that is underpinning the bull market:
*“Global liquidity is a powerful force, and the Iran War threatened it. The danger for * *equities was never the war itself, or even the spike in oil prices. The danger was * *what those events could have triggered, which was a sharp reduction in global * liquidity.”
While our prior report focused on the dynamics between oil prices and the U.S. Dollar, this report examines the bond market’s direct effect on global liquidity.
Treasury Yields Are the Biggest Risk to This Rally #
What many fail to appreciate about the U.S. Treasury market is that it remains the single most powerful force in global finance. We saw this reality play out vividly in 2024 with the Federal Reserve, and again in 2025 with executive trade policy:
- September 2024: The Federal Reserve surprised markets with a 50-bps rate cut. Although equities initially celebrated, long duration bonds peaked and began a sharp selloff, pushing up long-term yields due to renewed inflation and deficit fears. This market reaction forced the FOMC to halt its easing cycle and suddenly pivot back to a "higher-for-longer" stance.
- April 2025: The Executive Branch announced an aggressive tariff increase. Because tariffs reduce U.S. imports, they also shrink the global supply of dollars and reduce foreign appetite for Treasuries. Long-dated Treasuries dropped sharply, sending the 30-year yield over 5% with no sign of slowing. This forced the administration to announce a 90-day tariff just five days later.
Daily chart of the iShares 20+ Year Treasury Bond ETF (TLT) highlighting major macro events. TLT peaked after a 50-basis-point Fed rate cut in September 2024, then fell 16% as markets shifted to a higher-for-longer rate outlook. In 2025, the ETF dropped again following a tariff announcement before stabilizing after a 90-day tariff . The chart emphasizes the importance of the $80-$82 support area for long-duration Treasury bonds.
The $12 Trillion Debt Wall Meets Shrinking Demand #
The structural trend in the U.S. debt market is becoming an increasing threat to an ongoing liquidity uptrend. Over the next twelve months, the U.S. Treasury must finance roughly $12 trillion (approximately $37,000 per U.S. citizen). This is derived from marketable debt rolling off the maturity wall combined with net new borrowing to fund the growing deficit. To put this figure in perspective, it equals 210%–230% of total U.S. personal savings and roughly 42% of all global savings.
This wall of sovereign supply arrives at the exact moment structural demand is shrinking - driven by a shift in foreign central bank policies and unprecedented competition from the corporate bond market.
Why Global Demand for U.S. Treasuries Is Declining #
Foreign central banks have long served as the primary buyers of U.S. debt. However, this buyer base is actively stepping back due to heightened sanctions risk and a reluctance to absorb ongoing sovereign debt debasement.
When the US froze Russia’s foreign currency reserves in 2022 as a reaction to invading Ukraine, it sent a message to foreign markets that global reserves are not safe from the whims of US political action. Holding US dollar-denominated assets now carries inherent geopolitical risk. At the same time, the U.S. federal debt is climbing past $38 trillion with no fiscal consolidation on the horizon. In fact, the politically popular DOGE program, designed to reduce fiscal spending, was scrapped for a spending bill that would only increase deficits and debt.
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As a result, foreign central banks are steadily reducing Treasuries as a percentage of their total foreign exchange reserves, diversifying heavily into physical gold. The total market value of foreign official gold reserves recently surpassed official foreign holdings of U.S. Treasuries for the first time in decades. By swapping paper debt for physical bullion, global monetary authorities are prioritizing an un-freezable, zero-counterparty asset.
Line chart comparing the share of global foreign exchange reserves held in U.S. Treasuries and physical gold from 2021 to 2026. Treasury allocations decline from about 35% to 20%, while gold rises from 13% to 29%. The two assets reach parity in 2024, marking a historic shift in reserve allocation toward gold.
Second, Treasury debt is now facing real balance-sheet competition from the corporate sector. Historically cash-efficient hyperscalers (Amazon, Alphabet, Meta, Microsoft, and Oracle) continue to outpace Wall Street's expectations on capital expenditures for the AI build-out. As of now, hyperscalers are projected to spend more than $732 billion in 2026 and reach $1 trillion by 2027. As a result, Oracle and Google have reported negative free cash flow in 2026, while Meta and Amazon are not far behind.
With balance sheets stretched, tech giants have pivoted aggressively to debt markets to fund data centers and power infrastructure. Major tech and AI-related corporate bond issuance has surpassed $190 billion in 2026, up nearly 80% year-over-year, and is on track to top $250 billion. Alongside mega-deals from hyperscalers, even Nvidia entered the bond market in June 2026 for the first time in years, issuing a $25 billion bond sale across seven tranches. Because these high-grade corporate bonds offer institutional investors an attractive 100 to 180+ basis point yield premium over Treasuries, marginal balance sheet capacity is being funneled away from government debt auctions.
Combined bar and line chart tracking AI infrastructure debt issuance and corporate bond yield premiums over U.S. Treasuries. Annual issuance rises from roughly $35 billion in 2021 to $170 billion in 2026, while spread premiums increase from 45 to 165 basis points. The trend highlights growing competition between AI-related corporate borrowing and Treasury debt for investor capital.
Despite this shrinking demand, buyers must still be found for the incoming $12 trillion in Treasury issuance. Consequently, yields will have to adjust higher (bond prices lower) to clear the market.
The risk of higher yields lies in the feedback loop required to service higher interest on the debt. Every 10-basis-point (0.10%) increase in Treasury rates adds roughly $379 billion to cumulative deficits over 2027–2036, escalating to an additional $60 billion annually by 2036. Thus, higher yields compel larger deficits, requiring even more debt issuance to fund interest payments. This dynamic saps broad market liquidity by diverting private sector capital into public debt service, and it appears to be unavoidable.
While the structural trend in treasuries suggests higher yields over time is likely unavoidable, it’s worth noting that the bond market is not breaking down, yet. If we look at the long-dated treasuries of ETF (TLT), the critical $82 - $80 support continues to get defended. A breakdown in TLT below $80 will present a direct macro threat to the global liquidity trend, and thus equity bull cycle.
*Weekly chart of the iShares 20+ Year Treasury Bond ETF (TLT) illustrating a multi-year decline from 2020 highs. Elliott Wave analysis highlights successive lower highs and lower lows, with TLT trading near the critical $80-$82 support zone. A break below support could signal further weakness in long-duration Treasuries and rising pressure from higher Treasury yields.*
S&P 500 Outlook: Key Levels for Bulls and Bears #
While global liquidity is driving this market higher, there are real threats to its continued support of risk assets. The U.S. Dollar is one, which was discussed in our last broad market report, while the U.S. bond market remains the other. How we will know the liquidity cycle is being disrupted will best be seen in how equities react around critical support regions. As long as supports hold, the uptrend remains intact; if they break, it acts as an early warning that the bull market is under attack, while the U.S. bond market remains the other. How we will know the liquidity cycle is being disrupted will best be seen in how equities react around critical support regions. As long as supports hold, the uptrend remains intact; if they break, it acts as an early warning that the bull market is under attack. Based on the current price analysis, there are two counts I see as most probable:
Daily S&P 500 chart with Elliott Wave analysis outlining two potential paths. The bullish scenario targets 8,295, 9,133, and 9,887, while the bearish scenario projects a decline toward 6,192 to 5,707. Key support levels at 7,088 and 6,775 remain critical for maintaining the broader uptrend.
- Green Count –The move off the April 2025 low is the A wave within the final 5th wave. This was followed by a B wave, which was the correction that bottomed in late March of 2026. The V shaped recovery was wave 1 of C, and we are now in the 2nd wave. This 2nd wave can see additional weakness, but we should hold 7088 and must hold 6775 to remain valid. Below this level and the odds start shifting toward the more bearish count.
Further, if price can move over 7910, the odds will build that the 2nd wave is already in and we are in the 3rd wave push higher. - Blue Count – We have completed an extended 3rd wave within this diagonal pattern The 4th wave will likely trigger another cyclical bear market within an on-going secular bull market. We will hold under 7910 and then break below 7088 – 6775, setting up a drop to 6192 – 5707. After this drop, we should see a run to new highs into 2027, which would complete the diagonal pattern that started in October of 2022.
Market Rotation Remains Constructive #
The reason I favor the Green Count comes from a few data points that I am tracking. For one, no major support has broken or is even close to breaking. While we are seeing notable volatility in the AI trade, this has not spread to the rest of the market in a meaningful way, yet.
What appears to be taking place is a rotation out of the AI trade and into a more reflationary trade (inflation up, growth up). Since semis topped on June 22nd, we can see that the profitable AI hardware segment is taking a breather, while money is flowing into Energy, Financials, and Health Care, and most interesting – the AI Software trade.
Relative Rotation Graph (RRG) comparing sectors and AI segments against the S&P 500. AI Software leads with strong relative strength, while Energy and Financials are improving. AI Networking and AI Accelerators remain leaders despite recent weakness, while AI Foundries and AI Memory are lagging. The data suggests a rotation within the AI trade rather than a broad market deterioration.
This is not the character of a market preparing for a volatility event, like early 2025. In Q4 – Q1 of 2025, we saw money flowing into Consumer Staples, healthcare, Gold, and the Dollar – defensive positioning. Today, it appears that the market is preparing a pivot into forgotten sectors that tend to do well when inflation is up with growth.
What the CBOE Skew Index Is Signaling Right Now #
Another encouraging indicator comes from the signal we just received from the CBOE Skew Index. For those not familiar with this index, it is designed to act like a warning system for the stock market. It is measuring how much money big investors are paying for deep outside of the money put options – i.e., financial catastrophe insurance against a sudden market crash 30 days out. A higher score means institutional investors are growing increasingly nervous about a rare but devastating drop, driving up the cost of that downside protection.
If we look back at historical patterns, when the Skew index moves into the 160 region or higher, it tends to precede a volatility event month in advance. On the other hand, when we see a drop below 132, meaning that protective crash insurance is being sold, it tends to come before bigger moves higher in the market. Today, with the S&P 500 at all-time highs, the SKEW index dropped to 126.
Chart of the S&P 500 and CBOE SKEW Index from 2021 to 2026. Historical SKEW readings below roughly 132 coincided with subsequent gains in the S&P 500, while readings above 160 often preceded volatility events. The latest drop to around 126 suggests limited demand for crash protection and a potentially supportive backdrop for equities.
One counter point to be aware of in the backdrop of any breakout is the current positioning of both professional and retail investors.
Table showing NAAIM stock exposure and AAII investor sentiment percentiles during 2026 alongside historical readings near major S&P 500 market tops. Current data show low cash allocations, high stock exposure, and elevated bearish sentiment, providing context for comparing present investor positioning with prior peak market environments.
Conclusion #
While structural risks are clearly building under the fixed-income market, the broader market’s technical and liquidity trends remain intact for now. The ongoing rotation out of cash-heavy AI hardware and into reflationary sectors, alongside low hedging shown by the CBOE Skew Index, signals a market expanding rather than preparing for a sudden volatility event. The primary macro anchor remains the U.S. Treasury market. While a structural shift in global demand for sovereign debt will ultimately force yields higher over time, the global liquidity trend supporting risk assets should persist over the intermediate term, as so long as TLT defends its critical $80–$82 support zone and crude oil stays capped below $105–$111. Unless broad market index supports 7088 and 6775 break, the weight of evidence continues to favor our primary Green Count for higher equity prices into the Fall.
Join I/O Fund Portfolio Manager Knox Ridley this Thursday at 4 p.m. Eastern as he discusses the portfolio’s latest entries and exits, along with his risk management plan for the market ahead.
Knox has consistently outperformed hedge funds, tech ETFs and competing portfolios, with a 326% five-year cumulative return—and that does not yet include the I/O Fund’s 2026 outperformance. This year alone, the portfolio has 16 stocks outperforming the Nasdaq-100, including 6 stocks up more than **100% YTD. **
Join Knox this Thursday to hear how he is positioning the portfolio for what comes next.
Don't Miss out on the AI Trade. Subscribe Now. Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
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