So another selloff yesterday and futures slightly red at the moment. This raises the obvious question that we have been debating in the newsletter and on the podcast for months now…….

Wall Street is pouring trillions into artificial intelligence, fueling a gold-rush atmosphere reminiscent of past bubbles. Massive deals abound – for example, Blue Owl Capital just raised a $30 billion package to build a Meta data center, and another $14 billion for an Oracle–OpenAI project – reflecting an AI spending frenzy where fear of missing out trumps fear of a bubble. Giant asset managers and banks are all clamoring for a piece of the action Investor appetite is so frenzied that some lenders booked billion-dollar profits within days on AI-related financings, before the ink was even dry . With tech firms projected to spend nearly $3 trillion on AI by 2028 (while likely generating only half that in cash), AI has become “a bigger target than anything in history” for Wall Street’s enormous war chests. As Blue Owl’s co-founder quipped, when you’re counting capital expenditure in the trillions, “does it even matter if you keep counting after $1 trillion?” – a stark illustration of the scale of this boom.

Warning signs are flashing that this AI boom may be nearing its peak. Last week’s tech selloff was one red flag: Meta’s stock plunged 11% in a day despite record revenues, after Mark Zuckerberg vowed to “aggressively” boost AI spending. That reaction signals investors are questioning how all this investment will translate into actual profits. Big financial names are sounding alarms – even Goldman Sachs’ CEO David Solomon warned of “AI-fueled froth” in markets Tellingly, Goldman then raced to start an AI financing unit days later, epitomizing the “fear of missing out” driving this bubble. Debt rating agencies are growing wary too: Oracle, a key AI player with heavy borrowing needs, has seen its bonds on the brink of junk status and its stock down 32% in recent weeks. And let’s not forget history – the last time Wall Street went all-in on a hot sector was the shale fracking boom, which ended in a bust. Today’s AI frenzy is even larger. As one executive infamously said during the 2007 credit bubble, “as long as the music is playing, you’ve got to get up and dance”. Right now, Wall Street is dancing furiously to the AI tune – a classic late-stage bubble vibe.

Are we at the top of the AI bubble? It’s impossible to pinpoint exactly, but many hallmarks of a peak are here. When companies with rock-solid earnings see their stocks tank on AI spending news, and when financiers conjure exotic deals to justify ever-greater leverage (some AI projects even rely on circular financing where one player’s funding feeds another in a loop), it’s a sign of euphoria outpacing fundamentals. The hype is extreme and the money is cheap (some AI financings carry higher interest than normal just to lure more capital, suggesting investors are stretching logic to keep the party going. FOMO – the fear of being left behind – is overshadowing prudent risk analysis. History shows that when warnings are brushed aside and everyone believes this time is different, a bubble is near its breaking point. We may not know if we’re at the top until after it bursts, but the risk of a popping bubble is growing with each new eye-popping deal and each sign of market fatigue.

So, how should we invest in these frothy times? Cautiously, and with eyes wide open. This is not the moment to go “all in” on the AI hype. It’s also not a moment to sell everything and move to cash. Instead, consider hedging your bets and trimming excess exposure to overhyped tech names. Savvy investors might deploy strategies like ratio spreads (which we discussed last week) to participate in further AI upside while limiting downside risk. In plain terms, that means structuring your option positions so that a continued rise can yield gains, but a sharp reversal won’t blow up your account. It’s also wise to add some protective hedges – for example, buying put options on an AI-heavy index or holding uncorrelated assets – to buffer against a sudden drop. And above all, practice disciplined position sizing. Keep your AI-related bets to a moderate portion of your portfolio, so if this bubble bursts, it won’t take your wealth down with it. The AI revolution may indeed be transformative, but even transformative trends can get ahead of themselves. By investing prudently – balancing excitement with caution – you can capture some of the upside without being a casualty if the bubble pops. Remember, it’s better to leave a little money on the table than to be the last one dancing when the music stops.

As painful as these selloffs are, they are usually good at teaching us a few lessons. Looking through social media it seems that there are a lot of people who confused a bull market with smarts. Here are a couple of key takeaways:

For every theme I first pick out the obvious winners. These are typically larger stocks, they won’t move up as much, but they also won’t move down as much. These will be my largest positions. I then want to pick out a couple of smaller, more speculative names, that could win big, but have much more risk. These will be much smaller positions. I will also monitor these positions, if I’m right they become much bigger positions and should be trimmed. I then look at second and third order names, the companies that will benefit most from the theme.

Another tough day, they tried to rally in the morning but the bulls couldn’t keep it going. The QQQs are now under the 50 day moving average…..

As is SPY…..

If you are a trader, those are short signals.

Yesterday was extra bad from the standpoint you didn’t see a rotation. Sometimes money moves from growth and momentum to value and defensive, yesterday it just moved to cash. Also, if you are a bull, you would much rather see a day that goes from red to green, not green to red.

Meanwhile gold has come down, and bitcoin is getting crushed. That’s why I don’t consider either of those hedges, I do think you have to own them though.

Is this the top? I debate this above a bit as well, nobody knows. I have been saying that as long as we have AI capex through the roof and a dovish Fed then you need to be a buyer. We now have questions on each. As far as the Fed is concerned, they may hold in December, but that pretty much guarantees a cut in January. Perhaps that’s not that bad.

The AI side is a bit more problematic. But look at a company like MSFT, which I think is a must own as they are one of the most likely winners in a number of major themes….

If you are a bear you could argue for a double top or that it’s below it’s 50 day. But, it’s still up 21% year to date, and if you look at a monthly chart there’s nothing to see here….

We will see where this all goes. Anyone who tells you they can predict a bubble is lying, either to you or themselves. Beware the perma bears who will be brought out in the media because they got this one “right”. Bottom line is that if you have a smart investment strategy (hint: not 60/40 or traditional asset allocation), it’s not going to matter that much.

Today’s stock is CrowdStrike (CRWD)………

Stifel just raised their price target on CRWD to $600 and I think it’s the top cyber security name.

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