Chip Strength Holds Up the Indices but Creates an Inflation Problem

The market closed weak on Monday with the S&P 500 (SPY) finishing at its lows, down about 0.5%. Breadth was only 35% positive. This was one of those days where rotational action made the indices look better than they were. Semiconductors were strong with a gain of 1%, but the money going into them came out of everything else. The index decline of half a percent does not capture what happened underneath it.

The new highs and new lows tell the story. There were 159 names at new 12-month highs against 147 at new lows. That is close to even, and it does not look like a wild bullish uptrending market. It looks like a market where the number of stocks working and the number breaking down are nearly the same. That is churn.

The speculative action continues to fade as well. About 40 stocks were up more than 10%, down from over 200 in early August. A few pockets remain, with AXT (AXTI) and RCM Technologies (RCMT) among the movers, but the group is narrow and scattered rather than thematic.

Why Nothing Has Broken Yet

BTIG published data that explains much of the action so far this year. The New York Stock Exchange has recorded zero days in 2026 where downside volume exceeded 80% of total volume.

That threshold is generally viewed as the point where broad-based liquidation is taking place. When more than 80% of the volume is on the downside, it means everyone is hitting bids at once, and nobody is bothering to discriminate. Since 1997, the average year produces 21 of these days, and no year has finished with fewer than five. 2008 had 49, 2011 had 53, 2022 had 33, and last year had nine.

So far in 2026, there have been zero liquidation days. All the corrective action we have seen this year, including the July damage that took the chips into a bear market, has been rotational. Money left one group and went to another. It never left the market.

That’s why the indices keep absorbing damage that would ordinarily hurt. It is also why we have never had a proper washout. Every low this year has been a rotation low rather than a washout low, which means the selling has never gone far enough to trigger a real reset.

Whether that is strength or deferral is the question, and nobody can answer that. A market where nobody panics has underlying demand. A market that has never capitulated has also never been tested.

Chip Strength Carries a Problem

A big part of the problem is related to strength in semiconductors. It is more complicated than it looks.

The 30-year Treasury yield topped 5.31%, which is the highest in 19 years. Let that sink in. The 20+ Year Treasury Bond Fund (TLT) is trading at levels last seen in 2004. Those levels were hit in a week when the market convinced itself the Fed would not hike, after three data reports pointed to cooling inflation.

The bond market is not buying this story, and the reason connects directly to the semiconductors. Investors are bidding up the semiconductors because those companies have pricing power. That pricing power is driving up the cost of building AI infrastructure across the economy. Memory, servers, components, all of it costs more. That is inflation, and inflation expectations are what put the 30-year at a 19-year high.

Higher yields raise the cost of financing the buildout, and that buildout is being funded with more than $200 billion of borrowing this year. The four biggest spenders have guided to somewhere between $720 billion and $745 billion of capital spending in 2026, up from roughly $410 billion last year. So the cost is rising on the components, and the cost of money is also increasing, while the spending itself expands by 75%.

Higher chip prices drive inflation. Inflation drives yields. Yields drive up the cost of the buildout that is buying the chips. That is a vicious cycle and doesn’t end with a celebration.

The money rotating into semiconductors today is funding the pressure that eventually breaks the trade. Every buyer is making a reasonable decision. The aggregate produces the problem.

How it Breaks

There are two ways out of that cycle, and neither is good for the group. Chip prices roll over, which takes away the profit margins driving the rally. Or the spending slows, which takes away the demand. Suppliers win only while capex keeps expanding, and that expansion is what is raising rates that will eventually cut demand.

Game Plan

My positioning has not changed. Cash is high, and I am doing little buying.

A day like today reinforces the caution rather than relieving it. The indices held up because of rotation, not because of demand, and the internals were considerably worse than the half percent decline suggests. A 30-year yield at a 19-year high is the kind of development that can eventually produce the broad selling this market has avoided all year.

I would rather find out with cash than without it.

Have a good evening. I’ll see you tomorrow.

At the time of publication, DePorre had no positions in any securities mentioned.