📊 Our Economic Score: Still Cautious
The Edge Of Markets score sits at 5.09, within the 5.05-5.14 range, indicating Short 20%.
This isn't a panic signal, but it's a clear defensive posture. The score hasn't moved much from yesterday, which tells you something important: the model isn't seeing a reason to shift despite mixed signals.
Short 20% range: 5.05-5.14 | For Short 50% we'd need to drop below 5.04
📉 The Story So Far
Yesterday we covered the manufacturing collapse (Philly Fed crashed to -12.8) and the regional banking stress (banks plunged 5% on loan portfolio concerns). Markets sold off broadly, with the Dow falling 301 points.
Today? The hits keep coming, but now with a new twist: good news is being completely ignored.
🌏 Trade War 2.0: Port Fees, Tariffs, and Rare Earths
The big story weighing on futures this morning (-0.77%) is the U.S.-China trade war reigniting. Here's the timeline:
- October 9: China expands export controls on 12 of 17 rare-earth metals (effective Dec 1)
- October 10: Trump retaliates with threat of 100% tariff on China (effective Nov 1)
- October 14: Both countries impose additional port fees on each other's shipping vessels
- This weekend: China warns of "corresponding measures" if tariffs proceed
The result? Trump's tariff threat wiped out $2 trillion in equity value in a single day last Friday. Markets are still digesting that.
And the kicker: Trump was supposed to meet Xi Jinping at the APEC summit later this month. Now that meeting is in doubt. No diplomacy on the horizon = uncertainty priced in.
💻 TSMC Crushes Earnings... Market Yawns
Taiwan Semiconductor (TSMC) reported blowout earnings Thursday:
- Revenue: Up 30% year-over-year to $33.10 billion
- Net income: Up 39% year-over-year
- Guidance: Raised full-year growth outlook to mid-30% range (from 30%)
- Capex: Increased budget to $40 billion (70% for AI chip manufacturing)
This should be rocket fuel for tech stocks. AI demand is still exploding, TSMC is printing money, and they're doubling down on capacity.
So what happened? TSMC stock fell 1.5% in midday trading Thursday. Futures opened higher this morning, then gave back gains.
When markets ignore this level of good news, that's a risk-off signal. Investors aren't buying rallies—they're selling them.
🧩 The Disconnect: Manufacturing Crashes, Jobs Improve?
Here's where things get weird. Remember yesterday's Philly Fed manufacturing index that crashed -36 points to -12.8? That's screaming economic slowdown.
But this week's jobless claims data (from private estimates, since the government is shutdown) shows claims falling to 217,000 from 235,000 the prior week. That suggests the labor market is still healthy.
So which is it? Is the economy collapsing (manufacturing) or holding up (jobs)?
My take: Manufacturing leads, jobs lag. When factories start cutting back, layoffs follow with a delay. The jobless claims improvement could be a lagging indicator that's about to reverse. Or it could mean the slowdown is contained to manufacturing while services remain strong.
Either way, conflicting signals = uncertainty = caution warranted.
🚨 Week 3 of Government Shutdown: Fed Flying Blind
Let's not forget the elephant in the room: the federal government is still shutdown for week 3. That means:
- No official jobless claims (we're relying on JPMorgan and Goldman estimates)
- No retail sales data (postponed indefinitely)
- No CPI report (delayed until Oct 24 at earliest)
- No jobs report (delayed indefinitely)
Think about what this means for the Fed. They're trying to calibrate monetary policy while flying blind. They have to rely on private estimates and incomplete data.
Card data shows "softer" retail sales, but we don't have the hard numbers. Manufacturing is collapsing, but jobs might be holding up (or not—we don't know for sure). Uncertainty is priced into risk premiums right now.
🎯 My Take: Risk-Off Mode is Justified
Let me connect the dots here:
- Our score at 5.09 = Short 20% (defensive posture)
- Manufacturing crashed yesterday, banking stress surfaced
- Trade war escalation this week ($2T wiped out Friday)
- TSMC blowout earnings ignored by market (stock down)
- Government shutdown = data blackout, Fed uncertainty
- Futures down 0.77% this morning before open
When you see good news being ignored, that's one of the most reliable "stay defensive" signals you can get. Markets aren't rewarding bullish catalysts—they're punishing them.
The score was already in caution territory (Short 20%) before all this unfolded. It's not that the model predicted the exact headlines, but it picked up on underlying weakness that's now showing up in hard data and market behavior.
This is the kind of environment where you want to be patient. Don't fight the trend. Don't "buy the dip" just because you think things are oversold.
⚠️ Bottom Line: Stay Defensive
The market opens in about an hour (9:30 AM ET). Futures are down, trade war fears are escalating, and good news is being ignored. This is not a bullish setup.
Here's what to watch today:
- Regional banks: After yesterday's 5% plunge, are they stabilizing or continuing lower?
- Tech stocks: Will TSMC's strong earnings lift NVDA, AVGO, and chip stocks? Or will geopolitical fears win out?
- Trade headlines: Any news on diplomacy or further escalation?
- Market breadth: Is this a broad selloff or just specific sectors?
If your strategy follows our score: Maintain Short 20% (range 5.05-5.14) until the score moves. If it drops below 5.05, increase short exposure to 50%. If it rises to 5.15+, consider reducing shorts to a light position.
Right now, the score is telling you to be cautious. The market is confirming that message by ignoring good news and selling on bad news. Listen to what the price action is saying.