The next five trading days are going to be some of the most interesting in recent market history. Big-tech earnings kicked off with Alphabet (GOOGL) last night and continue today, we get updates on top-tier economic data including inflation and employment this week, and of course, the main event next Tuesday. 

Of course there are myriad ways these catalysts could blend together for different outcomes, but there are three key ideas that I'll be using as a trading framework. 1) Big-tech companies are innocent until proven guilty, 2) Bonds may threaten the "everything rally," and 3) The election is likely to be a volatility-reducing event.

1) The stock market is definitely getting expensive again, with forward valuations nearing 25 on the S&P 500. But tech valuations actually still seem fair. There's been a decent amount of dispersion within Mag-7 performance, and the most expensive trades are the ones generating the most earnings. We're starting to see A.I. products hit the market, so barring some major negative shock, the A.I. trade looks more likely to maintain momentum than lose it.

2) Bond bears are showing a lot of conviction lately, and for good reason. Economic data in the U.S. is surprising positively and still best in the world. Yields are still within the range of this past year, but the MOVE index for bond volatility is getting elevated again. Higher rates should be able to live harmoniously with big tech, but if the 10-year gets closer to spring highs of 4.7%, investors may see some of the auxiliary high-beta trades like small-caps, value, and possibly crypto, to cool off.

3) The bonds subject is a good transition to politics. As I wrote about last week in this newsletter, most of what's been happening in markets can be explained by the Fed and economic data and is unrelated to the Presidential election outcome. However, judging simply by the kink in VIX futures around next week, it's safe to say volatility is in some part staying bid thanks to the election. My basic framework for this is that as long as there isn't a contested election, the event should be vol-negative. 

There's also one fun thought experiment for next week: if you weight the predictive value of polls (right now at 50/50) and the prediction markets (currently about 60/40 in favor of Trump) equally, you get to a weighted average of 55/45 Trump. That should be a big enough margin to avoid a contested election.

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