Technology Select (XLK): The Santa Rally Runs on Borrowed Money
Why the year-end tech rally rides on leverage, buybacks and retail gamma, and how the private-credit cash box could turn XLK into the market's ATM.
Santa Borrowed the Sleigh
The tape behaves as if it owed everyone a favor. Retail piles into calls that die by the closing bell, the buyback desks are stretching their legs as the earnings blackouts lift, and the seasonal chatter about a year-end lift has begun early. The reflex is familiar: chase the dip, spin the dealers into hedging your calls, take a bow. I get the appeal.
What sits under the confetti bothers me more than the confetti itself. Private-credit funds hold loans nobody can honestly price, and pension boards have built portfolios that lean on those loans and on plain passive S&P exposure. The mechanics turn ugly when the private marks soften: the illiquid book cannot be dumped, so the liquid book gets liquidated to raise redemption cash. Every step deeper into alternatives makes the index more of an emergency cash box. Large-cap tech is the fattest drawer in that box.
Layer on the tariff loop, escalate, pause, handshake, repeat, and each swing in the headlines nudges rates and liquidity just far enough to keep the AI-capex machine fed. The machine once ran on profits; it now runs on borrowed money. Add record retail flow and you get a market that stays lively chiefly because it keeps quoting itself new prices. Fundamentals become optional when momentum is doing the talking.
Squeeze Fuel Under a Cautious Crowd
The early batch of reports beat expectations handily, yet positioning has not caught up: hedge funds have been net sellers lately, trend followers remain long and jumpy, and the survey mood stays wary with indices sitting near their highs. Cautious hands cushion any shock, and the same cautious hands supply the fuel for a squeeze if companies surprise on guidance rather than merely clearing the EPS bar. Versus last year, the crowd is underinvested in its own optimism.
For an options trader, that shape argues for owning convexity without paying full price for it. A rally built on leverage, buybacks and dealer hedging can extend further than sense allows, and outright calls on a tech ETF near its highs are pricey insurance against your own caution. Spreading the calls trims the premium bill, keeps the capital commitment small, and leaves a repair path if the tape stalls: rolling further out and layering a credit spread above, so the decay collected offsets the decay carried. The full ladder on XLK is in the letter; the point here is that the shape fits the regime: capped cost, defined risk, and a way to stay in the game if the emergency drawer gets pulled open.
A Delayed CPI Meets Loud Micro
The Fed stays silent until its Oct 29 meeting, so the delayed September CPI on the Friday before it carries the macro weight, with global flash PMIs landing the same day. Treasury supply is the other tell: the 20-year reopening midweek and the fresh TIPS auction the day after tell me whether long-end demand is holding and which way real rates lean, and real rates are the oxygen for a capex story financed by debt. Micro will be loud: a big slice of the S&P reports, Tesla, Netflix and GM among them, while Europe hears from Barclays, NatWest and SAP. Guidance matters more than the headline beat, because guidance is where the squeeze lives.
The other tells sit outside tech. Oil equities trailing crude while WTI weakens tells me the energy tape and the tech tape are reading different books, and insurers and freight costs now set more of the realized geopolitical risk than headlines do. Across Asia, Korea's chips-and-defense run, Japan's political breakout and a handful of China tech names now compete with US megacaps for the marginal dollar. If that money leaves, the cash box gets opened from a new side. Santa can trade on margin for a while. The margin call, when it comes, will be met by whoever holds the most liquid thing in the room, and that thing has a ticker.
This page is the write-up. The full letter, with the trade and its exit rule, is on Substack.
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