00:00 Jared Blikre

Welcome to the trading pit. I’m Jared Blikre, host of Stocks and Translation podcast, joined by Kenny Polkari, former New York Stock Exchange floor trader and host of Yahoo Finance’s Trader Talk podcast. Look, today we’re looking ahead to 2026, a mid-term year that could bring some chaos, some confusion, and volatility before the dust finally settles. We’re going to hit the big themes, the next phase of AI, quantum on the horizon, rising power demand, and what gridlock in Washington might mean for markets. We’re going to keep it simple for you. Levels and triggers on the charts and a risk management framework that lets you sleep at night and trade another day because as we like to say, risk is the only thing you can control in this game. So, Kenny, let’s dig in with uh maybe a quick rundown of the surprises. You know, I’m going to show the S&P 500 behind us here. This is a Spider S&P 500 ETF, and it is up 16 and a half percent year to date.

01:06 Kenny Polcari

And that is a surprise, right? A lot of people coming into the year thought maybe if we had a retreat back to what was more normal, kind of an 8 to 10%, maybe a 10 to 12% total return on the S&P might be what a lot of people expected coming into the year. And in fact, we’ve way outperformed and once again the Nasdaq has way outperformed. But I think within that story is kind of the the the the uh the amount of interest around AI and then across all industries, utilities and we’ll talk about being one of the ones that’s been a huge beneficiary of that trade.

01:43 Jared Blikre

Yeah, let’s take a look at the sector action year to date. Up in the upper left is tech, that’s XLK up 24% and here’s utilities just behind the S&P 500 but kind of a surprise there. First, talk about is AI in a bubble and then utilities along with that.

02:02 Kenny Polcari

So, so I’m in the camp that AI is not in a bubble, right? When I think about bubble and people talk about, they keep talking about the dotcom bubble. AI is nowhere near the dotcom bubble. Now, does that mean that it’s stretched? I think we are stretched. But stretch is different from being in a bubble, right? I think stretch is about the euphoria and the excitement just because AI has had such a dramatic effect and we’ve seen it happen all year long as it’s unfolded across Chat GBT and then Gemini and and Open AI and all the others. It’s been a very exciting story, but that doesn’t mean that investors haven’t stretched those valuations a little bit, which is something that I think you have to just keep in mind.

02:44 Jared Blikre

Yes. And uh let’s get to some thinking about where we are uh in December and how we’re going to uh kind of assess ourselves. So, I know you like to focus on risk profiles. Tell us what that means.

03:00 Kenny Polcari

So, I think it’s important for everybody to understand not only their own risk profile, but then the risk profile of their portfolio, what they put together because what you should understand is that every stock, every ETF has a risk score from 1 to 99, right? The same way your risk profile has a risk score from 1 to 99. 71 is S&P 500 market risk. So if you’re at 71, that’s your risk score. Above 71, you become more aggressive, below 71, you you become more conservative. But what people suddenly find out is that you have one risk score, but when you actually score your portfolio, it’s a very different score than than what you think it is. And as a matter of fact, it’s funny, I had a conversation this morning with a with a potential client who’s in his 70s. He’s in his 70s and his

04:06 Jared Blikre

He was all in Nvidia?

04:07 Kenny Polcari

And his pra- basically, it’s Nvidia, it’s Palantir, it’s AMD, it’s but his his prof- his portfolio was way up in the high 80s. Meanwhile, the guy’s 78 and he needs to be much more conservative.

04:22 Jared Blikre

Not a lot of dividends there.

04:24 Kenny Polcari

And so, he not a lot of dividends at all. And in fact, he kept asking me, how do I get more dividends? Well, you got to you got to get rid of some of those stocks. Not only because they’re not dividend payers, but because they’re way up on the risk scale. That that’s a portfolio that a 20 or 30-year-old should have had.

04:36 Jared Blikre

Well, unfortunately, most of those names are significantly up year to date.

04:40 Kenny Polcari

That’s right.

04:41 Jared Blikre

So, let’s talk about something called tax loss harvesting or just tax loss selling, and that’s where you have an investment that might be underwater since you bought it, but you can use that potentially to offset some of your taxable gains. So, talk to us about that strategy.

04:59 Kenny Polcari

Right. And so that’s a strategy really that wealth managers use and that individuals should use as you move into the end of the year to take advantage of exactly that, right? Offset your losses against your gains. Um, so this way then you can free up some money, you can use that benefit and then reallocate that money to wherever you think the next new sector or where you want to, you know, have more exposure. That’s how you would do it through tax loss harvesting and it’s very, very effective and actually wealth managers do it all the time. That’s part of kind of what we do, but individuals really need to understand that process as well.

05:35 Jared Blikre

Let us now dig into some of the themes that we’re really interested in this year and maybe looking ahead to next year. So I’m going to navigate to a couple of names. Let’s start with IBM, Big Blue. This is this is 2025 year to date and I’m going to put a max chart in. So this goes back to the 1960s, I believe. It took a long time, but it broke out recently and it’s been hitting record highs. Is Blue back?

06:06 Kenny Polcari

I think Blue is back. Look, to be fair, I own the name, the firm owns the name, so right, I’m speaking from from the point of view as an owner, right? Talking my book. But you could see it on the chart. And I think this speaks directly to one of the themes we’re talking about, AI but then quantum computing because IBM is really a leader in that quantum computing space and a lot of people, you know, they they they’re looking at other names, IONQ or QUBT or all these other names that are, you know, specifically quantum. I think you can’t overlook someone like Big Blue. First of all, it’s got history, right? It’s a big mega cap name. It gives you lots of um uh liquidity. It’s also a very good dividend payer, but yet it still gives you exposure in that space.

06:21 Jared Blikre

Talking your book.

07:05 Jared Blikre

Well, and you mentioned IonQ, so let’s just go there too and we can see let’s put a year to date on there. It’s this is this is very volatile. It’s only up 9%. It’s been up a lot more.

07:18 Kenny Polcari

Yeah. Yeah, so again, there’s another one that I own, so a little bit I’m talking my book, but look at how volatile it’s been, right? Very different from IBM. But that’s actually kind of what I want, right? I want specific exposure just to just to quantum and IONQ. IBM gives me a much broader exposure, right? to kind of the tech industry. But you have to be prepared for a name like this to ride the volatility. So you have to make sure that you understand the percentage it is of your portfolio, why you bought it, make sure that the story remains the same as you go along on why you bought it. If it if it isn’t, then you got to start to think of maybe unloading it. If the story remains the same, but you continue to have this volatility, on pullbacks you would add to add to the position.

07:44 Jared Blikre

That’s a fact.

08:14 Jared Blikre

All right, let’s keep ticking these down here. Uh, IREN, I R E N. This is a five-year look and you can see it’s really exploded in 2025 and I will show you the year-to-date here. Now, this is up 340% and it was up quite a bit more.

08:34 Kenny Polcari

Again, this is part of that AI story, right? So it’s it’s it’s uh it’s amongst a a handful of names, CIFR is another one, IREN, uh uh SMR, or all these names that are benefiting from that AI story, that energy play. And so there’s going to be another one, it’s very volatile. You can see it.

09:00 Jared Blikre

Yes.

09:01 Kenny Polcari

Look at the chart and it tells you you have to be prepared for the rides, but if you take a longer view, I think this is going to be a name that’s going to benefit.

09:12 Jared Blikre

All right. And we can’t talk about AI without data centers and the power which, you know, we’ve been, let’s continue that conversation here. Here’s another one, a volatile name, only up 5% year to date. But what do you like here?

09:27 Kenny Polcari

Right. But it was up clearly much more as we kind of moved through the year. This is interesting. I’m not so sure why it’s come back down. Uh I have to I have to kind of bring my myself up to speed on it, but this is one of those small nuclear reactor businesses, right? They’re going to create that energy for these data centers when we know that data centers are going to demand energy all over the place. There’s a massive energy demand. And so one of the ways to solve it is uh is with a company like uh SMR which is small nuclear reactor, nuclear power uh stock. Now, again, you have to be prepared for the volatility. It’s not a big mega cap name, so you’re going to have much more uh volatility in it. But as long as you’re in it for the long term, I think it’s a good name.

10:25 Jared Blikre

I want to talk energy here and just the broad sector. This is going to be the uh large cap sector ETF, uh XLE. I’m going to put a five, actually, let’s put a max chart because this is something I’ve had my eye on for years that it has just tried to push above and hold this 90 level, hasn’t gotten to 100, been able to hold that. Um, and this goes back to basically the beginning of the century. So, is it finally time for XLE to shine?

10:59 Kenny Polcari

So, again, I own it, so I want to be clear about that, right?

11:03 Jared Blikre

Please.

11:03 Kenny Polcari

But look at it. You can see where it’s just getting ready to push out. I I think it’s going to. I think the story behind energy once again is that the the massive demand out there. You know, when they keep talking about oil’s trading down, they give you an excuse, China’s not buying it all that stuff.

11:15 Jared Blikre

Always an excuse.

11:16 Kenny Polcari

You know, and they and they talk about, you know, it’s waning demand. There is no waning demand in energy, right? The the demand is massive. We have an over supply issue in energy which is fine, but that’s not a negative about demand. I think uh the XLE is just at this point where it’s going to break out. So keep your eyes on it right here because if it breaks out here, then it’s absolutely going to challenge the highs of what was that? 100?

11:42 Jared Blikre

Yeah, I what I really like here is that it’s been flagging sideways to up instead of just reaching on an overbought status and then, you know, precipitously falling.

11:53 Kenny Polcari

And and the point is it’s flagging sideways to up, not sideways to down.

11:58 Jared Blikre

Yes, right? Agreed. So we’re on the same page here. Um, let’s take a look at another uh sector ETF. This is financials and they’ve really come alive. This also goes back to the beginning of the century. I’m going to dial in on the last three years and you can see that’s from the lower left to the upper right. 50%, not bad for JP Morgan, Goldman Sachs that which have been hitting record highs this year.

12:28 Kenny Polcari

Bank of America.

12:29 Jared Blikre

Bank of America too and all the big ones. So what do you like about financials?

12:31 Kenny Polcari

And I think financials are going to be a story for uh 2026. I think financials is one of those sectors that I like it, I own it. I also own JP Morgan and Bank of America, part of it. Um, but I think in 2026, as we’re going to talk about that too, is going to be one of the sectors, financials in general, uh that you’re going to see people flock to as they try to add some stability uh in defensiveness into their portfolio.

13:01 Jared Blikre

You mentioned defensiveness, got to talk healthcare. Uh this is what healthcare has done over the last three years. Let’s put a 10-year chart on here. Uh pretty choppy, but it has broken out here. It’s looks like it’s testing these earlier highs and it really came alive in the last few months. Under owned, sentiment negative.

13:28 Kenny Polcari

That’s a good setup. It was it was actually, if you just put the year to date, you’ll see it was actually dead money for the first nine months of the year. It did actually nothing, right? And so I kept talking about it because I thought that it was a space that was way underperforming, but it was a space that I think was going to provide some opportunity uh in the months ahead. and in fact, you saw it in September, we started to break out there and now we’ve broken out of the uh of the March highs and well above it. And I think healthcare again is going to be one of those sectors coming into the new year, you’re going to see money kind of flood into it.

13:35 Jared Blikre

Sure.

14:10 Jared Blikre

All right, let’s get back to portfolio talk here. Um, how do you okay, we’ve just rattled off a list of tickers here, some great ideas. How do you think about them as you or as you add to your portfolio?

14:27 Kenny Polcari

So, here’s how I do it, right? So if I own the stock already, um I’m going to watch it. It’s got to pull back for me. When I say something’s on sale, I’m not talking 3 or 5 or 8%. It’s got to be down 20% or it’s got to be testing the long-term trend line for me to add to that position. If it’s not if it doesn’t if it doesn’t hit either one of those two metrics, I’m going to watch it and hold it. If we get down 20%, I start to lift my head up, I want to watch it on the chart to see where it where it lands on the long-term trend line. Then if the story remains the same but the stock’s just under pressure for no other reason than the market’s a little bit anxious, I would use that opportunity to buy more. Now, if it’s a name that you don’t own, you kind of want to go through the list of names that you like, look at their charts, identify positions where you think, you know, here’s a good entry point for me. I’m patient, I can wait for it uh and and do it that way or you could always do it by just dipping your toes in. Buy a little bit if you like the name and then watch where it goes. If it comes in, you can add to it, bring your basis down. If it goes up, you can watch it, add to it a little bit strategically.

15:37 Jared Blikre

Let’s talk about some of your predictions for 2026. It is an election year, so uh guess what? that’s midterms. Could see some volatility there. What do you think’s going to happen?

15:47 Kenny Polcari

I think we are going to see volatility and confusion the way that you and and chaos the way that you identified in the opening. Look, it the the whole house is up for for bargains, right? So all 435 seats are up to be reelected. So that’s going to cause some confusion. Uh I think the expectation is that the Democrats are going to retake the house, but yet the Republicans are expected to maintain control of the Senate and we have a Republican president. so therefore we’re going to have gridlock. Guess what? The market actually loves gridlock. Why?

16:21 Jared Blikre

It’s predictable. Nothing’s different.

16:22 Kenny Polcari

Because that’s why it’s predictable because nothing happens. You can’t go too far left, you can’t go too far right, right? Everything stays in the middle and the market likes that. But remember, the market can can function no matter what happens. It just wants to know what’s happening. It’s that lack of clarity in the first nine months of the year that’s going to cause that confusion until it becomes clearer on who the candidates are, who’s the actual winner, what does that now mean? And then the market can uh adjust. Look, you may not like the result, but the fact is the market can deal with it.

17:08 Jared Blikre

All right, got to get your take on what the Fed is going to do. Um, we don’t quite know what the Fed is doing in December, but just big picture, next year, are we going to get more rate cuts?

17:21 Kenny Polcari

So, I’m first of all in the camp that we shouldn’t have any rate cuts right now. So while I expect they’re going to cut them in December, uh I’m in the camp that we could leave them right where they are. Now, I think the first uh half of the year, I think we see the Fed just remain patient and they want to wait to see how some of this chaos unfolds. Now, if the data, if the macro data starts to get really weak, if the labor market starts to honestly get really weak, then I would say, yes, the Fed will cut, but I don’t see that yet. I don’t see real, real weakness in the labor market. I see it ticking up a tiny bit, but not enough for me yet to demand that they continue to cut rates. Remember, we’re already down 150 basis points from where we were, right?

18:14 Jared Blikre

Yes.

18:15 Kenny Polcari

We’re going to be back at you know, by by after the Fed meet after the December meeting, we’re going to be in the 3 and a half, 375 range on the Fed funds rate. That’s actually historically normal. That’s not necessarily restrictive. It’s not overly stimulative, which is why I think at that point, what’s going to be interesting is what J. Powell says at the meeting. It’s not going to be about whether we get the cut or not. We’re going to get the cut. It’s going to be like anything, it’s the forward guidance.

18:49 Jared Blikre

That’s right.

18:49 Kenny Polcari

What’s he saying about the next six months? What’s he saying about the mindset of the Fed?

18:55 Jared Blikre

Let’s uh we got a minute or two to go. Let’s bring it back to risk management. Any other thoughts that you would give to traders, investors heading into the new year?

19:04 Kenny Polcari

No, I think, you know, it’s always about not being emotional, right? Is that trying to trying to build a portfolio, understand your risks, build your risks, and then don’t make emotional decisions. If the market backs off, and I fully expect that we’re going to see the market back off. Remember, it’s a mid-term election year. Don’t be surprised if we’re down 10 or 15%. You should know that going in, so you should build your portfolio with that expectation that we’re potentially going to see that. That should allow you to then not get emotional if that happens and to be able to take advantage of uh of the pullback in the market.

19:42 Jared Blikre

Yes, and I think people should exercise patience for that because the market will come to you. And uh also, my recommendation, always have a written plan. Write down your thoughts, why you’re doing stuff because that’s important.

19:54 Kenny Polcari

That’s right. And you can always go back and refer to them and and kind of it reminds yourself, if you have the written plan, right? It kind of settles you down if you go back and you look at it and you understand your reasoning in the middle of all this chaos.

20:12 Jared Blikre

And that’s going to do it for this episode of Trading Pit. Hope you got your 2026 picks locked and loaded.