In partnership with
Want to get the most out of ChatGPT?
ChatGPT is a superpower if you know how to use it correctly.
Discover how HubSpot's guide to AI can elevate both your productivity and creativity to get more things done.
Learn to automate tasks, enhance decision-making, and foster innovation with the power of AI.
Good morning partner,
Few things to cover this morning:
Yesterday’s Session
Looks like we had another rotation day on our hands. This isn’t necessarily bullish or bearish, it’s just the market we’ve got right now.
Breadth wise, 49.2% of all stocks advanced yesterday, yet the S&P 500 index closed a decline of over 1%.
Normally, rotation days can still be green days, except when too much concentration into one area is present like today, where you can have half the market go up and the composite still decline.
I would see this as a sign that the music has slowed but not stopped. It stops when there’s no longer a rotation but a selling in all equity sectors simultaneously.
Let’s take a look at the day’s leaders and laggers:
Defensives, Healthcare, Real Estate.
Like yesterday, this session showed a very safety aware market. More than rotations into these non-AI sectors, other asset classes seemed to follow along.
Take the Dollar for example, pushing past $101 now and looking like it wants to print $104-$105 soon. Reaching those levels would mean a whole lot in terms of ripples through gold and Bitcoin probably, as well as the overextended stocks in tech.
Everything AI was sold yesterday, from Technology and Basic Materials to Industrials.
These names could use lower prices to be honest, lots of retail FOMO are attached to the trade and they need to be shaken off.
No matter how much capex is being spent, the AI trade really boils down to how much revenue and productivity these AI models can truly deliver.
So far, those requirements are looking speculative at best. These selloffs are no coincidence, but rather a symptom of what’s actually happening underneath.
We covered this in-depth last week inside Offside Premium by the way.
The Yield is Talking
Nothing further to say about Iran today, I’ll cover updates (if any) in tomorrow’s digest.
Today, I thought to replace that segment with a worthy mention in the United States yield curve (10y minus 2y) as it is now continuing in its lower low path.
A flattening yield curve is bearish for equities in most cases, as you can see the last peak was seen in late 2021 before the 2022 bear market.
One important thing to know is that, historically, 12-18 months after the curve goes from negative to positive, a recession has always followed.
I don’t think this time will be an exception, and the fact we’re making lower lows means bond traders are single-handedly forcing the Fed’s hand into hiking rates now.
Ball’s on your court Warsh.
News
The NASDAQ turns more volatile than the S&P 500 in recent days as technology stocks continue to whipsaw worldwide. All eyes on Micron earnings today after the close.
South Korea’s KOSPI has its largest one-day drop of over 10% yesterday, I suggest you track Taiwan and South Korea to see just how speculative the AI trade is getting. People are taking loans and cashing in life insurance money early just to buy the rally.
Bank of America now expects to see up to three rate hikes before the year is over, going back to my yield curve mention and the fact that inflation is still twice what the Fed would want it to be. By the way, AI is still inflationary.
The Trump Administration will loan up to $17 billion to speed up 10 nuclear reactor construction projects across the nation, here’s where I’d keep Constellation Energy in mind as they pretty much hold the nuclear monopoly in the US.
Movers & ES Levels
International Business Machines 📈 Jumped over 5% yesterday on a new J.P. Morgan upgrade and recent Trump push to speed up quantum computing development, sentiment directly translated to IBM.
Edgewell Personal Care 📈 Shares gained 15% after the consumer company rejected a takeover bid seen as too low. This goes to show the current valuation scheme across consumer stocks may be too low to ignore now, good for our DPZ position.
Qualcomm 📉 Sunk 8% as a broader tech selloff pressured the stock lower, the company is touting a new $4 billion acquisition of Modular (another AI name), but markets could be now seeing past the circular financing Ponzi.
Best Buy 📉 Is lower by 1.2% for no apparent reason, just that the CFO Matt Bilunas is now stepping down. I’ve always liked Best Buy, great profit margins and all the good stuff a compounder needs.
Now let’s get into some ES levels for today.
We seem to be back into a tight range for the S&P after the selloff from $7,600. This consolidation comes a couple of days before PCE and GDP come out on Thursday.
In terms of volatility, the ATRs are still compressed below historical averages, so I can expect a consolidation in this $7,425 to $7,460 range for now.
Bulls want to see us break above that high-point, and start to construct the tape at $7,500 or more. For now, it seems all rallies are getting sold as we see more rotation sessions heading out of tech and AI.
Bears want to break below the low-point and starts to build low-volume gaps starting at $7,400 such as was done at $7,500. These sharp moves beyond low-volume gaps suggest “fair” value is perceived lower.
I would think this concept of fair value is to be had in the $6,900s for now, unless new information about AI comes into the picture, then we could see an outright 20% discount from highs.
I will relay you to this publication covering the Commitment of Traders report, and why today’s positioning may signal a continued downtrend for the index in the foreseeable future.
Portfolio
I have initiated the Offside Portfolio for paid members, but you will receive daily updates on my positions after I decide to buy or sell.
Like yesterday, when I alerted of my Workday and Adobe buying. Later this week, the auction may be favorable to execute my weekly DCA into one of these names as well.
As these positions begin to meet their full allocation targets, options and futures hedging will be applied and alerted inside Offside Premium.
Markets are getting choppy, make sure you have me on your corner.
So keep notifications on, and consider joining us on the other side as I will post my deep dive research on these watchlist names:
Lululemon (LULU)
Uber (UBER)
Pagaya Technologies (PGY)
Cognizant (CTSH)
Nintendo (NTDOY)
Tractor Supply Co. (TSCO)
Here’s my current pitch deck on Lululemon for starters, get familiar with my thesis before I drop the entire deep dive in Offside Premium. ⬇
Subscribe to our premium content to read the rest.
Become a paying subscriber to get access to this post and other subscriber-only content.
Upgrade