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Good morning partner,
Few things to cover this morning:
Yesterday’s Session
The rotation trade continues to gain ground as the AI-related areas of the market get sold, again this isn’t necessarily bearish for equities as capital remains within the system.
With Micron posting a massive quarterly beat and guidance raise, the pre-market this morning looks quite the opposite from yesterday’s close, with the concentration trade coming back into the spotlight.
I would keep an eye on the SPY to RSP ratio on a short-term basis, as well as the IVE to IVW (value vs growth) behavior toward the end of the week to gauge which of the two camps grabs the most interest.
Save for the Micron event, most of this week had been a pure rotation trade, so I would expect this behavior to continue into the end of the third quarter.
Let’s take a look at the day’s leaders and laggers:
Healthcare, Utilities, Cyclicals.
This is the defensive rotation I just mentioned, with everything related to AI beginning to get de-risked.
From energy to infrastructure and communications, it seems the ripple effects of the “bullwhip” posted for paid members is starting to come to fruition.
If you read our last take on the AI trade, then you also know a continuation of this theme can bring renewed interest to the Software space.
One name to watch is Duolingo (DUOL) now back into a bull market after being one of the clear “replacement” stories.
Our Software deep dives continue to get posted inside Offside Premium this week, as more of these narratives get taken down within the rotation play.
Besides the memory rally rooted in Micron’s results, you can see that NVIDIA and its $5 trillion market cap is starting to lag every other peer.
There’s a specific event in the IRS code that will start to cut reported EPS in half, so maybe the market is looking to price this in ahead of the surprise, we covered the entire theme for you here ⬇
Too Much Confidence
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 Bank of America High Yield Credit Spreads, a measure of how risky corporate bonds are relative to the risk-free rate (10y bonds.)
So far, we still trade at cyclical lows, meaning markets see no risk in the corporate credit markets.
However,
Just like the VIX, this tends to spike without warning, so I would keep an eye on this as companies like Google, Oracle, and NVIDIA continue to finance their drunken sailor spending through new bond issuance.
Hedge fund manager Lee Robinson has something to say about the overconfidence seen in these spreads, comparing it to the 2008 subprime crisis as private credit loans are increasingly backed by GPU prices (which are beginning to crater.)
News
A 7.5 Magnitude Earthquake shakes Venezuela after Japan and California were hit as well in a single day. Damages are being assessed now and Trump has publicly stated he will send aid to the nation, private equity investors are lining up to expose their capital to rebuilding Venezuela’s infrastructure under U.S. influence.
GTA VI reached $1 billion in sales after just three days of pre-launch, I had posted the Take-Two Interactive (TTWO) thesis in my Twitter calling for the bullish case toward $300 per share as analysts haven’t updated revenue targets, an easy 50-80% beat is in the making based on YouTube trailer views and preordering volume.
The White House may have just given Kevin Warsh a subtle green light to raise interest rates this year. Whether inflation or AI speculation is the root concern, it seems most Wall Street banks agree that rates should be going up, not down.
Amazon Prime Day debuts this year with sales 16% lower compared to last year, one of the clearest indicators of a recession in the bottom part of this K-shaped economy. I stand by my opinion that lots of names in that bottom section are going to make for great compounders upon recovery.
Movers & ES Levels
Uber 📈 Got as high as 7.5% at one point yesterday after Nancy Pelosi announced a ton of call options buying activity, this had been on my watchlist as you know, and as of today makes part of the Offside portfolio at $70 per share (deep dive coming for paid.)
KB Home 📈 Rallied over 16% after an upbeat housing demand outlook, a name I had given for free in my Twitter at the beginning of the year, the housing thesis is starting to play out nicely now and will prompt me to cover the situation properly for paid.
Cerebras 📉 Plummeted by 19.5% despite a strong quarterly release, this goes to show investor expectations had been too high to meet, as are most of the AI companies today. This is why we begin our process by analyzing expectations first.
Alibaba 📉 Gets down below $100 for the first time in 16 months after Anthropic accused it of “stealing” its AI capabilities. By now, it’s known that China has better and cheaper AI, the fact Anthropic has to resort to these accusations show they’re getting desperate to keep more Microsofts from collaborating with DeepSeek and other Chinese models.
Now let’s get into some ES levels for today.
$7,500 was brazed and rejected harshly as anticipated, it was a similar “sell the rally” behavior as we saw at $7,600.
What’s interesting is we saw the opposite “buy the dip” reaction near $7,400. This gives us a clean 100-point range to lean on for the time being, considering it can be broken as we get PCE and GDP data later today.
Bulls want to close and build the tape above $7,500 to continue an uptrend and resume a dip-buying herd behavior, Micron’s earnings help, but economic data stands in the way.
Bears want to close below $7,425 and either consolidate or break $7,400. What’s important to keep in mind is the “P” shaped volume profile cutting off at $7,500 exactly.
As we approach a weekly close below that cutoff, a “P” reversal is typically the early stage in capitulation, which can be a probable outcome if the rotation continues out of AI-related areas and into real economy defensives.
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 Uber (UBER) buying at $70.
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)
Pagaya Technologies (PGY)
Cognizant (CTSH)
Nintendo (NTDOY)
Tractor Supply Co. (TSCO)
Intuitive Surgical (ISRG)
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. ⬇
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