Morning Digest 07/02

The index's top ten stocks make up nearly 40% of its total value as of Q226. All have some connection to AI.

Now SpaceX is filing its IPO. Priced at 92x sales. Lost $5 billion last year. 

Robert Arnott, chairman of Research Affiliates, called it "ludicrous" in the WSJ this month but said he'd gladly buy SpaceX anyway. His reason? Index funds have to buy it to avoid trailing the benchmark.

It’s becoming a very crowded boat, and moreso with Anthropic and OpenAI IPOs around the corner.

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Good morning partner,

Few things to cover this morning:

Yesterday’s Session

The tug-of-war continues between the concentration and breadth trade, and as I mentioned yesterday, this is mechanically tough for the markets to continue to do unless there’s enough oil in the engine.

Oil being liquidity, a topic we’ll cover later today in another post so keep an eye out for your inbox.

What was interesting to see yesterday was the type of rotation the market chose to apply. Not just into real economy defensive names, but also select parts of the tech trade.

As I broke down last week, there’s a $1.5 trillion rug starting to get pulled in South Korea.

I even gave you the lottery tickets to play in $EWY and $KORU both of which were down big yesterday.

More importantly, they effectively dragged down Micron, NVIDIA, Broadcom, and others with it.

At the same time, the de-risking of these names created a sizeable bid for software stocks like Adobe, where the thesis behind the software industry is being proven correct day by day.

I expect the tug-of-war to continue as markets make up their mind about AI and its real effects on the economy, but we need to be wary of increased whipsaws and volatility.

Let’s take a look at the day’s leaders and laggers:

Comms, Financials, Cyclicals.

Very interesting to see communication stocks lead the day while technology as a whole falls behind by a similar amount. I guess some names in software are associated here through information.

In yesterday’s rotation session, markets chose to bid financials and cyclicals as well. Keep this in mind as I break down the manufacturing PMI later today and point you to one consumer industry that is showing signs of a potential breakout.

On the downside, it seems everything AI-related was taken down.

This is the sort of back-and-forth I’m talking about, one day we have concentration preferences, the next we have rotation into breadth.

The healthiest thing to do in this market is to expose yourself to factors and sectors that have failed to rally along with the AI madness, where risk/reward ratios are much more favorable.

Only Offside Premium members will get access to the companies I choose to buy and deep dive into before anyone else.

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It’s Happening

Yesterday was a small preview of what’s coming ahead.

If you study history, specifically the market setup that led to Japan’s lost decade in the 1980s, and the psychology behind America’s great financial crisis in 2008…

Then you understand what’s happening in South Korea is no different.

What matters is the contagion risk here, where over $3 trillion in market cap created (in less than six months) is being fueled by all-time high margin loans.

The collateral for these loans? US equities that have been going up just as much, like:

And many others which now make a larger share of the S&P 500.
What happens to them - and the index - when Korea starts getting margin called?

I’ve got the answer for you.

News

Movers & ES Levels

Now let’s get into some ES levels for today.

Yesterday’s levels came in handy for traders, and it was especially important for getting a read into what’s happening underneath the auction right now.

$7,500 was not quite tested, but we got within ~5 points of doing so before a wave of buyers came in to bid the market higher.

On the other end, there was a similar reaction right under $7,580. This is where I believe passive sellers started to come in, and then again at $7,558 in a much more passive way toward the end of the session.

If you read this through, I would say positioning suggests there are lots of aggressive buyers now trapped just above $7,500 (the line in the sand for a weekly close) and lots of passive sellers now waiting around $7,580.

Aggressive buyers may not have that much room - or patience - to hold a drawdown, especially given how important $7,500 is to the “P” shaped profile this week.

Bulls want to close above $7,520 and avoid getting near $7,500 at all costs, otherwise they risk the exit of all these aggressive buyers and then we see $7,450 or so.

Bears are sitting comfortably between $7,558 and $7,580 with room for exits at $7,600 given their passive nature yesterday.

Their goal is to dial up the heat as we approach $7,500 and attempt to take out those trapped buyers.

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.

Click here to check it out.

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.

It has just closed its first month at a 0.7% return, while the S&P 500 has moved lower by 1.30% over the same period.

Not a bad start, especially as we are still 62% in cash.

For paid members, I’ll cover correlation and volatility measures, outlook on prices to add or cut, option hedging strategies, and even discuss some long/short equity pair trades to make some short-term gains and cushion these small drawdowns.

All of these features will be limited for free readers, to get the full content, I will see you inside Offside Premium.

Markets are getting choppy, make sure you have me on your corner.

Keep notifications on, and consider joining us on the other side as I will post my deep dive research on these watchlist names:

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. ⬇