Morning Digest 07/03

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Good morning partner,

Few things to cover this morning:

Yesterday’s Session

Markets chose to rotate again rather than to concentrate, as the two sides have come to be the only thing driving the price action recently.

If you read yesterday’s take on the tug-of-war currently present, then you know this might be one of the reasons why the Fed chose to pump the M2 money supply by a second standard deviation last month.

What’s interesting is more than half the market went up, yet the S&P had a sharp selloff of over 100 points in no time from levels given in yesterday’s digest.

I want you to focus on one relationship though, and notice that each time AI-related tech comes off, software and real economy names take the lead (look at Adobe and Walmart for example.)

Standing by my warning on South Korea, which paid off big this week, I expect markets will continue in this back-and-forth until the decision is made around AI’s future. What’s likely to happen is increased volatility and liquidity until something gives.

No crash or bear market of any kind unless we don’t get a rotation but rather a de-risking across all sectors.

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

Healthcare, Defensives, Materials.

One of the most defensive rotations I’ve seen this week for sure, and I hope this one goes to show you how fickle the market has become…

Nine out of eleven sectors pushed higher yesterday, yet you see the S&P closing in the red.

This is concentration at its finest, which can be easily spotted in the Technology, Communications decline.

There are other areas exposed to this trade, like industrials and materials, but most of the sector is already well off their 52-week highs for me to dismiss them as a concern.

What remains excessively expensive and irrational is the memory and semis trade, but cracks are beginning to show with Micron being down 20% after my warning post coming from South Korea.

In this setup, where a rotation is more probable than a broader selloff, I am actively hunting for companies in sectors that win no matter what happens to the AI trade.

(There are two of them)

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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A History Check

You’ve probably seen this image before.

What they don’t tell you is that it is outdated by a few quarters now, where the following has happened:

So, when you account for all these nuances, this 40% should very quickly get closer to ~55% or more.

As I’ve said throughout my Twitter, I don’t think I have the skills (nor the stomach) to short this madness, as timing the top would be a very painful process.

I suggest you don’t try this either, unless it is in a very risk-adjusted manner like option spreads or long/short equity pairs.

What I’m doing here is spotting the areas that may reward investors no matter what the AI trade ends up doing, and I believe I’ve found a couple.

Take this Hyperscaler vs Semis divergence for your weekend reading.

News

Movers & ES Levels

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

Holiday weekend ahead, please do not open up your charts today!!

Enjoy, grill some steaks, and drink a beer on me.

Since I am in Spain right now, there’s none of that going on this weekend, so you better bet I am going to be at my desk working hard to bring you some kick ass ideas for next week.

Still, here’s my take on yesterday’s session:

We rammed the aggressive buyers that were trapped at $7,500 as was expected, only to find a second round of even more aggressive buyers right at $7,480 or so.

What happened is the sellers who aggressively sold at $7,520 (another given level) got trapped there and then again at $7,500. Buyers waited until the bears were positioned to then ram through these levels and take them out.

All told, there are now no trapped participants other than the aggressive buyers at $7,450 and the supporters at $7,500. Next week is a balancing game to test where aggressive sellers want to come back to play.

The most important fact is that bulls managed to close above $7,500 to be in the upper half of the “P” shaped profile. This is a failed bearish reversal, so I think maybe we go higher to $7,612 or so quicker than you think.

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.

In less than a month, we have managed to outperform the S&P 500 by just over 3%.

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.

PLEASE NOTE THAT PRICES WILL GO UP TO $249.99/Mo STARTING JULY 17TH

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. ⬇