Morning Digest 07/06

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Good morning partner,

Few things to cover this morning:

Friday’s Session

As covered in yesterday’s weekly plan, the momentum trade is beginning to fade.

Quality, breadth, and value are all factors keen to replace the leaders as soon as they are given a chance.

The market has been showing you this rotation trade since last month, and right now it seems it is desperate to break out and be part of the game.

Notice how AI-related names ended the day down big, giving software names and beaten-down hyperscalers like Microsoft a chance to overtake them and lead the day.

Literally everything AI-related is driving a wedge in the concentration vs breadth trade, take Caterpillar for example (down 2.8%.)

Like I’ve said before, this is more like the market reaching the wall of logic, realizing that current valuations command too high of an expectation to be fulfilled by these companies.

The probable outcome is a 15-20% drawdown in the indexes so long as we have a timely and orderly rotation out of these bloated names. If this isn’t done in a controlled manner, then we could see a larger drawdown than that.

Here’s what I plan to do about it, and what triggers the rotation specifically.

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

Healthcare, Comms, Cyclicals.

Not the most defensive week I’ve seen since these digests started posting.

But, it makes sense considering the type of opening the week had, massively led by these AI-related communication names.

What’s interesting is the way Healthcare is leading two weeks back-to-back. Usually, a defensive rotation during a recovering economy is led by a mix of healthcare and financials (banks specifically.)

This time, financials are moving, but not as much as they should to perhaps reflect the uncertainty around economic output outside of the AI capex splashing around a small circle.

When it comes to cyclicals, this is where I think we can have some fun in the coming quarter:

There are two ways I’m looking to go about this, and a combination of the two:

Offside Premium members will have this trade structure, management, and thesis paper sent to them this week.

Click here to access Offside Premium content.

Checking On Korea

The KOSPI is down overnight, which should be bearish for the DRAM and Semiconductor trade in the United States.

However,

I expect that Samsung earnings tomorrow will deliver a rebound to the South Korean index, which may hold up strong until SK Hynix is listed in American markets coming up.

The issue with the memory trade is twofold:

These two factors combined create an issue much bigger than most realize, specifically as the $1.5 trillion gambling spree in South Korea could take down as much as $600 billion worth of US equities (Micron, SanDisk included.)

Here’s exactly what’s happening inside South Korea, and how it can affect US markets.

News

Movers & ES Levels

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

Two extremely important levels remain, and were made far more important in Thursday’s session.

These are $7,500 and $7,600 respectively, where hard and sharp swings left behind a footprint for both aggressive buyers and sellers. If you’ve been following these digests, you understand aggressive auction levels have very little tolerance for movement, so these participants are rather quick to close out and move on.

Therefore, I would not focus on the chop that is likely to show up between $7,575 and $7,520. You can play around these if you’re a more active trader, as a breakout zone or reversal, capturing 25 points on breakouts and 50 points on reversals.

For me, I’d rather save my emotional and mental capital to act around the extremes of $7,600 and $7,500 where a cushy 100-point range becomes attractive.

If we were to see a break past any of these levels, specifically $7,500 as the cutoff point inside a “P” shaped profile, then I think a renewed bull/bear market can be in our hands.

FOMC on Wednesday, earnings kickoff, and a post-Iran inflation report could all make it happen this month.

Stay tuned.

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 trading brief for On Holdings (ONON) for starters, a shorter-term swing position I am considering, get familiar with my thesis before I drop the entire deep dive in Offside Premium. ⬇