Morning Digest 07/15

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Good morning partner,

Few things to cover this morning:

Yesterday’s Session

Even as the banks presented record profits and healthy deal-making, the market barely edged higher past our resistance levels.

The banks are essentially the keepers and controllers of the capital cycle, and the capital cycle drives risk-taking appetites for the stock market.

So perhaps this record profit announcement across Goldman Sachs, Bank of America, J.P. Morgan Chase, and Citigroup is also a sign of potential tightening to come.

Otherwise, I’m having a hard time figuring out (other than Iran) why markets had such a balanced - weak - session yesterday with no clear leadership.

Stay tuned, later today I will break down the banking earnings and give you the better insight from them.

Let’s take a look at yesterday’s leaders and laggers:

Industrials, Technology, Cyclicals.

Another AI-led day, albeit in a very weak manner. The industrials that were once beginning to unwind managed to lead the day yesterday of all things, I think this could be a dead cat bounce though.

The reason I say that is you’re starting to see names like IBM go down over 25% in a single day from missed AI expectations, where otherwise the core business looked great.

These same expectations are centered around industrials and materials, where any disappointment (however small) around data center contracting, AI infrastructure, or repeated aggressive language could lead to similar selloffs.

At the end of the day, it all comes down to the capex intensity out of hyperscalers and other competitors coming online (like in Taiwan, Japan, South Korea.)

While more capex is good for the AI trade, it is also the exact reason why it could end it all.

It’s called the capital cycle, and every overinvestment boom has led to lower pricing power, margins, and valuations.

Understanding the capital cycle will help you understand that this is when AI winners become losers.

The Tricky Part

We’ve all been trained to look at valuation multiples as the ultimate filter for opportunity.

More often than not, future returns are determined by the multiple you pay today for a company, that’s absolutely true.

What people often miss is the relativeness of these multiples, let’s take the semiconductor/memory space as an example:

When markets suddenly start to pay less for a company or a sector, it typically means their expectations for earnings are getting worse (not better.)

The opposite is true when multiples are suddenly rising, expectations are getting better and you can often find great investments if the growth can be justified.

If this is the case, then why would I be buying something like Adobe or Workday just because they are cheap?

That’s the tricky part… Every once in a while, things will trade at high/low multiples for the wrong reasons, and if you can spot those, the corrections can pay off big.

This is why I bought Adobe, and why I’m looking for $600 next.

News

Movers & ES Levels

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

We rammed through the $7,575 - $7,600 range I gave you yesterday as being likely for the bulls to win.

More importantly, buyers achieved this run leaving very little openings behind, as no aggressive footprints took place on the way up.

At the same time, these buyers are now running into the multiple aggressive selling walls standing in the $7,600 - $7,620 range here, an area that must be taken out in a much sharper way than yesterday’s uptrend.

This puts the market in an awkward situation, as we now lean on $7,600 - $7,620 to be rammed by buyers who are probably in need of a breather, and have little cash in the sidelines to keep buying.

Then, sellers who pretty much took a break for the entire day, could be ready to take on the last level where aggressive buyers decided to play (and are likely trapped), which is $7,532 or so.

From this setup, I expect a slow grind lower toward $7,532 and then an ultimate sharp ram through if the bears are to win. For bulls, their job remains to keep closing above $7,575 - $7,552 to increase the odds of a ram through that resistance wall.

Portfolio

3% in just over a month, beating the S&P while still being 50-60% in cash.

Last week, I pitched out two new positions in the apparel industry, which has now delivered over 6.1% on equity and 30%+ on options.

If you missed the apparel play, it may not be too late for you:

Click Here to Access That Report.

The primary metals long/short equity trade I pushed out yesterday is also ripe for entering in the coming days, as the volume profile and chart looks favorable for taking some exposure in it through the next quarter.

I will be adding a portfolio correlation and volatility study as an add-on feature in our weekly reports, so you can understand what drives risk and reward around the portfolio itself.

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 on a primary metals long/short equity play for starters, a shorter-term swing position I am considering after my PMI breakdown post, which will be hedged in case my thinking is off.

Here’s the positioning update for today’s premium members, stay tuned for these updates as the metals trade may be put on in the coming days: