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Good morning partner,
Few things to cover this morning:
Yesterday’s Session
Very unclear session, one of the most nuanced I’ve seen in a while.
Not quite a rotation, not quite the risk-on AI concentration trade.
What we saw yesterday was honestly nothing, as over 70% of sectors barely moved anything more than 0.1-0.2%.
This morning, more evidence has come on the table as South Korea’s KOSPI continues to decline past a 30% drawdown from the highs, just as the central bank decided to hike rates, directly hitting the brakes on the AI margin madness happening there.
The result of these whipsaws happening in the AI-related is a large divergence in volatility terms.
ETFs like the SOX and DRAM now carry 5x more volatility than the S&P 500, and if you read yesterday’s post on banking earnings, you know that the AI trade is now the most crowded in the history of finance.
I will take yesterday’s session as a side effect of this setup, where overall index volatility keeps compressing while individual stock volatility spikes.
This is called the “Dispersion” trade, and it typically lasts for 1-3 months as opposed to the current 6 month-long one we’re under.
All that to say, the next logical step is to keep having the rotation trade back into HALO and real economy names in an orderly manner.
If this volatility gets out of hand, and the rotation is forced to happen quicker, then we could have a more aggressive market downturn than my current base case for a 10-15% decline.
Let’s take a look at yesterday’s leaders and laggers:
Communications, Cyclicals, Defensives.
The little bullish sentiment that came in yesterday decided to concentrate around the cash-flowing areas of the AI trade, and leave the areas that have yet to see any cash flow.
Remember that there’s a two-sided bet in the AI race going on now, where those receiving all the hyperscaler capex and booking it as revenue will continue to see their stock prices bid as long as capex continues.
On the other side, there are those like materials and industrials (lagging yesterday) who likely won’t see a return on all the capex they’ve put down toward AI infrastructure.
Much like the software vs semis trade, there’s now a cash flow now vs cash flow uncertain trade happening elsewhere.
What I want to focus on though is the fact that cyclicals and defensives rose together in a day when markets obviously chose “cash flow now” companies.
You already have the cyclicals trade in apparel, equity + options sleeve that’s already up over 6% since execution.
I am now working on a similar setup in the defensives, where I expect to see both double-digit upside and a very attractive dividend yield.
Table is Hot
South Korean stocks report the highest level of volatility since the great financial crisis in 2008.
This is the side effect of a $1.5 trillion gambling spree happening around the KOSPI and its leveraged derivative ETFs, resulting in limit up/down days during most days of the week.
Needless to say, that’s not a healthy-functioning market, and the contagion repercussions could worsen for the rest of the South Korean financial system as well as all the players involved in this memory trade race.
Because of the $600 billion in US equity collateral behind these bets, higher interest rates and volatility halts could call in most of this collateral within the month, so I lean to believe that the semiconductor/memory selloff in the US is not over just yet.
News
Taiwan Semiconductor to spend an additional $265 billion in US capacity expansion projects, the announcement comes a day after ASML said they’d expand capacity by 60% over the next two days. Overshooting supply is when AI winners become losers.
Japan plans to fix its aging population issue and labor shortages by building a national robotics hub, so they plan to buy the latest NVIDIA Rubin chips in order to get this done.
Alibaba jumps after Apple chose the Chinese powerhouse as an AI campaign collaborator, expanding on our thesis behind a higher valuation for the company as part of our portfolio.
Brazil Hit With 25% additional tariffs for most of its products, except for coffee now that the bean’s price is spiking aggressively, we can’t have an El Nino heatwave and tariffs, I think this is a net win for small coffee players like Dutch Bros.
Movers & ES Levels
BlackRock 📈 Rose 6.6% after becoming the world’s largest asset manager with over $15 trillion in AUM, their results look awfully similar to my investment banking earnings breakdown and what it means for the capital cycle.
Bank of New York Mellon 📈 Gained 5.1% after a strong quarterly announcement, another bank led by the top of the issuance and investment banking fee cycle that’s typically led to market turns. Click here to read my deep dive on the topic.
Micron 📉 Fell by 8% after Chinese competitor CXMT started pushing toward an IPO, Apple’s adoption of Chinese players, and most titans of memory manufacturing beginning to overshoot supply and threaten margins.
SpaceX 📉 Declined another 0.6% to close below its initial IPO price, the reasons are unclear but I believe it is getting punished along with everything else AI-related, where most growth promises are clearly not going to be met.
Now let’s get into some ES levels for today.
Buyers are getting more aggressive in their dip-buying compared to earlier in the week.
What doesn’t budge is the upper range I provided yesterday, where sellers (both passive and aggressive) are defending the $7,600 line with some fake-out room of roughly 25 points above.
The shift in behavior from buyers could be the pent-up demand to keep pushing the index higher, and as bears know this they have chosen to defend their marks in a passive way rather than go all-in just yet.
Seems like the buyers aren’t that patient, as they have become aggressive at the $7,595 - $7,575 levels and effectively getting “trapped” to give sellers an opening.
Bulls want to avoid touching those two levels today, where the passive sellers could become aggressive quickly and ram through lower.
Bears need quite the opposite here, they want to have the chance to ram through $7,595 - $7,575 and see us close near or at $7,552.
Otherwise, I think $7,600 - $7,625 remains the safe zone for now.
Portfolio
We keep hovering between 3-4% to close out the first full month of operations in the Offside Portfolio.
Not a bad start, considering it would have paid for over a year’s worth of Premium membership with half the year to go still.
Even better, while being 58% in cash.
As mentioned, I have added two names in the wholesale defensive sectors, and a proper deep dive is soon to hit your inbox if you’re subscribed to Premium.
There’s also a name I talked about often, but have decided to take out of the watchlist as I don’t think there’s much upside to it.
PLEASE NOTE THAT PRICES WILL GO UP TO $249.99/Mo STARTING JULY 17TH (TOMORROW)
Markets are getting choppy, make sure you have me on your corner.
Here’s the positioning update for today’s premium members, stay tuned for these updates as the metals and defensives trade may be put on in the coming days:
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