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Good morning partner,
Few things to cover this morning:
Friday’s Session
It was almost like everyone took the day off ahead of the World Cup finals, as volatility compressed and no one theme emerged in the market to end the week.
No concentration, no HALO, nothing.
Of course this is also normal, and it essentially sets the market up for a volatility breakout event after such a compressing day took place.
Specifically, we have earnings to look forward to this week as a catalyst for this volatility breakout.
I will cover the most important ones, most especially Google’s earnings considering they fell victim to the aggressive accounting measures being applied by most other peers in the AI race.
For now, Markets remain quiet. I still expect we will fall back into the tug-of-war trend between tech concentration days and HALO real economy rotations.
Again, if this rotation is orderly and has enough available liquidity, we should see no more than a 15-20% drawdown in the S&P as capital completes its migration.
Let’s take a look at last week’s leaders and laggers:
Energy, Real Estate, Defensives.
This tells you markets are once again worried about the two main events around inflation:
Continued Hormuz closure
Inflationary AI demand on infrastructure materials and energy
Which is not the good kind of inflation that tends to lift all stocks, therefore you only see sectors like real estate and defensives bid higher on this bearish inflation theme.
As China just burst the US pricing model on AI, showing the world we don’t need trillions in capex, I believe the inflation outlook will be forced to change.
Either way this outlook goes, I believe the winning themes remain the same within HALO real economy stocks and the beaten-down software names.
However,
If I’m correct in expecting lower inflation after the China bout and an eventual Hormuz opening, there’s one overlooked trade that will deliver a hefty profit.
Turn the Music Down
Single stock volatility is at record highs against the VIX.
The reason for this phenomenon is that the momentum factor quickly became the entire market’s engine.
By design, all AI and tech trades today are momentum and growth stocks, so after you read on the fundamentals of why AI winners become losers, you can look to these factors for timing the potential unwind.
It seems July - so far - has shown enough evidence of this unwind, with the momentum factor falling by over 20% into a bear market, dragging most semiconductor/memory stocks down with it.
Now this move was exacerbated by the Chinese news, leaving very little spark left to light another down move. Unless this earnings season brings forth financial pressure from aggressive accounting practices, I would expect somewhat of a rebound in this trade soon.
Don’t get me wrong though, there’s a lot of unwinding left in this corner of the market.
And,
While the AI trade goes into a bear market, one of my top software picks is close to 20% off the lows, proving an AI unwind will directly serve as a bid for these software names.
News
Strikes on Iran continue for nine consecutive days as the US forces a resolution to stop Iran from striking further targets and to open the Strait of Hormuz.
Kimi Kim3 is out as the latest open-source model beating all other AI competitors with a much lower cost basis, sparking a new price war on token economics that may end up bursting the AI trade altogether.
Consumer Sentiment rebounded after a short fall in gas prices, though as the Iran war continues to escalate onto five months now, this could be a further headwind allowing us to DCA into our favorite HALO names.
The KOSPI posts another hard decline after 3% of South Korea’s adult population is hit with a margin call. The issue doesn’t stop there as the $1.5 trillion betting bubble will have to force liquidate roughly $600 billion in US technology stocks.
Movers & ES Levels
BJ’s Restaurants 📈 Rallied by just over 8% after analysts at William Blair upgraded the stock on improving sales momentum and outlooks. If restaurants can post improvements, imagine what’s in store for our consumer staples trade idea.
Nebius 📈 Rose nearly 4% after announcing a new $775 million debt financing initiative going toward more AI infrastructure expansion. This is yet another of the hundreds of players flooding the market with cheaper capital and more physical supply capacity… What happens to margins then?
Alcoa 📉 Fell 6.2% after citing lower aluminum demand in the US. This has everything to do with data center annual growth slowing to less than 5%, also boosting confidence in our metals long/short equity trade idea.
Intuitive Surgical 📉 Collapsed by 14% after reporting weaker US sales for its surgical robotics product. I believe this is one of the companies best prepared to lead the way into the robotics wave, perhaps a dip-buying opportunity, perhaps confirmation that the AI hype has gone too far.
Now let’s get into some ES levels for today.
The lower ranges given last week have been rejected with overwhelmingly aggressive buyers stepping in.
$7,483 through $7,490 has left enough tails in the auction to make me see them as easy wins for sellers to tackle, considering the amount of aggressive buyers that are now trapped around those areas.
These same early buyers had been in the scene since July 2nd, starting at that $7,483 mark and repeating their aggressive auction every time we’ve gotten close to that price.
Meaning, we may keep getting aggressive buys above this. Specifically at $7,500 through $7,552.
Those late buyers create more easy wins for sellers to balance the tape as has been done all of July. If these sellers fail to contain the pressure, then we could quickly see $7,575 - $7,600 trade again with no resistance.
Sellers want to ultimately tackle today’s momentum and get us back within the contained zone of $7,500 - $7,525. Closing within this area - or lower - can give the bears more time to assess and catch their breath before another potential run.
So these levels - and the reaction around them - will be very telling.
Portfolio
Even after Friday’s weak auction, the portfolio is still holding strong at 4.4% profit in its first month of operation.
We remain over 50% in cash, with a good chunk to be deployed this week as our GLP-1 boom trade idea shows us levels to enter at.
As I pointed out last week, Domino’s Pizza reported earnings this morning, sending the stock higher by over 5%.
Expect to see the P/L impact reflected in tomorrow’s morning digest, another breakthrough for members.
As cumulative profits have delivered over two years’ worth of membership costs, I decided to raise prices last week.
Still,
You can enjoy an introductory rate of $125.00/month for the first three months - enough to cover over a year of membership through profits - and then it kicks up to the standard new rate.
Here’s the positioning update for today’s premium members, where a correlation/volatility primer will be added on this weekend:
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