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Good morning partner,
Few things to cover this morning:
Yesterday’s Session
As expected from the Chinese-induced selloff last week, this recent capitulation has created a short-term bottom and rebound for the technology and AI-related stock trade.
Seems like the tug-of-war continues, so I expect the rotational days to continue to be more abundant during and after earnings season.
Especially as the S&P 500 closed below a key level yesterday, signaling participants are placing a higher probability on this outcome rather than a renewed concentration theme.
As always, the broader risk-taking appetite will be determined by how orderly this rotation takes place, if the pace gets too aggressive, we may see a broader risk-off move in the markets.
The exception to the tug-of-war this earnings season will of course be the hyperscaler numbers, chipmakers, and other deeply involved names in the AI race.
Let’s take a look at yesterday’s leaders and laggers:
Technology, Materials, Industrials.
The same stocks that sold off yesterday are the ones leading the market today. Notice that all three of these leaders are the ones directly involved in every phase of the AI growth narrative.
Even names like Bloom Energy (BE) and Caterpillar (CAT) are rebounding this morning as the momentum starts to tick higher again.
In Sunday’s weekly plan, I showed you how the momentum trade had hit a 20% drawdown where institutional involvement is triggered, now money is changing hands and that’s why the rebound is here.
Usually, these 20% marks are tested 2-3x before markets decide where they want to go from there and organize their collateral requirements.
So, I expect this to be the first of another test to come. If the market rejects that selloff as it just did, then we could expect more bullish price action down the line.
Otherwise, the rotation wins the tug-of-war, and momentum/growth fails the second or third test of this 20% drawdown mark.
Everyone Can Join
Yesterday, two very important things happened in the AI space.
Google released a new, more efficient chip, to compete with other TPU and GPU makers in the market, tailoring this product to run their Gemini models first.
AMD expanded its server rack capacity, and landed Microsoft as its first customer
While this is great news for all the companies involved, it is a net negative for the rest of the AI trade down the line.
This is the 15th time we get news of expansion in the span of three days folks.
Over $30 billion of capital has gone into these data center, servers, and chipmaking efforts and we’re only three weeks into the month.
That should scare you if you’re an AI bull, because while everyone focused on the demand side of the equation, only a few were willing to ask about supply.
Supply was never in the minds of these buyers and management teams, but now it might be.
With all this new competition and supply of chips and servers coming online, I wonder what happens to margins and earnings down the line.
For all involved, it likely won’t be great, which explains why most of these companies trade at cycle-low P/E multiples.
News
Goldman Sachs offers three alternative areas to invest into outside of the AI trade. Not surprisingly, a lot of the stocks in the Offside Portfolio are included in the bank’s reading.
Commodity Traders begin to form an opinion on how El Nino is going to affect markets in the coming months. A record European heatwave and this global phenomenon can likely create tail risk opportunities when prices normalize.
Samsung shares rise as the company makes a narrative push for physical AI in the robotics space. I’m not a robotics bear, but I also cannot help and notice how the AI promise is shifting every other month now while delivering nothing.
Trump Imposed 50% tariffs on Canadian goods after an alleged trade discrimination case. I am automatically interested in looking within the lumber, oil, and natural gas areas of that exposure for some opportunities here.
Movers & ES Levels
Alibaba 📈 Came back with a near 5% rally after its Qwen AI model proved good enough to challenge Anthropic’s Fable 5. As part of the Offside Portfolio, I’m happy to see China catching a bid here.
Iren 📈 Leads the day with a 19.5% rally after the company signed new AI infrastructure customer deals. I repeat, how many such news have we heard this week? There’s a ton of new supply and competition entering the AI trade that wasn’t underwritten for before.
Restaurant Stocks 📉 Fell nearly double-digits yesterday as a recent cyclosporiasis outbreak was linked to lettuce products in places like CAVA, Chipotle, and others. I believe this can be the opening I need to execute my GLP-1 boom trade structure pitched yesterday, stay tuned.
Best Buy 📉 Lost nearly 5% as the memory cost spikes continue to impact their hardware pricing. Because this is a brick-and-mortar managing billions in sitting inventory, the effects of pricing are amplified by the very nature of the business.
Now let’s get into some ES levels for today.
Yesterday’s levels played out beautifully, giving you the exact high and exact low.
Now that we’ve seen the reaction from buyers and sellers at both extremes, the tape has become very telling.
$7,475 remains the level where most buyers refuse to let up and effectively become trapped. This used to be $7,500 a couple of weeks ago if you recall, so the 25-point retreat is important by itself.
Sellers are pushing $7,530 - $7,540 in an aggressive manner, defending that $7,552 level marking yesterday’s high.
This gives us the lay of the land for today, where buyers and sellers will look to tackle their trapped counterparts.
Let’s lean on $7,470 and $7,530 - $7,540 for today. If you’re a bull, you want to close near the upper ranges or above, if you’re a bear then you’ll want to ram through $7,470 and take out the trapped buyers there.
Portfolio
We are back to our 5% threshold on portfolio performance.
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.
I am currently working on a few ideas to catch the potential AI rebound here if it proves to be more than just a one-day thing.
And, even if that call turns out to be fatal, I think there’s a good spread trade shaping up around the TLT bond ETF.
I have done a study on this ETF, and came across one datapoint that explains ~76% of its price action.
That indicator could soon flip in favor of bonds, offering a 5% terminal yield and roughly 50% upside from here.
I am posting my entire research for bonds inside Offside Premium this week.
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…
Also, a supplementary report on my current bond thesis:
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