Morning Digest 07/24

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Good morning partner,

Few things to cover this morning:

Yesterday’s Session

The S&P 500 closed lower for the day, even though most of the market managed to close in the green.

Not a normal functioning market, and it’s all due to the dangerous levels of concentration we’re experiencing today.

Because some of the biggest technology names (Micron, NVIDIA, Broadcom) declined along with some of the semiconductors like SanDisk, it was enough to bring the entire market down.

In South Korea, markets are going crazy and issuing over 5 million margin calls this week alone. The culprit leading to that outcome was a 95% level of concentration into Samsung and SK Hynix alone.

The KOSPI gained $4 trillion in market cap within six months alone, which was enough to get the market to the dangerous setup that led to its demise. I mention this because it’s a lot similar to what’s happening here in the US.

Trillion-dollar companies were springing up every week for a while, with no apparent change in the underlying fundamentals to sustain these sudden gains.

I still remain of the view that we’ll have a tug-of-war between AI and tech concentration and HALO real economy names. Despite over seven months of this fight, it seems the effort has been in vain considering how concentrated the market remains.

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

Communications, Financials, Materials.

Very nuanced mix here, but I believe there’s an explanation for it.

Look at energy, the only sector that declined yesterday despite crude oil nearing in on $90 a barrel again.

I believe communications and financials may be rallying due to the same underlying reason tied to energy:

I like to hunt for spread trades, like the semis vs software, or GLP-1 vs consumers. It looks like the financials and energy sectors are creating one such spread now.

When energy rallies on a delayed Hormuz resolution, inflation expectations affect banking profits via the yield curve. When energy sells off on resolution hopes, the opposite happens to aid banking profitability.

For the materials rally, I believe it is part HALO and part AI. This sector’s move was significantly driven by a 20%+ rally in Cleveland-Cliffs, our long candidate in this long/short metals trade idea.

Profits were collected yesterday, a very beautiful play indeed.

Earnings Guidance

Long-term earnings growth expectations are at an all-time high.

This is a massively bullish setup for the S&P 500, as long as these expectations can be met.

I believe some sectors have already priced above these expectations, setting them up for a potential miss in future quarterly reports (like Google, GE Vernova, Micron.)

Other sectors have overly pessimistic expectations embedded in their prices, making beats a lot easier to bring to reality (like Cleveland-Cliffs yesterday.)

We are actively hunting for these overly pessimistic areas in the market, and dialing in on the companies that are most likely to deliver an earnings beat.

Let’s take advantage of these all-time high expectations together.

Click here to join Offside Premium, 50% off for three months.

News

Movers & ES Levels

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

We broke $7,450 and came roaring back to ram it.

What’s important is that all the trapped buyers at the levels I gave through the week were wiped out with relatively little effort from the sellers (especially $7,483.)

Now buyers are back to play at $7,420 - $7,425 as they showed their hand through aggressive buying activity.

This is where they are effectively “trapped” now, giving sellers a price to target and ram through again potentially.

For now, after this rebalance, I see a new structure to the tape coming up.

$7,480 is where the flush happened for the trapped buyers, and where sellers became aggressive again, making it a highly important level for the coming days.

That price is also the new cutoff point in a “P” shaped profile, where repeatedly closing below it could bring us into a more extended down move.

Buyers want to do everything they can to ram that price and have multiple closes above it.

Sellers, on the other hand, want to use whatever strength is left to at least consolidate at $7,420 - $7,425 to show the bulls “We’re here, and we’re not scared of you.”

Those will be the places to watch for today.

Portfolio

The drawdown slowed yesterday, as the big event has already taken place (SK Hynix listing.)

Now it all depends on hyperscaler and semis/memory earnings to determine the path of the portfolio.

I still expect somewhat of a decline in the coming days, giving us an opportunity to DCA back into current holdings.

The portfolio holdings remain relatively strong in this tug-of-war between rotation into HALO and concentration into AI and tech.

Which is why I’m comfortable keeping ~55% cash holdings while we continue to push back to - and above - a 5% performance threshold.

Keep in mind, we are still under two full months of operation, so I want to take advantage of a strong start.

Yesterday, I released my research on what I think is the cheapest growth area you can buy in the market today.

There’s a three-part sleeve to the entire trade, so stay tuned as it all gets released and potentially executed.

Here’s the positioning update for today’s premium members: