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Good morning partner,
Few things to cover this morning:
Yesterday’s Session
Quite the opposite auction as we’ve seen over most of the week so far.
Notice one corner of the market - AI related stocks - doing all of the lifting and bringing the S&P 500 higher by 1%+.
At the same time, the rally came at the expense of software stocks, which acted as the mirror image to the semiconductors/memory trades.
I believe the reason behind this sudden rally and concentration has a lot to do with Leopold Aschenbrenner’s fund Situational Awareness going bust.
Citadel Securities bought the fund’s book for cents on the dollar and successfully containing its liquidation.
This isn’t the first time Citadel does this, and each time it points to a major market top and credit cycle.
In 2006, Amaranth went bust due to leveraged betting on the bubble at the time, where Citadel ended up having to come and rescue the hedge fund’s books for a discount.
That’s exactly why the AI concentration is back, but be very careful as this is usually the dead cat bounce before the rescuers at Citadel consider selling out for a quick 20-30% flip if history is of any relevance.
Let’s take a look at yesterday’s leaders and laggers:
Cyclicals, Communications, Industrials.
Cyclical stocks were lifted by Chipotle’s strong earnings and price action thereafter.
By association, other consumer stocks like Shake Shack, CAVA, and others have delivered a strong day as well.
Communications came in close behind in performance, boosted by the rebound in all the AI-related names bid by the above events.
Industrials carry a similar story, as the AI supply chain stocks rallied along with the communication names as the hyperscalers like Amazon, Google, Microsoft continue to boost their capex spending.
The expectation that this all trickles down through the chain has lifted the market’s outlook for future potential earnings in this space.
It’ll be interesting to see how the factor performance spreads end the week, and whether momentum is now making its way back to leadership, or whether value and breadth continues to catch up and cross over in to leadership.
U-Turn
2Q’26 US GDP Contributors, Offside Capital
We’ll go over this in detail next week.
The US GDP print yesterday was a bit cooler than expected at 1.5% versus the 2.1% consensus from economists.
As you can see in this breakdown, the majority of the first quarter GDP growth had come from non-defense investments.
Meaning,
AI-related infrastructure and direct investment from both domestic and foreign entities (like the hyperscalers.)
Yesterday’s print showed us that these non-defense investments slowed down significantly despite hyperscalers recently announcing an increment in overall capex, so this likely suggests the hyperscalers are now the only ones carrying this investment figure.
Last time this happened was in the fourth quarter of 2025, when the S&P 500 and all other AI-related stocks entered into a classic distribution pattern.
This pattern may be repeating now as the investment prints decline, as well as the 12% decline in the manager’s exposure index from last week.
I would be very wary of the recent rebound as Citadel’s bailout settles the dust here, nobody knows what could happen next from here.
What I would genuinely do is hunt for better risk/reward areas in the market without all of the hype and volatility.
The very areas that have brought the Offside Portfolio higher by 8% in a single quarter.
News
Anthropic Hacked into several organizations and their systems during a broader network test, raising questions around corporate and enterprise adoption. OpenAI had reported a similar incident earlier this month.
PCE Inflation slowed by 0.1% on the month, though the Fed’s preferred measure remains well above their 2% target as Warsh made tough comments around inflation though no decisive action or plan just yet.
Citadel Rescues Situational Awareness assets to halt the capitulation selloff in the AI-related base. With the bailout comes the admission of spillover leverage in the system currently, South Korea being another case in question.
South Korea Joins the rescue rout as $14 billion are now considered for several wealth funds facing insolvency from the selloff in all AI-related names, amplified by leverage and crowding.
Movers & ES Levels
Memory Stocks 📈 Jump over 15% for the most part as the Citadel bailout and increased hyperscaler capex boosts sentiment into the concentrated AI bets, further earnings announcements will demonstrate whether fundamentals remain solid.
Starbucks 📈 Rose nearly 2% after posting strong same-store sales growth and higher average tickets per customer, another win for the consumer space that could boost several of our Offside Portfolio picks.
Qualcomm 📉 Lost nearly 3% after reporting another quarter of declining sales, making markets reconsider their outlooks on the future demand wave of chips and memory.
Crocs 📉 Fell over 7% on weaker demand and sales, a shift in the overall consumer thesis we have been playing into our portfolio names, something to watch as far as retail sales go in the coming months and quarters.
Now let’s get into some ES levels for today.
As expected yesterday, the buyers have successfully claimed the $7,500 cutoff point in the “P” shaped profile for the S&P.
The wave of buyers were supported by the Citadel news, successfully ramming through levels where trapped sellers crowded (namely $7,420 and $7,480.)
I would expect $7,552 to $7,525 to be the same of business execution that we saw earlier in the week and last week.
There is no direct view of where sellers may choose to step in, though I expect a passive day for the sellers as the wave of Citadel’s rescue makes its way through the market.
However,
If there’s any area I would look for a reaction it would be $7,500 - $7,525 first, then move toward the $7,525 - $7552 if we start to do business above that initial range.
Portfolio
We remain close to the all-time highs of 8.2% performance in the portfolio.
Even with a pretty bloody day in the software sleeve of the portfolio, the Microsoft earnings spike along with our recent consumer picks proved to be great diversifiers and hedges to the core holdings.
What I expect soon is to see the continued tug-of-war between the HALO and real economy names versus the AI concentration.
On rotational days, which have been more numerous than the concentration days this month, the core holdings of the portfolio will outperform all other areas of the market.
As we continue to implement our mid-caps rotation thesis, I expect further diversification and underwritten upside for the portfolio.
Plenty of room to do so as we remain in over 51% cash holdings.
Here’s the positioning update for today’s premium members:
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