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Good morning partner,
Few things to cover this morning:
Yesterday’s Session
After yesterday’s rotation into the real economy names, we’re back to a concentration for AI and selective technology.
Chipmakers (semis/memory) and communications all went up while most of the market gave up gains in the session.
Interestingly, the S&P took a leg lower mid-day as some of these leaders lost ground before a final rally to end the day.
Simply put, I think this has to do with what I mentioned yesterday about excess leverage still in the system.
Situational Awareness’ bailout by Citadel could have been the cleansing event to stop this frenzy, yet in less than a week the fund raised another $400 million and is now running it at just the same leverage.
Moral hazard?
The lift higher continues, and I’m happy to announce our fresh AI positions are in a net profit (both the longs and the short hedge.)
Let’s take a look at yesterday’s leaders and laggers:
Materials, Technology, Industrials.
Clearly an AI-related bid for these sectors.
For the materials part, this is exactly where my PMI breakdown led you last night, especially as Trump now bans Chinese imports for AI components.
Combined with tariffs, this decision will only boost demand and pricing power for domestically manufactured materials.
What’s interesting is to see healthcare and cyclicals follow along this move higher, so perhaps the inflation “growth shock” that was present yesterday is fading as part of a broader trend.
That broader trend could have everything to do with the AI trade being bid as:
Capex triggers more AI rallies
Investments are reflected in GDP and PMI figures
Bond Yield Curves can’t react in a “growth shock” manner
Despite this being a very selective growth boost, it is still enough to keep bonds from showing their true colors.
Overprotective Markets
I have been onto the dispersion trade since April of this year.
Right now, it seems the extremes are becoming - well- too extreme for the market’s own good.
Dispersion happens when the VIX remains below the VIXEQ (single-stock volatility.)
We are now back to the 1999-2000 dot com bubble peaks of dispersion, which can be best explained by:
Investors rotating between sectors/assets aggressively
Increased macro and equity hedging
Low correlations between stocks (outlook disagreement)
This is exactly what I’ve been breaking down daily in these session analyses.
Tug-of-war between AI and the real economy, dissonance between inflation “growth shocks” and continued upside, different outlooks on the economy.
This never ends up well.
Mechanically, the market is the consensus agreement to where people think the economy will be in the next 12-18 months from here.
If there’s no agreement, liquidity suffers and risk amplifies.
Forward this to a friend as we’ll cover the subject later next week.
News
SK Hynix plans to spend an additional $38 billion to expand its South Korea fab capacity, even though NVIDIA said future racks will require less memory. If anything, this goes back to my oversupply analysis hurting margins for all.
BofA’s sentiment indicator hits the most extreme bullish level since 2001, matching the dispersion read as a symptom of overly euphoric markets at the moment.
Foreign Markets are now outperforming the S&P, and could continue to do so if my mid-caps and bonds thesis pays off. Analysts have recommended 33 stocks to look over.
Meta AI becomes the latest model to go rogue and hacking into other organization’s data, another case posing a headwind for enterprise adoption as more companies become cautious around implementing AI due to security concerns.
Movers & ES Levels
Airbnb 📈 Pops 13% after reporting a strong quarter and raising future guidance. This business model is now resembling a bank as their interest income begins to grow past 20% of operating income.
Albemarle 📈 Gained 5.6% as its latest quarter shows stronger lithium demand as part of the AI supply chain energy needs, the wave of capex continues to trickle down into more beneficiaries each week.
Zillow 📉 Lost 7.5% after posting weak results and even weaker guidance as the US housing market continues to show slowing signs, a trend I expect will continue as long as the plumbing (bonds) situation remains restrictive.
Papa John’s 📉 Declined by over 17% after cutting its dividend and posting slowing sales. This is where my Domino’s Pizza thesis begins to win as the true value player trading at overly pessimistic valuations.
Now let’s get into some ES levels for today.
$7,750 was taken and supported as expected from yesterday’s take.
It now seems that a lot of passive buyers have come in at $7,725 as well to continue to support the move higher, understanding that volatility is overdue to creep in for the market soon.
Which is why these buyers were so passive, understanding that a volatility breakout could quickly bring them to the below distribution starting at $7,620 or so.
This is preemptive risk management on their part, but also gives sellers the opening they would need if they truly want to step in with some aggressive selling.
As we’re prepared to get the NFP print here in a few, I believe this is the volatility that is being anticipated (at least in the short term.)
I believe $7,780 remains the cutoff point on the upside where business is just not getting done, drawing price away from that print.
On the downside, things become a bit nuanced here as the market seems to be in some disagreement.
$7,630 - $7,620 marks the mid-point between a “P” shaped profile running up to $7,750 and a “b” shaped profile running down to $7,450.
Very rarely do we get these symmetrical double distributions, and it typically signals the markets are “okay” with either move as conviction remains low.
Based on everything we’ve covered above, I would also think there’s lack of conviction here.
Portfolio
After yesterday’s transactions.
We have now $3,700 of realized gains, enough to pay for five years of Offside Premium membership…
After I raised that cash in trimming some of the biggest winners on top, I alerted members of my latest AI purchase.
Even with AAOI pulling the AI names lower in the after-market, this position remains at breakeven below.
How?
Went long two high-conviction names, shorted a low-conviction hedge.
Voila, no matter which way the market turns on AI, this trade is designed to profit.
Now that the pre-market action seems back in favor of AI, I suspect this fresh position will add a few points to the portfolio overall.
We remain above 10% for the quarter, roughly 5.3% annualized vol, and 60% in cash now.
In other words, we will not have major swings even if we choose to chase some AI kickers here.
Like Leopold Aschenbrenner, I saw a few players on Twitter posting their equity curve as if it was something to be proud of…
10-20% swings in a week are not something to celebrate, they are the beginning stages of a complete crash of your equity.
For $2/day, you can avoid those crashes, and learn how this business truly works.
Here’s the positioning update for today’s premium members:
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