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Good morning partner,
Few things to cover this morning:
Yesterday’s Session
Pretty tame day to continue on the week’s theme of compressed volatility.
What’s interesting about this current auction is that we did see some AI leadership and concentration show up through the day, despite the S&P index falling by 20-some-odd points toward the close.
I believe this has a lot to do with the dispersion trade that’s currently shaking off extreme levels, an unwind that mechanically creates demand for the VIX and supply for the VIXEQ.
If that sounds a bit confusing, click here to read a primer on the dispersion trade and what it means.
In a nutshell, the single-stock volatility is beginning to get sold, therefore bidding up the most concentrated names in the market while not necessarily leading to an index breakout.
VIXEQ is down, VIX mechanically has to go up to meet it, keeping the S&P at bay even if most of the AI-related plays continue to rally.
Let’s take a look at yesterday’s leaders and laggers:
Technology, Materials, Industrials.
As described above, the tape showed another day of AI-related leadership and concentration, with overall good breadth in the rest of the economy.
Yet, the S&P 500 struggled to keep its highs toward the end of the session.
Another piece of evidence that the dispersion trade is unwinding this week.
This may be good news for the overall rotation trade back into HALO real economy names and away from the AI excess.
I say this because financials, real estate, and cyclicals joined in the uptrend albeit less aggressively.
Still counts during a dispersion unwind scenario.
What worries me is how much lower the index will have to go in order to fully normalize as the dispersion unwinds toward normal ranges.
Panic Capital
NVIDIA credit default swaps still sit near a 52-week high, pricing in a rising probability of credit stress.
Andromeda’s CIO, Alberto Gallo, explained this setup very well in a recent interview and paper about the AI trade.
He called it “Panic Capital” as more AI-related companies keep spending at breakneck intensity just to keep up with their competitors and rising footprints.
This is exactly what we’re seeing with the hyperscalers and most others involved.
My competitor drops $500 million on data centers
I must beat it at $750 million
They’re now raising capex to $1.5 billion
Let’s go into debt to beat them at $3 billion
At the end of the day, Gallo cites, there’s no guarantee that these investments will return a net profit, given that there will be select winners and several losers in this race.
As is every race involving new technology and new markets.
That said,
NVIDIA is currently “fine” with a strong cash flow position to absorb its rising debts.
But,
Over 80% of these cash flows are coming from their equity stakes in other companies both rising in price (pumped by Huang and Trump) and receiving payments on the same credit lines NVIDIA extended to sell them GPUs.
In other words,
Should the market see a sustained drawdown on most of the AI names, or GPU prices come off by even 10%…
NVIDIA’s solvency will come into question, and so will it be for ~100 other entities involved in the GPU-backed financing.
News
Norway’s Sovereign Wealth Fund is the largest of its kind in the entire world. Its managers just dropped the dire assessment that the entirety of its $2.3 trillion NAV could be wiped out if the market were to decline. They are not alone in this exposure, which is over 90% concentrated in AI/technology stocks, this has gone beyond contagion in South Korea.
Healthcare is the New AI Short according to prime brokerage data and broader market price action. It used to be that software was the short hedge for AI, but after 40%+ rallies across the space, it seems healthcare is the new victim.
NVIDIA Releases an Open-Source Model adding to the supply of open-source coming from China, Microsoft, Meta, and most likely Google coming up. This is a net negative for token prices (which are already down 40% from highs), and another questionable setup for the big spenders and their solvency.
Employers Will Drop Coverage for Ozempic and other weight loss related drugs in their benefit plans, which may shift the distribution of such products down to a tele-health model, which is where I think a name like Hims & Hers may win.
Movers & ES Levels
CAVA 📈 Gained over 10% after reporting a massively bullish quarter, confirming my original thesis is not only intact but accelerating ahead of schedule, click here to read my earnings breakdown.
CoreWeave 📈 Spiked another 10% move in its stock after reporting a rise in cloud computing demand, perhaps the clear winners from token prices coming off are the compute suppliers, where a handful of companies may be the clear winners.
On Holding 📉 Lost over 20% after announcing a weaker than expected year-end profit figure. A direct hit to our call options as part of the Offside portfolio, though the core apparel holdings remain in over 12% profit thanks to the limited downside of options premiums.
SpaceX 📉 Gave up nearly 4% after some profit-taking took place on the recent rally past the IPO price once again, not a great sign for this aggressive growth story.
Now let’s get into some ES levels for today.
Low volatility on Friday has kept the outlook identical for today **
^ This is the third consecutive day I say this, goes to show how much we need a breakout.
$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
The portfolio remains near its all-time highs.
Right now, we still carry less than 6% annualized volatility with a net return of 11.5% so far into our first quarter.
That’s nearly a 2.0x Sharpe Ratio.
Believe me, keeping your volatility under control will be paramount in the second half of this year, lest you want to end up like most Twitter investors celebrating a ~30% swing on their accounts last week due to AI rebounds.
That’s not something to celebrate, it’s a symptom of overleverage and concentration.
I obsess over risk so that my portfolios (and yours) never blow up.
It’s what keeps you in the long game.
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Here’s the positioning update for today’s premium members:
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