A New Week 10/04

Finding alpha goes well beyond what retail traders and investors get sold.

A quick riches pitch of technical analysis and finding low P/E stocks to buy, as if the billionaire hedge fund managers did nothing but draw lines and screen cheap stocks all day long.

Sometimes, it takes a bit of zooming out to find the best ideas.

Last week, I journeyed into the quant realm to find what truly happens after PMI composite scores begin to gain momentum for certain industries.

The result was a high enough t-statistic (high confidence of an existing relationship) pointing to the fact that rising PMI composite scores tend to lead to positive one-month returns.

Zero technicals, no nonsense simplified ratio screening.

Historical results show this is where most S&P outperformance lies, which is why my training at Goldman focused so much around the PMI reports.

I went over all the trends and themes building up in the economy right now, and the select industries meeting that composite score momentum to give you a way to profits.

Click here to read the PMI breakdown and what industries are expected to break out from here.

Now let’s get an update on what the market likes and dislikes:

Growth and Momentum (again.)

Another closed week where the only factors that led the market were the ones directly attached to the AI complex.

Everything else, zip.

Breadth, value, and quality cash flows took a back seat for another consecutive week to show just how disconnected the market has become from the economic reality.

I’ve written at length, and shown through actual data, that GDP and the S&P 500 move in lockstep ~88% of the time with a six month lag or so.

The rest of the time?

Divergences begin to build and widen, only to end up in a sharp and aggressive rotation for the market as it catches up to the realities of the economy and the consumer.

Simply put,

Last quarter’s GDP directly shed a light on the fact that AI lost its grip as a GDP contributor, while the real economy and other defensive sectors took the lead instead.

The economic contributors are moving away from AI while the market remains hyper focused and concentrated on the same AI basket bet.

We’ve fallen outside of that 88% mark, and a big reckoning is probably soon to hit the tape.

Click here to read my GDP breakdown and how the economy moved past AI now.

And,

When you’re ready to make outsized returns from the moves that come outside this 88% relationship…

I sent over my updated 6-12 month watchlist driven out of the PMI reports.

My usual read on the commitment of traders (COT) report has been extremely quiet as of late…

So I decided to create a new gauge and begin covering it until the futures market provides a reliable signal once again.

This measure represents the spread between daily VIX implied moves versus S&P 500 daily realized moves through time.

As you can see, each time we reach a 1-2 standard deviation, it creates a fantastic dip buying event, especially if you start playing options portfolios.

Right now, things are quiet and supportive of a continued breakout in the S&P especially now that we’ve reclaimed $7,700.

However,

This also means volatility spikes could show up unannounced.

Note: Whenever this spread widens, it means current market conditions and assumptions have changed enough to correct the options market, and consequently the VIX (which is priced upon these option expectations.)

No such expectation corrections coming about.

Now let’s cover some items for this coming week:

New Earnings:

Nothing much from the earnings side this week.

Other than Delta Airlines (DAL) to give us a new look and guidance into the consumer discretionary sentiment, and how current diesel spread spikes affect transportation stocks.

Apart from that, there’s not much to keep an eye on this week.

Services PMI - Monday:

After the Manufacturing PMI gave us the look to cyclical stocks and where opportunities will be found over the next few months…

We’ll get Services PMI data to corroborate the current level of activity in the non-cyclical economy for most of the defensive industries and their themes.

Some of which, like construction and information, have some analytic power for the AI complex so I guess it will be somewhat important to review that market to GDP divergence.

FOMC Minutes - Wednesday:

We’ll get the latest from Fed chair Kevin Warsh on Wednesday.

So far, it seems the pressure is back on from President Trump and other market participants to ease off the tightening of rates and monetary policy.

I have stopped guessing where things go at this point and just looked to react afterwards, but the fact is that the bond market is now looking to force the Fed’s hand into hiking rates further.

We shall see what ends up being the case.

Consumer Sentiment - Friday:

We’re at an all-time low reading for consumer sentiment, which again is one of the coiled springs in the economy right now.

With rising yields and further pricing uncertainty, I don’t see how this recovers sooner than what most think.

However,

The GDP and PMI data could prove this sentiment reading wrong, which could make me refocus on the sector as a whole outside of the couple of names that are already part of the Offside Portfolio.

I have covered enough content from the bull side of AI.

Time to give the bears a shot at making their case, so I am dropping an interesting interview with one of the 2008 crisis big shorts.

Worth comparing against Jordi Visser’s latest “human time is not real, rates don’t matter anymore” take….

Until next time,

OFFSIDE RESEARCH

Against the Tape, Ahead of the Curve.