A New Week 11/08

The information technology sector has now fallen below the S&P 500’s forward P/E valuation for the first time since ChatGPT was released.

What I’m seeing across social media is that this somehow represents a generational buying opportunity, given how cheap some of the AI names have become.

I will say this until I’m blue in the face, but it means quite the opposite.

When I told you to buy Intel at $19 per share, its P/E was closing in on 300x!

Then, when I told you to short Micron at $1,100 its P/E was roughly 4x!

Notice the difference between an untrained investor and someone who’s been doing this for 15 years?

Now look at current valuation spreads.

There’s one thing in common among these premium sectors.

They are all defensive, real economy sectors, and most of which were deemed “coiled springs” in my analysis throughout the past quarter.

Now that the trigger, an AI unwind, is being pulled to release them…

It’s due time you start to consider the opportunities that lie within these areas.

Last week, I gave you my latest PMI watchlist filled with opportunities around these sectors, aimed at replicating last month’s watchlist which delivered a combined 30% return for you.

Click here to see what’s in store for November.

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

For a third consecutive week: Value, Quality, Breadth led the market.

We are beginning to see the fruits of our labor in factor performance tracking, where I explicitly told you the momentum (AI) trade was going to be replaced by the factors that are now leading.

The best part?

When the U.S. sneezes, other countries catch a cold.

So if value and quality stocks are doing great in the U.S. right now, imagine how much more upside you can drive by investing in the right overseas market.

We’ll get to that later this week in Offside Premium.

For now, understand that for the first time since ChatGPT was launched, momentum and growth will be outperformed by some of the less popular themes and factors in the market.

Which is exactly why I’m tilting my portfolio and research in that direction.

Now here’s the most important lesson:

Meaning,

Unless you figure out what outperforms during these value and quality rotations, you will most likely have a breakeven performance through 2036.

I’m not just saying it, I’m proving it to you through 36 countries over 50 years of studied data.

There are really only two asset classes that beat the indexes over a lost decade.

Click here to find out what they are.

In this relative risk model, I aimed to measure the breakout points of volatility in the S&P 500.

By taking the daily market volatility vs the daily VIX volatility, you can land at the spread above, and see when the good times to buy/sell are.

Right now, the S&P daily volatility has been above the implied daily VIX volatility for over a week now.

Historically, these crossovers tend to last roughly 20-30 days to represent volatility clusters in the market amid some unforeseen event or repricing.

From the recent AI unwind acceleration, I believe the market will continue to reprice this cluster for another week or two.

After that,

We will either see the big blowoff into a proper bear market (or worse.)

Or,

Some external event will create an opportunity for stocks to make a run higher again.

Only time, the next 20-30 days, will tell.

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

New Earnings:

We have a few important releases coming out of the AI complex this week.

Tuesday: CoreWeave will shine a light on exactly what is happening inside the AI debt run, and whether the credit markets are right in punishing the stock this much due to rising default odds.

Thursday: Nu Holdings are going to give me some further insights into the Brazilian equities opportunity, which was abruptly shut down after Lula won the elections at the last minute.

Other than that, there are a couple of other worthy mentions that will have an earnings analysis delivered to your inbox if they prove to be worthy of a major narrative change or industry shift.

CPI Inflation - Tuesday:

The Fed will be pinned against the tight ropes again this week.

Inflation data will pressure the path of interest rates again, especially as both PMI reports for the month pointed to a high probability of a continued uptrend in inflation.

Perhaps this will begin to be the top, especially if data center spending and growth effectively slows down after the midterm elections.

Which could very well ease the supply chains for most of the materials causing the uptick in inflation right now.

Then there is the potential ending to the Iran war, adding another inflation relief catalyst coming from fuel prices.

PPI Inflation - Friday:

We will get another round of inflation insights to end the week, this time from the business inputs themselves.

Again,

After PMI data showed that most industries are now paying up to deliver their products and services, I suspect the next print in PPI will be a hot one again.

Do know that if this is not the case, the relief rally could very well be underway for the indexes.

Meanwhile, here is the latest from Goldman Sachs showing you where they see global capital moving into from here.

It’s beyond U.S. markets, and that kind of confirms the excitement I’m building around the China opportunity from here:

Until next time,

OFFSIDE RESEARCH

Against the Tape, Ahead of the Curve.