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Good morning partner,
Few things to cover this morning:
Yesterday’s Session
We are now in our fourth consecutive day of compressed volatility, just as the single-stock volatility (VIXEQ) side of the dispersion equation continues to sell down.
This is the coiled spring I was mentioning in an earlier post, which mechanically should bring a massive bid for the VIX in the coming days or weeks.
Perhaps markets are waiting for further information surrounding the AI trade.
Especially as we continue to get mixed results out of this earnings season, with some in compute-related areas pushing higher, and others in the “bottlenecks” selling down.
What I can tell you is this,
September tends to be a historically tough month for the stock market when all of its current features look this extended.
This could be the case especially as dispersion unwinds and billions begin to flow into the VIX.
Let’s take a look at yesterday’s leaders and laggers:
Communications, Real Estate, Financials.
Besides the CoreWeave (CRWV) earnings rally, there’s very little to say about the communications leadership.
When we look at the financial and real estate position on top of the auction, it marks another consecutive day where the market chooses to price in a “growth shock.”
This theme is no longer an idea, it has already been proven enough times this week, especially with a cooler CPI print yesterday, to warrant further research into it.
Which is where I will cover our next wave of content for you.
Materials lost the day by a wide margin, which is another direct hit to the growth story as most of the material names are directly dependent on the “growth shock” theme not becoming bigger by the week.
I suspect it is too late for that now.
More to come on the subject.
Growth Shock is Born
CPI Inflation Data, Offside Capital
CPI just read flattish for the month at 0.07% growth.
In the histogram above, this represents a second standard deviation move away from the normalized monthly change.
Simply put,
Last month’s move in inflation was cool, way cooler than the usual.
Still, the annualized CPI rate stand at 3.3% above the Fed’s 2% target.
This effectively raises real rates (yields - inflation) and why TIP bonds are up in a parabolic line this month.
In other words,
Financial conditions are tightening ahead of the Fed, effectively forcing policy to raise rates in order to match what the money markets are calling for now.
This is also the culprit of every “growth shock” event that’s happened in economic cycles.
I suspect that my mid-caps thesis will begin to greatly appreciate from this broadening theme, especially as government spending seeks to lever up GDP growth as inflation and AI investment cools off.
>90% of revenue growth in my latest mid-cap pick comes from increased government spending.
There’s over 100% upside built into this idea, which I sent over last night.
News
Trucking is Booming Again as the latest sign of a real economy recovery theme in the market, not surprisingly this breakout comes after the PMI data showed consecutive expansion readings for the transportation industry. Here’s my PMI breakdown pointing you in that direction.
Home Sales Fell 1.7% to a new quarterly low, pointing to a weakening homebuyer base in the United States as both prices and mortgage rates price out the vast majority of would-be buyers.
CXMT Tops Tencent as China’s largest company. A memory chipmaker has now topped one of the most entrenched and conglomerate names in Asia’s powerhouse, fundamentally this cannot be sustainable with China being a services nation, in my honest opinion.
Hormuz Traffic Sinks to three-month lows as Iran debunks Trump’s claim that the US is now in full control of the Strait. As reserves begin to get pulled globally, the conflict will eventually have to come to a resolution, unless Trump’s plan is to create a contrast effect in inflation by the time midterms come.
Movers & ES Levels
Super Micro Computer 📈 Popped just under 20% after a strong earnings report, though financial analysis would show you most of the gains are in non-cash items rooted in NVIDIA’s circular financing scheme.
Wendy’s 📈 Gained 15% after a takeover bid is potentially in the works from Nelson Peltz, I do believe this marks a potential roll-up of an otherwise cheap industry right now, boosting my thesis for the CAVA bull case.
United States Antimony 📉 Fell nearly 25% after announcing a weaker sales outlook connected to the slowdown in natural resource demand from mostly delayed or already completed data center projects.
AECOM 📉 Gets hit with a 9% selloff as the company reported a few troubled infrastructure projects, another direct hit to the AI buildout theme as now being potentially saturated with supply.
Now let’s get into some ES levels for today.
Low volatility on Friday has kept the outlook identical for today **
^ This is the fourth consecutive day I say this, we are in dire need of a breakout, this sort of episode can only be due to massive disagreement and uncertainty around markets.
$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
We just got a big move out of a portfolio name yesterday.
Even as the market remains shaky underneath a quiet S&P 500, our performance is still beyond the market for the quarter.
Funny enough,
Our latest AI plays are the only laggards, while every big winner is part of the areas that AI was supposed to replace.
That says a lot about where that trade sits right now.
Last night, due diligence was sent on a high-conviction name buying its way to better economics.
Last time a player did this for its industry, we had the 2013-2016 beer rally, with names like Heineken, Ambev, and Coors going on 100%+ runs.
I believe my research points to the same thing happening somewhere else.
By the way,
Check out what this Offside Premium member made on one of my latest mid-cap ideas.
Enough to pay for nearly 4 years worth of membership costs…
Here’s the positioning update for today’s premium members:
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