Stop typing what you could say in 10 seconds.
Wispr Flow turns your voice into clean, professional text inside any app. Emails, Slack, client updates — speak once, send without editing. 4x faster than typing.
Good morning partner,
Few things to cover this morning:
Last Week’s Session
The biggest communications, neoclouds, and chip names seem to have acted as a leading indicator for the close last Friday.
With large chunks of capital flowing out of:
Broadcom (AVGO), Oracle (ORCL), Palantir (PLTR), and several others
That same wave of outflows found its way into the HALO and real economy side of the market, pushing the value factor higher as we covered in yesterday’s weekly plan.
However,
Not all real economy names did well simultaneously, as the cyclical areas declined while the defensive corners pushed higher on the week.
A cementing piece of evidence working toward the “growth shock” narrative that is now spotted and being researched.
There are several names in our pipeline that stand to benefit from these shock scenarios, especially if we see a government spending backstop as a result of it.
Let’s take a look at last week’s leaders and laggers:
Energy, Technology, Industrials.
Obviously the aggregate for the week looked a lot different compared to Friday’s close.
Most of the week was concentrated into the AI constituents, with a clear leadership on energy as continued Hormuz issues showed up.
But then look at the losers…
Cyclicals, materials, communications.
That’s the best evidence I can give you of the growth shock narrative here, as they were the mirror image to the green middle of the pack.
Which were financials, defensives, utilities.
That behavior will have massive implications on the trades that we want to put on for the quarter, the types of trades already being filled up in our current pipeline.
More research coming on the growth shock topic once we’re through an updated read on supply and capex dynamics in the AI trade.
Back to School?
I uncovered the true capital cycle extremes for all the AI-related industries in the market.
What I’ve found is that foundries and memory are the most exposed to a bullwhip effect currently starting in token prices.
We’ll get to the bull/bear case of falling token prices later this week…
For now, know that all three major components in the capital cycle are warning us of a potential top in memory names.
Capex / D&A intensity now at 2018 peaks, a natural turning point in the industry
Gross and Operating margins at all-time highs continue to attract new entrants and competition, driving supply faster than anyone thought
And the most important one: Inventories.
Most don’t realize that over 85% of all inventories in the memory industry are made up of WIP (work in process) items, and as those inventories now build in the dozens of billions…
It’s just a matter of time before they all hit the market at once.
You can begin to see why I’m struggling to be an outright bull on the AI trade, and why I’m carefully trying to structure sensible trades around the space.
I am currently working on a calendar put spread trade for some of these memory names, expected to pay a hefty profit the more time it takes to realize.
The perfect way to get paid to wait while this WIP wave hits the market.
Last time I did something like this was in South Korea’s selloff, where our calendar put spreads paid over 600%.
News
Israel Strikes Lebanon as the ceasefire agreement expires, one reason why diesel/crude spreads continue to widen and price in an ensuing energy crisis.
Korea and Japan are pricing in some of the world’s most restrictive policy according to bond traders. Because of the amount of AI equipment and investment that comes out of the region, I expect future financing and capex will take a hit.
US Retail Sales came in short of expectations, with the biggest contraction coming out of nonstore (online) retail sales, a usually strong recession indicator which doesn’t really matter today, especially as over 50% of GDP growth is coming from AI-related investments and exports.
NVIDIA Cuts Ohio data center backing from $250 billion to $120 billion as investors worry about the amount of risk being taken in the chipmaker’s balance sheet. This data center’s financing payout was linked to OpenAI revenues.
Movers & ES Levels
Wayfair 📈 Managed to end green by 0.6% even in a consumer decline as it received an upgrade, citing increased market share despite a slowing industry. This could be an eventual name to play in the portfolio for a consumer recovery.
Intuitive Machines 📈 Popped over 25% after its rising backlog earned it an upgrade from Wall Street analysts. This is evidence of the shift in the AI trade from memory to robotic applications now.
Applied Materials 📉 Lost 5.1% as analysts quoted lofty expectations impossible to being met, even after the company reported a strong quarter last week.
Broadcom 📉 Fell by over 5.9% as an analyst pointed its new AI infrastructure vehicle could accumulate over $370 billion worth of debt, markets are assuming this debt will be a 100% write off with no return to it.
Now let’s get into some ES levels for today.
Last week I told you that closing below $7,800 could represent a major reversal at the highs.
Sellers tackled it and got through it, only to be met by just the right amount of buying to get us a close slightly above the key level.
The fact we got passive buyers in very small amounts at the level tells me two things:
Sellers are not confident enough to ram through
Buyers are testing the conviction of the market
Now this is happening at a time when the VIX is ~$14.5. I think it is highly probable we will have a volatility breakout, especially as the dispersion trade unwinds further.
What this means is,
The sellers that chose to wait and go passive at $7,800 could step in and execute their views when/if the VIX breakout comes around the corner.
Until that happens, I believe buyers can have a pretty good risk/reward at $7,800 and squeeze out 25-50 points of upside from there, assuming the volatility spike could happen at any time.
Trade accordingly.
Portfolio
New all-time high for the portfolio, still over 50% in cash.
More importantly, our upside in the long/short AI trade structure is starting to go into a profit of 0.25% for the overall portfolio.
Not much, but it’s very telling as to where I should start looking for our next idea.
Which is probably going to be found in calendar put option spreads around memory.
In other areas, I have pending orders for our recent mid-cap deep dive with over 75% upside potential.
Pipeline is filled with other such opportunities, with one of my favorite names so far this year dropping later in the week in terms of research.
For $2/day, you can be a part of this process and receive top notch research on the companies I’m buying and selling.
Here’s the positioning update for today’s premium members:
Subscribe to our premium content to read the rest.
Become a paying subscriber to get access to this post and other subscriber-only content.
Upgrade