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Good morning partner,
Few things to cover this morning:
Yesterday’s Session
For the first time in August, we had a net de-risking out of the stock market rather than a rotation in this tug-of-war between AI and the real economy.
Most sectors and industries ended up in the red, with only some energy and chipmaker names pushing higher on the day.
Ordinarily, this would have caused the index to go up considering how concentrated it is around these AI-related plays.
However, it wasn’t all of AI that went up together, only the chipmakers around memory and communications equipment.
Another theme has become clear as well, apart from the “growth shock” trade that’s still in its infancy.
Traders are once again shorting software to hedge out their semiconductor/memory bets considering the behavior we just got yesterday.
When it comes to memory specifically, I think the most logical way to play this is aligning the supply cycle of the industry along with the VIX September seasonality.
Let’s take a look at yesterday’s leaders and laggers:
Energy, Basic Materials, Industrials.
Oil remains above $80 a barrel, even as Trump touts that the Strait is open and we’re still under a ceasefire agreement (though nothing has been signed at all.)
It makes sense for energy to be leading as a result of the commodity push, and also because of the sector’s association to the AI buildout.
Materials and Industrials have a dual mandate to meet aerospace and defense demand along with AI supply demand.
Nonetheless, yesterday’s leadership was 100% accredited to an AI trade bid, with the laggards showing us the market’s true colors.
With defensives, communications, and cyclicals selling off…
I think this one goes way past a “growth shock” and now into a net de-risking ahead of what may come in September.
In Sunday’s weekly plan, I warned you of both leveraged money and long-only managers selling exposure in the S&P 500 together, a rare but very telling event.
Back to School?
US 30-year Yield, Bloomberg
The cost of capital is going up past previous crisis levels.
On a relative basis, this means a whole lot for market participants as we breach 2008 yields.
On an absolute basis, however, it’s not that alarming considering:
The 10-year TIPS yield is only 2.41%
Hyperscaler bond basket spreads to treasuries is only 1.62% (~6.5% nominal)
Sure the path we’ve seen to get there seems restrictive enough to be alarming…
But the reality is the system won’t start to break unless we see either significantly lower inflation rates, or significantly higher yields from where we are today.
Nonetheless you should still take this as a warning.
Bond markets are voting against everything that’s happening at both the economy and the stock market level.
News
Anthropic Triples Its Revenue to a $65 billion annualized rate. However bullish this may seem, it still falls short of their $200 billion target, and remains at a huge gap relative to their more than $5 trillion in commitments.
Bank of America’s Sentiment Gauge posts a near-record bullish level for the broader investor base in the market. However, actual positioning in the indexes would contradict this reading, perhaps looking to spark a return to the other extreme.
Jim Cramer Says Not Too Late to own some of these memory stocks, all of which were shown to be discounted by the market in yesterday’s post. The Cramer curse has made my initial idea worth pursuing this week.
Harvard Bets Big on AI as over 50% of their endowment fund is exposed to these positions, sovereign wealth funds are all over them as well for a public and private contagion effect in the making.
Movers & ES Levels
Alibaba 📈 Jumped more than 5% after the company announced a new merchant platform to expand on its Alipay duopoly in China. As part of the Offside portfolio, I am happy to see this name continue to go up.
Intel 📈 Pushed just under 1% during a red day in markets as the CEO increased his stake in the company. Don’t be fooled, this is part of the broader capital cycle where buybacks happen at over 5.0x P/B multiples.
Workday 📉 Lost over 5% after downgrades from several banks came along. Lucky for you, Premium members were alerted the moment I decided to take profits at $206 and lock in a 75% return for the portfolio.
Nike 📉 Hit a new low after falling by 4%, dragging other apparel and sneaker names down with it like ON Holdings (ONON) where we currently hold an options position, likely to be written off at a total loss.
Now let’s get into some ES levels for today.
I warned you if we closed below $7,800 we would see a reversal, and it’s now starting to happen.
Unless we hit and ram through $7,650 I wouldn’t call this a win for the sellers, though that now seems a lot more likely given the September effect and the VIX bids to come after a dispersion trade unwind.
There’s a double distribution lower as well, starting at $7,570 and reaching all the way to $7,425.
This could be a sensible range to keep in mind as we effect the $7,800 reversal and see the VIX starting to creep back higher.
Whatever happens to the leverage and margin riding behind the AI-related plays, especially in memory as we just broke down yesterday, will determine whether we see a broader selloff into correction.
For now, keep the $7,650 - $7,800 range as your base.
Portfolio
Small headwind for the net performance after a red day yesterday.
That’s fine, as our latest long/short equity play has now reached nearly 1.0% in additional performance for the broader portfolio, and I expect earnings could soon deliver the big payoff.
More importantly, I am likely going to execute the calendar put spreads trade on memory stocks this week.
Last time I found a setup like this it was South Korea, and our options delivered over 600% returns.
The trade structure and thesis will be sent to Offside Premium members.
For $2/day, you can access the research and execution flow that’s reserved for investment bank clients.
Here’s the positioning update for today’s premium members:
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