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Good morning partner,
Few things to cover this morning:
Last Week’s Session
As Bitcoin and other speculative assets like gold made a big push higher, it makes sense to see the hyperscalers get beaten down as a result.
The reason is the tug-of-war divergence I had pointed out last week, where we now have a cash flows versus “growth at any cost” sentiment pushing against one another.
Friday’s close showed everyone that this growth narrative won the day but not the week, as I explained in Yesterday’s weekly plan through factor performance.
Value continues to beat momentum for now, which makes me lean on a “sell the rallies” strategy for the Offside Portfolio and its AI holdings.
Especially helpful for my long/short put option spread on the memory space.
An interesting winner revealed itself as well, that being healthcare.
I think this is more about the Moderna cancer treatment news, and the excitement about robotics applications to the sector as well. Remember, the growth at any cost pull carries with it exciting narratives with very little proof or fundamentals to it.
Robotics in healthcare is one such narrative, so expect select healthcare stocks to rally whenever hyperscalers sell off and vice versa.
One of the most divided markets I’ve seen in a long time…
Let’s take a look at last week’s leaders and laggers:
Basic Materials, Healthcare, Energy.
You can very quickly determine that this week’s leadership was exclusively stimulus and AI centered, while everything else closed the week in the red to showcase exactly how the market feels about the real environment ex-AI.
Materials were mainly driven by metals like gold and silver, surprisingly the steel and AI infrastructure-related materials didn’t join the party last week.
In fact, some AI infrastructure plays in the Offside Portfolio have hindered our performance and are soon to get cut.
Ending the infrastructure trade pins the AI theme into a very tight corner:
Memory must continue to push
Robotics needs to become a more tangible theme
Otherwise, I do believe the entire trade is very sensitive to a broad dumping, as every other promise and narrative has now been debunked through price action.
Consumer Cyclicals closing green is interesting here…
I believe this is an extension of the stimulus trade that’s now driving metals higher, as markets see a fantastic risk/reward setup in some of those companies.
Look at Celsius Holdings (CELH) and its breakout this week for starters.
Warehoused Risk
There’s a huge theme that’s mostly being ignored right now.
Credit Default Swaps (CDS) are now spiking in both cost and demand for the hyperscalers and pretty much anyone that has a whiff of exposure to Anthropic and OpenAI.
I believe the evidence behind that expansion is only becoming clearer.
Hyperscaler off-balance sheet obligations have jumped by an average of 400% compared to last year.
In most cases, like Google, these off-balance sheet obligations have reached over $1 trillion in value.
These obligations are categorized as items like:
Data center lease payments
Chip purchasing commitments
Equity procurements contingent on cloud compute usage
In other words,
These hyperscalers have effectively passed on the default risk to whoever was supposed to see these obligations fulfilled.
Most of them being the neoclouds and memory stocks, which is why I see them as the most exposed to the cycle right now.
However, they are not risk-free.
As they take on these obligations with negative free cash flow, investors will have to come to their senses and punish these stocks for what they have become.
No company can trade near all-time highs while burning free cash flow and accumulating debt for projects that have yet to show an ROI even after three years.
News
300 Thousand Tons of Beef will be imported tariff-free, Trump’s latest effort to help lower beef prices as falling consumption begins to affect farmers and other companies like grocers, there could be a potential trade opportunity here.
Hedge Funds Had Their Worst performing month relative to the S&P 500 in over 20 years, Goldman reports the largest de-grossing in the history of hedge funds, all happening throughout AI holdings.
SPACs are Back as 2026 marks a record-year for IPOs and money being raised via these vehicles, all confirming my take on the global M&A activity part of a topping capital cycle (like late 2021.)
Household Savings Rate Falls to 2007 Levels as the K-shaped economy continues to squeeze the consumer, a theme unlikely to get fixed unless the Fed yields to the bond market and raises rates, upending the AI finance plumbing and its effects on AI.
Movers & ES Levels
BJ’s Wholesale 📈 Moved higher by 6% after announcing a more bullish guidance range for the rest of 2026, probably aided by tariff refunds and the effect this could have on the consumer.
Ross Stores 📈 Rose by 4.5% after giving shareholders better guidance for the third quarter, a thematic that’s being helped through PMI trends previously covered and the removal of domestic textile activity in exchange for imported materials.
Marvell 📉 Lost 5.6% as investors digest how the company will more than 10x its revenue line just to make good on Google’s equity procurement deal, which sounds more like an unrealistic promise than a well-thought deal structure.
OSI Systems 📉 Fell over 5% as the company disappointed investor expectations in the AI-related electronic component space, showing how fragile the supply chain is becoming.
Now let’s get into some ES levels for today.
** Due to low volatility, yesterday’s take on the index remains the same for today
Note that $7,655 was hit to validate our lower-level of the current range, with no aggressive reaction yet, meaning we could hit it again and lose it most likely. **
$7,650 - $7,800 remains the base to trade for now, until we see the potential September effect on volatility (which so far is right on schedule.)
We continue to see a “sell the rally” behavior currently, with the latest evidence shown at $7,740 and $7,720.
Should be see more aggressive selling activity at or below $7,700 and I suspect we may as well reach the lower end of the current base at $7,650.
What happens after that will be up to the momentum factor (AI) and how the components around memory and neoclouds continue to behave.
For now I wouldn’t have too strong of a view on the index unless these levels break on renewed aggressive offering from the sellers.
More importantly, we should continue to see passive bidding from the buyers in order to keep prices below that $7,800 turn distribution I mentioned on Monday.
Know that we are at an extremely important cutoff here at $7,700.
Below that we find a 150-point distribution running from $7,400 to $7,550 which I believe could trade and consolidate should we see that aggressive offer from sellers come in.
Portfolio
Another pullback from the all-time highs, about a 1% drawdown right now as our holdings continue to pick a path in this new tug-of-war mentioned above.
With new additions to the pipeline coming next week on PMI data, I believe we will have enough fresh ideas to feed our path toward the 20% performance mark in just under two quarters of operation.
Some AI names will have to be cut considering this new flocking behavior out of everything AI except for memory and select chipmakers.
One of our biggest winners is also ripe for trimming, realizing some profits and further reducing the chances of another - bigger - drawdown from the high watermark.
By month-end, I will mark-to-market all of our options positions, where a memory long/short put spread will likely surprise us by adding a few hundred bps to the performance.
A great performance so far indeed.
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