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Good morning partner,
Few things to cover this morning:
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Yesterday’s Session
The most extreme evidence of the tug-of-war is happening right now.
Chipmakers in semiconductors/memory are deep in green territory, dragging everything else that’s AI-related up with them.
That includes materials and industrials as well.
However, the rally comes at the expense of everything else. Specifically, the hyperscalers are losing ground big time in order for these AI-centric players to see the light of day again.
I will reiterate my view on leverage and concentration from this current behavior:
Situational Awareness’ blow up failed to mark the top of the manic cycle
Now South Korean traders and retail margin leverage in the United States are migrating to buy all they can in these AI names, creating a KOSPI 2.0 of sorts, albeit much less concentrated and at risk of a major drawdown.
Still,
My old belief that we would have an orderly rotation back to real economy HALO names has to be thrown out the window.
This has become a trader’s - a stock picker’s - market of sorts, so I am refocusing my energy to find alpha wherever I can for you.
Such as my recent pitch on a data center capex beneficiary.
With all the AI-related names beginning to go manic again, I suspect we’ll see some good things when and if CTOS makes it to the portfolio.
Stay tuned for updates and live trade alerts on that one.
Let’s take a look at yesterday’s leaders and laggers:
Technology, Industrials, Utilities.
Truly, the only leader was technology when you consider the scale of the move.
Everything else in the market, non AI-related, is down as the S&P had rejected our $7,700 level several times to close below it.
Again,
This is not a healthy market, but rather an overly concentrated and overleveraged bet on a handful to a dozen companies.
Such is the hand we are dealt, and we are choosing to play it in the only way that makes sense during times like these.
Which is to build long/short portfolios in both equity and options for these AI names, knowing that any given day the accounting shenanigans happening in the sector could adjust broader EPS lower by ~50% or more.
If that sounds bold,
Don’t skip the part where I dissect the EPS cash vs non-cash items.
All this to say,
Yes you can play AI, but you have to remain properly hedged through it all considering the collapse in earnings quality and the massive amounts of leverage wrapped up in the trade.
Hot for Longer
PCE Inflation Trends, Offside Capital
Inflation data, despite oil falling on a new wave of Iran deal announcements, is still significantly above the Fed’s 2% target at 3.7%.
However,
The monthly bump of 0.16% was encouraging as a sign of a much tamer print compared to last month, a trend that could very well get things under control as long as the renewed capex from NVIDIA’s financing wave doesn’t ruin the party.
I am of the belief that inflation is being driven by two things at this point:
AI infrastructure buildouts driving commodity prices higher everywhere
The positive wealth effect keeping the top % of households in the US spending more
It’s a feedback loop I will continue to cover for you, meaning we will not see any spending slowdown unless asset prices come off these incredible runs.
That loop is tied to the growth shock that is emerging from the debasement trade as well, where you see bond yields rising while labor and economic output slow.
Usually, these growth shocks create a knee-jerk reaction from the government, as they are forced to ramp up spending into infrastructure and other public-sponsored projects.
Perhaps this is the reason why ROAD was up close to 5% yesterday as part of the Offside Portfolio.
Should this theme continue, I suspect bond yields could be much higher despite Bessent’s attempt to tame yields by enacting new buybacks.
News
US Probes Apex Over NVIDIA Chip Smuggling activity in China, where the AI leader has adopted an under-the-table tactic to deliver embargoed products into China, helping Asia’s powerhouse build its AI footprint and competitive stance.
How Celsius Became a Household Name to rival larger peers in the drinks market, a trend that will only continue to expand in a health-conscious consumer wave backed by further GLP-1 sales.
Check Out the 10 Stocks institutions are buying right now under a momentum strategy. Every other investing approach has been de-grossing exposure to these same names, extrapolating on the tug-of-war discussed above.
Bill Gates wrote an entire essay warning about the economic upheaval and issues that may come from AI developing as there is “no plan.”
Movers & ES Levels
Salesforce 📈 Jumped over 11% after reporting a strong quarter, showing the SaaS trade may be back on the table. I expect this sentiment will spill over onto our other software holdings in the Offside Portfolio.
NVIDIA 📈 Pares losses to be up 10% after its quarterly report, a turnaround boosted by management’s comments on 70% revenue growth by 2028, a rather aggressive bar to be setting in my opinion.
Snap 📉 Falls by nearly 2.5% after Pennsylvania sues the company over alleged risks to children and minors on addictive features in its platform.
Zoom 📉 Slipped 7% after their quarter missed Wall Street expectations, a new stab to the software trade showing there are select winners and losers alike.
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.
It has now been nearly a week of this tight range happening, with the NVIDIA catalyst now out the way. **
$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
I expect the NVIDIA swing to have two net effects on the portfolio today.
First, our long/short AI equity plays should see a boost as their association to the broader buildout will benefit them.
Second, the long/short put spread on memory should see another drawdown on the NVIDIA spike, which is fine by me as the short leg will continue to decline in value and fund the long side of the trade.
The longer my view on the memory peak takes, the more times I can roll over the short leg of the options trade and fund up to 80% of the long side.
At the end of that structure, even if my memory picks don’t really move that much, a small deviation could still swing the trade into a sizable profit.
Timing the market is a fool’s game, structuring trades that give you the luxury of not having to time it is where professionals live.
Offside Premium members know this.
Here’s the positioning update for today’s premium members:
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