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Good morning partner,
Few things to cover this morning:
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Yesterday’s Session
Did you notice that NVIDIA was up while most of the other AI incumbents - the ones that are supposed to benefit from NVIDIA’s quarter - all went down?
Micron, SanDisk, Caterpillar, and several others.
Even gold and Bitcoin gave up the highs and are slightly lower this morning.
The reason is a simple capital rotation, the likes of which I’ve been pointing out to you during several of these digests.
Most noticeably, we have the tug-of-war between hyperscalers (spenders) and semis/memory (receivers) starting to become more aggressive.
This back and forth is like pushing the engine beyond comfort, and in order to keep up the revs we need to ensure the engine has enough oil for this.
Oil being liquidity in this case.
With billions - some days trillions - flowing between AI and hyperscalers, the underlying volatility and sensitivity makes this a very shaky market, which is why I guess we have struggled to break the recent channels.
That is exactly why I’ve focused on picking companies that can both ride the AI buildout but also offer downside protection in case value in the real economy becomes the preference again.
Such as my latest addition:
Let’s take a look at yesterday’s leaders and laggers:
Basic Materials, Defensives, Cyclicals.
While the market was led by NVIDIA yesterday, it seems most of the winners today have shifted to the opposite direction.
Basic materials are now the mirror image to technology, and that is worth explaining.
Yesterday materials rose with the AI trade, as some companies get lifted on the data center construction boom.
Today, materials as they relate to the real economy infrastructure are rallying. Think of metals for the transportation and automotive industry, where my PMI read on trucking could come in handy.
The other leg of this leadership is found in the consumer, with both cyclicals and defensives pushing higher as the economy begins to wake up again.
It is my hope that we do not see a broader market crash, but rather an orderly rotation out of the bloated AI trade and back into the real economy, like these materials and consumer rallies.
However,
At this point, NVIDIA’s quarter has shown me this rotation is the less probable case.
Worth a Listen
I fell asleep listening to this podcast last night.
Even though I didn’t consciously finish it, I can tell you that the first half hour or so is filled with some of the most candid takes on the AI trade I’ve heard so far.
On one end, you have Ed Zitron breaking down the AI ecosystem by the numbers and all the actual current facts.
The interviewer is more like you and me, daily power users of AI for everyday life and often times as an aid in business.
They go on to compare the revolutionary adoption and power of AI to previous advancements like the automobile and the internet.
If there’s any bullishness in me toward AI, and how unknown the future is around it, Ed Zitron really beat it out of me with one single number.
Absolutely worth a listen,
News
SK Hynix proposed a new production facility in Indiana. further increasing the capital and inventory peak that’s already been pointed out for the memory industry.
NVIDIA Pauses Revenue-Sharing Deals with AI cloud companies, I suspect this may be due to the rising costs of capital across developed economies as a result of higher bond yields. If liquidity dries up for the circular schemes, valuations could soon take a hit.
Jackson Hole is on watch as markets await what Fed Chair Warsh will have to say about the economy, outlooks on rates, and the state of inflation running steadily above their 2% target.
Tencent Touts New AI Model saying it rivals Moonshot and other available models in China so far, adding another competitive stance to compete against the more expensive US options.
Movers & ES Levels
Dollar General 📈 Gained 2.6% after reporting strong quarterly results and even better guidance, showing the real economy trade is starting to show more signs of a potential revival.
Okta 📈 Jumped over 25% on earnings as demand for cybersecurity increases to bridge the gap between AI adoption and proper security measures set in place.
Wendy’s 📉 Lost more than 13% as Nelson Peltz withdrew their intention to acquire the company, this name might go bankrupt after all as I called for a while back on YouTube.
Marvell 📉 Slipped over 8% after disappointing earnings and demand outlooks, a brand new hit to the AI trade on top of the NVIDIA revenue-sharing dismissal.
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
Made a new addition to the portfolio yesterday, and still have plenty of cash room left to consider the other handful of opportunities still in the pipeline.
Especially as next week’s PMI reports could give me further evidence to prove these ideas.
The Memory long/short options portfolio and AI long/short equity portfolio should have a decent swing today as the AI concentration seems to reverse in the pre-market.
Even more so with the Jackson Hole volatility to come later today.
On a mark-to-market basis, the portfolio’s performance should be closer to 15% when we add the financing benefits of the short legs in the options portfolio.
For now,
Some of the biggest winners continue to carry our returns to new highs, maturing to the point where some profit taking might be advised.
Here’s the positioning update for today’s premium members:
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