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Good morning partner,
Few things to cover this morning:
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Friday’s Session
The tug of war continues to intensify now.
NVIDIA and most of the semis/memory names in the market declined to end the week in red territory, as capital rotated into the hyperscalers on quality and cash flow preference.
The secondary rotation was pronounced in the consumer areas like defensives and cyclicals, boosting momentum in our real economy HALO name recoveries already posted.
As we continue to see the tug-of-war between the hyperscalers and semis/memory, the market’s single-stock volatility could continue to rise even as the VIX is kept artificially compressed on another round of a dispersion trade.
In order for this to stay contained, the market needs the appropriate level of liquidity, otherwise we’d risk a break in structure and trigger a net de-risking out of the equity markets.
Because the yield curve is now headed into a bear flattener (2s catching up to 10s) I suspect there likely won’t be sufficient liquidity available to sustain this aggressive back and forth.
Note that on days like Friday, where AI constituents are affected, other areas like industrials and materials also see some selling pressure as well.
Which should itself show you how dangerously interconnected and concentrated the entire S&P 500 has become.
Let’s take a look at Friday’s leaders and laggers:
Communications (Hyperscalers), Cyclicals, Defensives.
From yesterday’s weekly recap on factor performance, you should now understand that value and quality are becoming more attractive compared to momentum and growth areas for investors.
Meaning,
These bids on hyperscalers and consumer names all reiterate what I’ve been exposing the Offside Portfolio to:
A real economy rotation
That’s why most of our consumer holdings have sustained double-digit returns this quarter.
Now that also brings up an important divergence in performance.
The AI-related long/short plays in the portfolio will likely begin to underperform (most of them already are.)
Which is exactly why I spent the weekend writing up a deep dive on my next consumer acquisition.
This one is attached to the automotive recovery, which also happens to be the area commanding the widest forward P/E premium right now.
High expectations soon to be filled.
For Premium Members only, stay tuned after the bell.
Cyclical Rotations
I cannot argue much with the presented cyclicality.
According to this econometric take, we are about to see a sustained period of weaker DXY dollar levels.
Judging by how the manufacturing PMI index has expanded this year, I would say it is likely that we do see a weaker dollar in the coming years.
Combined with everything else that’s happening in yields, inflation, and the market’s anticipation of a rotation back into cyclicals/consumer names…
I think the FX market is merely trying to stay one step ahead of the potential stimulus that could be triggered from an AI unwind.
Especially if yields are right to attempt to dismantle the finance plumbing underneath all the capex and data center expansions.
In other words,
A weaker dollar with tightening policy could be the market’s way of saying:
Dollar traders - as with bonds - see trouble ahead, so might as well start positioning for it
I can lean on this conclusion because of the premiums being assigned to the industries that typically outperform during a weaker dollar regime.
The spillover effect is taking place now.
News
The U.S. and Iran exchange fire once again, reigniting the conflict’s volatility bout just in time for the September seasonality effect to begin.
Diesel to Crack Spreads continue to widen, and Goldman Sachs is now stepping in with warnings about this behavior and how it historically has always resulted in an energy crisis.
Chevron & Other Oil Giants line up to begin their rebuild of Venezuela’s oil industry, where a recent U.S. deal will allow some cushioning from the Iran conflict and Hormuz disruptions.
Trucking is Booming again thanks to the AI buildout, I gave you the early breakout of the industry last month when we reviewed the PMI data. Click here to read how this view can help CTOS rally.
Movers & ES Levels
Workday 📈 Gained nearly 6% after reporting a fantastic quarter, showing our initial thesis on the company is still strong. However, not even the strong numbers were enough to get us past our exit price of $206.
Elastic 📈 Spiked over 19% on strong earnings, adding to the view that software demand is still running and not being affected by the rise of AI whatsoever.
PayPal 📉 Fell over 12% as the company’s buyers, like Stripe, stepped away from a potential takeover. This serves as an example that not all cheap companies are great deals.
IREN 📉 Lost 12.5% even after beating earnings and revenue expectations, a direct hit to the AI trade suggesting that expectations may be set above what’s realistic, keeping companies from gaining further market cap.
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
Pretty quiet day on Friday, the portfolio didn’t move at all.
As the tug-of-war continues to intensify, I am going to keep a close eye on our AI positions, especially in the long/short strategy to determine which leg needs adding/cutting.
Our two most recent acquisitions have shown strong support from the buying base, so a DCA addition into breakouts could be warranted.
Consumer names are beginning to see the benefits of the rebound in the broader sector, and automotive is showing itself to be one of the leading areas.
Which is exactly why I will send out a deep dive I prepared over the weekend to explain my next play in the space.
Here’s the positioning update for today’s premium members:
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