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Good morning partner,
Few things to cover this morning:
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Yesterday’s Session
Only 35% of stocks advanced in yesterday’s session, and even though the majority of names in the S&P 500 finished deep in the red, the index still managed to pull off a rebound in the last hours of trading.
The reason should already be familiar to you by now:
AI names won the tug-of-war that day
You can see most of that dynamic accentuated in the split performance between hyperscalers and semis/memory names.
Amazon of all things was down 2.5% while Micron gained 2.8%.
That’s the nature of this divide right now, but I would generalize it even further:
Cash flow quality versus growth at any cost
If you keep that mantra in mind, you will probably make it out okay as far as where you choose to look for investment ideas.
Go back to the factor performance section of our weekly plan,
Knowing that value and breadth are beginning to trend higher, while momentum and growth lose ground, will act as another vote of confidence to show where the market wants to rotate into next.
That is exactly why my latest watchlist addition is founded on this very rotation gaining traction.
Let’s take a look at Friday’s leaders and laggers:
Energy, Technology.
As mentioned, over three-quarters of the market declined yesterday, but the only one that matters still pushed higher, even if it was 0.22% higher.
Energy’s rally can be attributed to renewed strikes between Iran and the U.S. with a new cherry on top being the Venezuelan oil deal.
Spoiler: Venezuela has the most sour and heaviest crude in the world, so even if we manage to get the 65 million barrels per day, they will likely end up going to diesel and not crude inventories.
Now compare everything that’s being affected by the capital pulling of the semis/memory names:
Communications (hyperscalers)
Real estate (data centers, fabs)
Utilities (plants feeding data centers
It’s on days like this where you realize that the market’s vote is now clearly divided between that cash flow and growth at any cost tug-of-war I mentioned.
Simply put,
The market doesn’t think anything outside of semis/memory will ever see cash flows or ROI from their bets on AI.
Credit Reset
Credit card and auto loan delinquencies are at 15-year highs.
Recent earnings figures from the likes of Walmart (WMT), Lowe’s (LOW), Home Depot (HD) and Dollar General (DG) will show that the consumer is being more selective about where spending goes.
That’s a classic divide in the K-shaped economy…
Some splurge, some get picky.
I believe the combination of rising delinquencies with higher bond yields globally could cause a potential credit reset, where a new wave of stimulus and introductory offer rates hit the consumer sector in bulk.
Especially discretionary and automotive.
The market is already paying a premium forward P/E for both of these sectors, meaning expectations on future EPS growth are high.
I’m personally leaning more on the automotive corner, given everything I’ve seen in my research (and also because the Offside Portfolio already has a discretionary sleeve.)
News
Anthropic Closes a $35 Billion deal with NVIDIA-backed company Lambda, just a day after NVIDIA took a $3.5 billion stake in MediaTek. We’ll likely see these deals ramp up to another $100 billion, NVIDIA’s revenue growth targets have to come from somewhere.
Bessent & Warsh Kick Off the G-20 Summit where they will discuss growth, trade, and why an intervention approach to bond markets and the Yen is sound economic policy (it isn’t.)
Risk/Reward on Stocks is Getting Worse according to Citadel, whether we want to believe them or not, I would have to agree considering where yields, valuations, and the compressed VIX are.
Bessent Pressures Japan to raise interest rates further in its latest round of intervention for the currency. Whatever the bond market makes of this will be seen later in the week.
Movers & ES Levels
Avis Budget & Tesla 📈 Both rallied over 6% for different reasons, but I would like to group them here to show you how sensitive the automotive sector is to the slightest of good news, building my case further for OPLN’s upside target.
SanDisk 📈 Gained over 5% after being added to the MSCI world index, perhaps the memory rally was sparked by association to the news, or just because of the hyperscaler selloff… I guess we’ll see toward the end of the week.
Howmet Aerospace 📉 Lost over 7.5% after Elon Musk publicly stated SpaceX will begin building turbine blades in-house, undercutting future demand and earnings outlooks for their former supplier.
Eli Lilly 📉 Slipped 1.5% after announcing plans to acquire Merida Biosciences, the market’s way of punishing excessive M&A activity when valuations are at all-time highs.
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
The portfolio is approaching a “correction” in terms of performance.
This is exactly when managers roll up their sleeves and recount the state of all the theses for each and every position in the mix.
After combing through everything, I can tell you one thing:
Everything is still the same except for two sleeves
The AI infrastructure and the memory sleeves are starting to behave in ways that are quite puzzling.
Never mind the net portfolio performance, as it has been mostly driven lower by the broader breadth decline in the market.
What I’m most interested in is the fact that, despite NVIDIA’s spending binge and AI concentration winning the tug-of-war, my AI infrastructure picks are both down over 10% each!
I have placed a short to hedge them, so the portfolio impact is less than 1.0%.
However, the lesson is that the AI narrative has shifted completely from “your capex is my gain” to whatever this is now.
History will tell you that this is the late-stage of every bubble, but I’m not making any calls here.
I’m just adding new ideas to the pipeline so I can remove these when the time comes without a second thought.
Here’s the positioning update for today’s premium members:
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