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Good morning partner,
Few things to cover this morning:
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Yesterday’s Session
Yesterday was tricky to say the least, as we got a mix of both the AI trade concentration and some rallies in the real economy corner of the markets.
However,
The big leaders in basic materials had less to do with data centers and more to do with the one area that’s beginning to rally outside of that.
Primary metals for the economy (like aluminum and steel) mostly used in the automotive and agricultural industry led the day to reiterate my rebound view of that space.
The rest came from the potential growth shock I’ve been mentioning in the past few days, as gold and silver took over in case we continue to see a weaker dollar in a debasement trade.
If that trend continues, I believe we are going to see a trillion-dollar rotation into Japan as the carry trade economics break in real time.
We just got the highest Japanese 10-year yield since 1995 along with the weakest Yen in history. Those two are not supposed to be true at the same time.
Let’s take a look at Friday’s leaders and laggers:
Materials, Communications, Financials.
Again, this would have seemed like a great day for AI, except that it was beaten by the growth shock and real economy rallies in the materials sector.
Still, NVIDIA’s move higher alone was enough to get the S&P 500 to rally aggressively off the day’s lows, as the stock sets a record at just over 8% of the index.
Apart from the tug-of-war in AI and the real economy there, take a look at the consumer.
Both defensives and cyclicals gained on the day, which isn’t a common occurrence especially during times of added economic uncertainty.
Zooming in, it was mostly retail and automotive names that led the consumer move higher, beginning to prove my thesis on those spaces correct and justifying the additions made this week in the portfolio.
Don’t be fooled by the NVIDIA rally, the cloud names ended the day deep in the red just ahead of Broadcom earnings, so perhaps a slowdown in future cloud commitments is the tell here.
Expectations Shift
S&P 500 short interest spiked to a two-decade high at 3.2%.
That’s for the median stock, which is highly skewed by the 8% in the top 10% of stocks which are very clearly made up by AI-related companies.
When you compare this to, say, the 2008 financial crisis, we have a wide gap between the median and the top 10% of stocks carrying this short interest.
I believe this gap may signify the sheer size of these companies today.
NVIDIA at 8% of the index carries a ~$5 trillion market cap
So yes, today’s 8% for the 90th percentile may as well equal 15% when adjusted for size back in 2008.
Now I’m not saying dump everything and run because folks are beginning to short these mega-caps, but you should absolutely keep this in mind when we cover the net de-risking trends out of the commitment of traders report.
And,
As the factor performance shows momentum going down the drain while value and quality continue to recover and trend higher on a relative basis.
News
World Governments Sell USD as credibility along with fiscal uncertainty begin to drive the currency, rather than rates and yield curves as they should. Japan is one of the biggest rotators, leading up to my Japanese equity trade ideas.
China Lashes at the U.S. during the G-20 summit, calling its “non-market” intervention operations a practice that exacerbate imbalances. In some ways they are right, these interventions are keeping the market from doing its job really.
Uber Cuts 10% of Workforce to free up cash to be deployed into autonomous driving investments, on top of the already committed $10 billion, markets seemed to like this move so far.
Chevron Expands its Venezuela operations by already boosting 15% of the land’s production. This will come in handy for heavy crude supply in the U.S. as government spending picks up the AI slack.
Movers & ES Levels
Snowflake 📈 Gained 25% after a strong AI-led quarter demonstrates the “AI will kill software” narrative may as well be dead, most of the Offside Portfolio’s gains this quarter came from software actually.
Reddit 📈 Pushed higher by 9.3% after Baird analysts reminded markets of upcoming data-license renewals to bring in the money for the company.
Palo Alto 📉 Gave up 9.3% even after a strong quarter, showing the growing divide between software and AI stocks.
Credo Technology 📉 Slipped by 20% after a weak quarter and even worse guidance, showing you the AI narrative has shifted from optics and energy to somewhere else instead.
Now let’s get into some ES levels for today.
We got to the lower ranges given yesterday only to see buyers become aggressive, as expected.
I can now reiterate the view that most of these buyers have been trapped at $7,620 as they smelled the seller weakness and decided to capitalize on it.
$7,660 is another aggressive buying base to watch for today.
Sellers took the $7,700-$7,690 range that I gave you yesterday as a place to start offering aggressively, giving us a 30-40 point range to work off first.
Bears want to bring this back to $7,620 and possibly ram through the trapped aggressive buyers.
But, they’ll have to take $7,660 first.
Bulls want to protect $7,660 at all costs, and continue to ram through the most important level of the week at $7,700.
Portfolio
As we start the new quarter, I am confident that this ~8.3% will go back toward our previous highs of ~15%.
The reason I say that is that we are about to get confirmation out of the Services PMI today as to which industries to look for ideas in.
A filled pipeline coming up to the next earnings season is always a great thing to have.
Even with this, the short options leg of the memory trade is now over 80% in profit, meaning they are ripe for rolling to finance another round of the long put leg in the trade.
Another two weeks like this, and over half the trade (and its risk) will be financed by these short legs.
You will also start to see some of our Japanese positions in this portfolio as well, which may as well drive the bulk of the quarter’s returns if I’m right on my FX views.
Here’s the positioning update for today’s premium members:
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