Morning Digest 09/04

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Good morning partner,

Few things to cover this morning:

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Yesterday’s Session

I think this is one of the best examples of how the tug-of-war is being set up between the two prevalent themes in the market right now.

Yesterday, that dynamic manifested itself through bidding semis/memory names as well as some cloud computing names on the secondary move.

Then you look at something like Apple and Microsoft being down, conveniently the two companies in the hyperscaler mix choosing not to bet their entire balance sheet on AI with no concept of an ROI yet.

Notice how that wave of growth optimism spilled to other historically unrelated areas, like Caterpillar and GE Vernova.

This is why you cannot just look at the AI complex to gauge how concentrated and correlated the market is.

When you see that ~40% concentration number, know that it’s more like 60%.

The bond market is trying to keep things from overheating through rising yields, though the real effects of this tightening wave are showing up all the way across the world.

Here’s how Japanese bonds broke a 30-year market relationship.

Let’s take a look at Friday’s leaders and laggers:

Technology, Industrials, Communications.

You want to see the huge wedge driving the two market forces today?

Compare this leadership board against yesterday’s digest, and you’ll quickly see how today’s leaders were yesterday’s losers and vice versa.

Throw on top of that the fact that only ~25% of stocks advanced yesterday, yet that was enough to send the S&P 500 higher by roughly 100 points from my given support levels.

Yet when 80% of stocks rallied yesterday, the index closed in the red only because NVIDIA and a few chipmakers were red.

I will repeat myself,

This is not a healthy market, and the tug-of-war that keeps growing will need added liquidity to act as oil for an engine that’s running hotter and hotter.

Now that the 2-year yields are rising to meet 10-year yields, a bear flattening for the yield curve suggests that engine may not reach adequate liquidity levels.

And that, is when the dispersion trade turns single-stock volatility into broad VIX spikes.

Factor Rollover

The technical side of the AI trade just showed its biggest weak point yet.

Rolling 60-day momentum has crashed by over 60% since the August peak.

This doesn’t mean momentum stocks are selling off, it just means they have lost steam and the certainty that previously drove them to make new all-time highs multiple times in a single month.

Bulls will say this is consolidation before a new run.
Bears will say the stall is due to introduced uncertainty.

Both can be right, as the price action hasn’t given us any leeway to know which will be proven yet.

What I can tell you is this:

And, most AI-related stocks are still sitting well in correction/bear market levels (10%, 20% off the highs respectively.)

Combine this with a sharp loss of momentum, and I believe the bears may have the advantage in believing there’s new uncertainty.

To be completely honest with you, every day I find more data points that lead me to believe we are headed to some weird sort of rotation.

A rotation that affects memory stocks the most.

In a recent publication, I specifically pointed to the fact that names like Micron, Samsung, SK Hynix, SanDisk refuse to invest at the necessary capex intensity needed to solve the memory bottlenecks.

I believe it’s because if they do, supply will normalize prices, and NVIDIA GPUs will crash.

That would severely compromise the $8-$10 trillion in loans that are collateralized by these GPU prices.

If it walks like a duck, and talks like a duck… It’s probably not a chicken.

Click here to read my take on the memory cycle.

News

Movers & ES Levels

Now let’s get into some ES levels for today.

As explained yesterday, the bulls had one job and they did it well.

Ramming through $7,700 was the ultimate line of resistance where tons of aggressive sellers were trapped with a pretty bad R/R.

Now that we’re looking to close the week above that key level, the distribution changes as participants look for “fair value” at higher prices.

I suspect this higher value will be tested at around $7,800.

But, to get there bulls must swiftly through $7,775-$7,780 as there seems to be a lot of resting orders on the sell side, otherwise known as a liquidity pool.

Perhaps a bullish NFP print could lead us there, otherwise some prepared remarks on the Iran front could do it.

Who knows…

Bears want to attack $7,725 if they want to regain any ground today, but they must first ram $7,740 as “no man’s land” in the current distribution, where lots of fake outs could be seen.

For now, $7,725 through $7,775 remains my range to watch, a nice enough 50-point opportunity set.

Portfolio

Seems like the broader selloff in HALO/real economy has stabilized to end the week.

Interestingly enough, there is no movement in the AI infrastructure long/short basket, meaning the movers like Caterpillar and GE Vernova are gaining only because of their relationship to NVIDIA, not because there are gains to be had in the space.

That’s very telling as a position, which might as well get cut if it doesn’t perform soon.

The Japanese equity trade is soon to be placed, perhaps today I will get the marks I’m looking for to execute it along with other ideas reiterated by this week’s PMI data.

Within the memory long/short options trade, the short leg is now in 85% profit, prime for a roll today or into next week to finance another 20-30% chunk of the long puts and increase our R/R on that trade.

Here’s the positioning update for today’s premium members: