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Good morning partner,
Few things to cover this morning:
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Yesterday’s Session
Something must have happened over the course of the auction, and overnight markets, to trigger what we are seeing in today’s auction.
Which is a broader equity de-risking flow.
News flow will point you to Iran escalating once again, where the summer season ending at $100 brent could mean amplified trouble ahead for several industries, especially as diesel spreads hit all-time highs.
This is a trend I have been watching over for a while now, and I think it is now time to make a proper post on what’s going on, and how it could affect markets.
This is why you see energy being the main leader in the market, and a mixed action inside the AI trade.
Commodity shortages and “seesawing” demand can also point to where capital may rotate out of first, as sensitivity is increasing as a result of underlying economics.
Let’s take a look at Yesterday’s leaders and laggers:
Energy, Utilities, Industrials.
A clear representation of the rising conflict in Iran, as energy leads on spiking oil prices.
The interesting part is the divergence in performance for the second-order industries like:
Utilities leading outside of energy
Healthcare lagging on the opposite end
In my view, this can be seen as an inflation mechanism translating into better margins and pricing power for utilities, while healthcare goes into a growth shock filter.
Because physical goods inflation doesn’t necessarily spill over onto services inflation, this fact is at the heart of the utilities to healthcare divergence.
Don’t consider this a market theme though, as we are sure to have a TACO event soon to erase this current behavior.
What likely comes next is a return of the tug-of-war between cash flow quality and growth at any cost.
That’s where we are starting to filter our research selection, within the areas of interest found inside the PMIs.
Don’t Fight the Fed
Yen shorts have gone to historic extremes, just as both the U.S. Fed and the BOJ are acting together for the first time since 1998 to strengthen the currency.
It is in both countries’ interest to have a stronger Yen, especially as bond yields continue to swing higher and disrupt the infamous carry trade.
With Japanese yields rising this much, the 10-year Treasury must now pay 6.7% of more to remain as competitive as it used to be.
Which is why the BOJ has been selling Treasuries to buy Yen, and so have other governments and central banks around the world.
This perfect cocktail for Yen bulls could drive a short squeeze considering the record level of shorts now present in the currency, and of course, there will be major implications for several industries and their stocks.
Like manufacturing, exporters, and auto makers.
News
Bessent Warns Yen Bears as he is now explicitly on a mission to strengthen Japan’s currency to the benefit of the U.S. bond market, one of the easiest trades of the year.
South Korea Sends Hormuz aid as rising fuel and shipping costs are beginning to affect the country’s export wave, the only engine that seems to be reigning in the cash from memory races right now.
Qualcomm & Amazon Deal in on a procurement stake financing, which is fancy for “I will let you buy my stock at x price, if you sell me chips and compute at x price.” A less risky way to invest in the AI buildout knowing it could blow up tomorrow, that’s where the procurement clause allows the two to walk away.
Trump Hits Ford for its Chinese ties, potentially disrupting the market’s interest on the stock or its outright trade economics. Yesterday, a trade involving Ford was put on, I think you’ll be happy to read this one over.
Movers & ES Levels
Solaris Energy Infrastructure 📈 Jumped over 16% after raising its quarterly outlooks on stronger energy business performance. This has everything to do with the infrastructure themes I spotted for you in my PMI breakdown.
Intel 📈 Pops 9% after announcing they will raise PC processing prices by approximately 10% next month, making it the latest company passing down electronic and memory component costs down to its consumers.
Boston Scientific 📉 Lost 6% after a missed guidance announcement as a result of a cyberattack, making this the latest hit to the AI robotics theme so far.
Peloton 📉 Sank 6% with a Morgan Stanley downgrade citing headwinds in the fitness industry, in reality, this is a side effect that’s been affecting most growth companies across the market.
Now let’s get into some ES levels for today.
We broke below the lower $7,690 range given yesterday, and more importantly we closed below the balance-breaking level of $7,700 for the first time this week.
What the tape points to is the first initial aggressive selling footprint at $7,690 followed by aggressive buying at $7,672 or so.
The overnight session shows follow up sellers coming in at $7,690 again turning yesterday’s “support” into today’s “resistance" and creating a new balancing range to consider for the rest of the day and even the week.
$7,650 remains the sell-side target to hit this week, and I stand by that so far, though any TACO event with Brent at $100 could quickly turn us higher again toward $7,775 or so on a whiff.
You could even say there’s an inverse head and shoulders forming here with shoulders right around $7,680 and the head at $7,625.
Which gives you the ultimate support for the current distribution at $7,625 before we potentially revisit old distributions with $7,575 as support.
For now, unless $7,625 is taken out I wouldn’t bet on the sell-side, though I wouldn’t call it a win for the bulls either unless the week is closed above $7,700.
Portfolio
I just opened a long/short equity trade in the Japanese theme portfolio, which is already in a decent amount of profit.
PMI pointed to some of the previous theses around a selective consumer, real economy dynamics, and AI buildout names as potential candidates for adding more exposure in the coming days.
But here’s the important part:
The long/short options portfolio around memory will see its short leg rolled today most likely, and that’s going to have the net effect of financing over 50% of the entire long leg in this trade.
With one more month left to expiry, allowing for yet another roll on the short leg to reduce our risk in this trade by roughly 90%.
In other words, I’ve been horribly wrong in timing the downfall of memory stocks this entire month, and still I’m only expecting to lose 10% on my position.
Such is my risk management approach, enjoyed by those over in Offside Premium.
Chances are such long/short option strategies will show up in some Chinese names, as a significant development is starting to turn things bullish there.
Here’s the positioning update for today’s premium members:
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