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Good morning partner,
Few things to cover this morning:
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Yesterday’s Session
After the Fed decided to raise rates by 25bps, the initial market selloff ended up becoming a broad rebound of both AI and non-AI stocks alike.
A very rare occurrence, and one that sends a clear message to all:
The rate hike was too weak, too late
That is why all sectors pushed higher and continue to push higher this morning in the pre-market.
What will become extremely important now is to watch what the 10-year yield does, as if it remains continuously above 5% after the hike, then the broader market could run into trouble soon.
Why?
Sustainedly high bond yields signal this recent rate hike was not enough tightening, combined with oil above $100/barrel, and an ensuing energy crisis on our hands.
As of this morning, the 10-year yield has slightly crossed below 5%, but I believe the odds are high for a move back above.
Click here to read what is really driving bond yields higher (not the Fed, not inflation.)
Let’s take a look at Friday’s leaders and laggards:
Materials, Technology, Industrials.
The day markets chose to agree and rally together was also the day AI’s biggest pressure points were made very clear.
Materials and Industrials specifically.
Even with a 25bps rate hike, as I mentioned the message is that this move wasn’t aggressive enough and neither was the language during the meeting.
So, the AI trade is once again spiking into a victory that looks like more easy financing and ample credit to pass around.
That takes care of the high-beta side of the equation.
Which is why I will reiterate my view on this long/short equity trade for AI cooling companies, structured in a way that pays on such rallies but also significantly limits your downside if data center financing/spending were to slow down.
Your Content Edge
Most people look at the current situation in Hormuz and think “buy oil.”
That trade has been obvious since March, and there’s little money to be made in what’s already obvious.
Seven months into this Hormuz disruption, we are beginning to see the effects on inventories across the economy.
Not in crude oil, not in gasoline… In diesel.
The diesel wedge (a proxy for how much it costs to process heavy oil into diesel) is the only one spiking beyond reason since May 2026.
All while oil and gasoline have remained relatively flat.
That divergence in behavior means the real bottlenecks and future inventory issues are going to come from distillate fuels, of which there are three types:
0 to 15 ppm
15 to 500 ppm
Over 500 ppm
Costco has decided to ration motor oil, Valvoline (VVV) is now at 68% of its 52-week high, and refinery margins continue to push to an all-time high.
If you’re sniffing a trade idea from this entire setup, you’re right.
Research on this topic will be delivered in the coming days…
News
The U.S. Fed Hikes for the first time since 2023, this is also one of the few decisions that came with a 12-0 vote in favor of the hikes, despite Trump’s public call to lower rates to 1%.
Intel Calls on SK Hynix to make its chips in the U.S. now, another signal proving my capital cycle thesis right for most memory stocks, where investing into the peak of the earnings cycle will eventually ruin returns for all.
GOP Passes Bill to Curve data center costs, shielding local residents from spiking energy and utility bills as a result of the increased demand from these buildings. I will dig further into this bill and give you a proper take.
Food Prices Continue to Rise as the above-mentioned diesel spreads start to get built into the farming, transport, and storage part of the food supply chain, which is why I’m tackling this topic as priority.
Movers & ES Levels
SpaceX 📈 Rallied more than 5% after announcing its next Starship test flight, giving investors confidence that the company will monetize on new contracts.
Honeywell 📈 Climbed over 2% as the company reported strong incoming orders in the first sign of non-AI industrial demand, potentially a tailwind to the rest of the real economy trade.
J.B. Hunt 📉 Fell more than 13% on volatile fuel prices, specifically the distillate fuels I mentioned above, pointing to transportation gains in more asset-light business models, and also creating a coiled spring for several names once fuel normalizes.
Zillow 📉 Drops nearly 4% after losing a legal bid to pull home listings from Illinois’ largest real estate service.
Now let’s get into some ES levels for today.
Even with the rates rally, the index is still struggling to breach and sustain $7,700 as the cutoff point.
The most important tell yesterday was the massive wave of aggressive buyers coming in at $7,580 or so, bringing in enough pressure to send the price higher to and past the right shoulder of $7,650 in this inverse head and shoulders pattern.
I mentioned yesterday I cannot turn bearish unless that level is taken and held, and sellers did take it but failed to hold it, so we are back to neutral territory.
Reiterating on yesterday’s view, I also cannot turn bullish unless we take and hold $7,700.
For today, I see a tighter 50-point range in $7,650-$7,700 as the ground to cover and grind through until either level gives.
Sellers know that buyers are trapped at that $7,580 mark as aggressive orders accumulated there, and buyers know some aggressive sellers may be trapped at $7,685 as two instances showcased their hand.
Within that 50-point range, these are the two levels I would trade.
Portfolio
Even with the rates volatility, the portfolio has held up its ground in this current 5-8% performance range for the quarter, and still below its all-time high of 16% to give us room for recovery rebounds.
The bulk of the risk has been dismissed in the top weights as price action confirms we are in the clear of structure breaks for now, leaving us with the bunts I mentioned in September’s portfolio review.
Today’s pre-market action will be good for a lot of the AI long/short plays we have on, and it potentially spills over to help Chinese tech names reach and break their call walls and trigger a gamma squeeze.
For that view, there are some call spreads going on to help us benefit in that event.
Speaking of options, there is a put spread still on for memory names in the U.S. currently over 50% financed by the short leg.
With two months still left in that trade to expiration, by the time September is over I expect that over 80% of the long put costs will be financed through the shorts.
That will also give us further breathing room to make the trade profitable on the long put leg if the underlying names make even the smallest move lower.
Here’s the positioning update for today’s premium members:
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