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Good morning partner,
Few things to cover this morning:
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Yesterday’s Session
A broader equity rally got all names going in both AI and non-AI related sectors.
However, there’s some nuance to the breadth of this rally, as a bit of a factor skew showed up in how different sectors ended up rotating.
This was a growth and momentum-led session, with the only place where money did not go toward was value as a factor.
Notice companies like Walmart, Visa, Mastercard, and Berkshire Hathaway all going down on a broader index rally.
Growth outperforming value is due to a few developments, like:
10-year yield crossing below 5.0%
WTI going into correction (10% off the highs)
DXY crossing $100 again
I’m beginning to form an opinion that the Iran war will end as we approach the midterm elections in the U.S.
Which would resolve a lot of the rising yield, distillate fuel shortages, and future policy path from the Fed.
I have alerted Premium members inside the Telegram community on the TLT ETF closing above a key price level, pushing for a potential scale-in position.
Let’s take a look at Friday’s leaders and laggards:
Technology, Materials, Cyclicals.
AI took the lead on the broader equity rally, as expected.
Outside of the AI supply chain winners in materials and the semis/memory leaders in technology, we see consumer cyclicals joining the party.
That gives me more confidence on the watchlist names I have given members this month, which are currently being kept down due to rising fuel costs.
You notice the price action in restaurants since diesel prices broke out, and you’ll quickly see that more expensive gas affects consumer budgets around eating out and other experiences.
Airlines, trucking, and other industries represent such coiled springs to be released as soon as the diesel spreads normalize.
One of the names to benefit from this is ROAD, directly affected from rising asphalt manufacturing costs, as the U.S. runs into a cyclical low level of asphalt inventories.
My take is that there’s double-digit upside in this name on a normalized diesel wedge.
Struggling Homes
The biggest homebuilding names in the United States are all facing the same hardships of this market.
Profit margins and bottom-line earnings are being threatened from both the sale and the financing of each home right now as:
Price cuts continue to deepen during rising construction costs
Mortgage rate buydowns also eat into whatever profit is left
The problem is, however, that unsuspecting buyers think that these rate buydowns mean they can have their cake and eat it too.
As they say, there’s no free lunch in the market.
Truth be told, these rate buydowns - unless people buy fixed - just end up matching the normal market rate after two years since loan origination.
In Florida, I’ve had conversations with a few buyers who are now paying twice to three times their original mortgage payment as they took on these rate buydown loans.
Either way, lower home prices are a great start to revisit some REIT portfolios, all we’re missing is real wage growth above inflation, and mortgage rates coming down in my TLT long thesis.
News
The Bank of Japan joins the Fed in hiking rates, amplifying the view of a strengthening Yen and a massive rotation in Japanese equities. Here are the industries I am interested in trading once this rotation begins.
Softbank Inflated Credit Line to $6.5 Billion to invest more into OpenAI and NVIDIA, funding two of the companies at the epicenter of all circular financing deals, so expect more GPU-backed loans to hit the market this month.
Ed Yardeni Joins Wells Fargo in cutting price targets for the S&P 500, this time pointing at rising yields and declining earnings growth/quality as the main drivers behind the decision.
80% Margins at Anthropic are being challenged by more financial publications as the company left out the cost of training models, GPUs, and partnership distributions (a key input to bring in revenues.)
Movers & ES Levels
Workday 📈 Rose by 6% after reiterating its plans to approve a take-private deal, which seemed to be already priced when I decided to exit at $206 for a 75% profit.
Nokia 📈 Gained 5% after announcing it will provide more equipment to names like Microsoft to expand on its AI offering, an unlikely name becoming a winner in this race.
CoreWeave 📉 Fell over 4% after announcing a new debt and equity capital raise, diluting shareholders and boosting an already debt-loaded company with further leverage.
Fluence Energy 📉 Slipped 16% after cutting guidance for the rest of the year, despite an industrials and materials rally as confidence on the AI buildout continues.
Now let’s get into some ES levels for today.
The $7,700 level has been taken, ramming through trapped aggressive sellers that were sitting near the $7,725 mark to justify a turn to bullish sentiment in the index for now.
There seems to be no reaction from the sellers yet, as they have now gone passive near the breakout, showing that even with a 25bps hike the AI exuberance continues to expand on the view that this hike was much too weak.
I now see $7,750 as the next target for the buyers to tackle and attempt closing above on.
For the sellers, the new level of interest is $7,700 as the old cutoff point and differentiator between bullish and bearish structure.
That’s the 50-point range I am interested in as a trader, and would like to see how the market reacts around the extremes in order to understand what the tape is trying to say in terms of future trends forming.
Portfolio
A decent rally of 1% in the portfolio, mostly led by the AI long/short positioning rebound as well as the diesel-pressured consumer names recovering.
If we continue to see this sort of price action within the portfolio, it will serve as further proof of growing traction in the diesel leverage idea for industries to benefit from a falling diesel wedge.
More research on that theme coming your way soon (if not today, over the weekend.)
I do see a breakout past the call wall for Chinese tech as well, which will move the call spreads trade within the space in the right direction for a decent profit to end the week.
For the memory put spreads, a failed breakout gives me confidence we’ll be able to finance another leg in the shorts to cover more than 80% of the long cost and afford the position another month of waiting for a potential downward move.
This is why different strategies are useful when timing is shaky or even uncertain.
Here’s the positioning update for today’s premium members:
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