Ava is the first AI BDR to run outbound end to end, from finding leads to booking meetings, autonomously or on copilot. She's SOC 2 audited and trusted by companies like DoorDash and Grammarly. Book a demo.
Good morning partner,
Few things to cover this morning:
** PREMIUM MEMBER REMINDER (If you haven’t yet) ‼
You can now access the Telegram Community to receive our live trade desk alerts in real time (no more waiting on emails to hit), and a dedicated Q&A space with access to Gabriel for anything you’d like to discuss
Friday’s Session
Last week ended with a rotation back into the AI trade, as both semis/memory stocks rallied together at the expense of most other sectors in the market.
You can see that concentration bid as hyperscalers, defensives, and cyclicals all declined with capital headed toward the speculative growth corners.
I will remind you that this massive tug-of-war can only continue without affecting the market’s plumbing if and only if there is enough liquidity in the system to allow for it.
With the Fed going on a new tightening cycle, this would normally mark the catalyst for that tug-of-war to break the market altogether.
However,
Warsh also decided to inject an additional ~$16 billion into the economy just as rates were raised, which goes to show you how invested our politicians are in keeping the AI circular financing going.
The way I see it, all these vested interests will do whatever it takes to keep the race hot until OpenAI and Anthropic effect their IPOs.
Until then,
It seems a lot of value is being harvested in the real economy-type names, while the active trading continues to be found between the cash flow quality (hyperscalers) and growth at any cost (semis/memory) themes.
Let’s take a look at Friday’s leaders and laggards:
Technology.
This was the only sector that managed a green day on Friday, while everything else looked like another broader equity de-risking day.
Because the winning side is already obvious in the semis/memory complex, I want to focus on what followed, that being consumer cyclicals.
Cyclicals are, in my opinion, one of the best opportunities to find value swings when the macro backdrop becomes accommodative for a rally in them.
Things like bond yields, inflation, and especially distillate fuel prices.
As the average American now feels the pain of the Iran war at the fuel pump and the supermarket checkout, a ton of these discretionary products and services will be kept lower.
But,
Markets are now placing bets that this situation will end and normalize by December 2026, suspiciously close to the November midterm elections, where incentives are high to make living cost situations better for Americans.
This scenario will sure be bullish for most of these cyclical names, but there’s one area in particular I’m interested in for double-digit upside.
Lower Your Expectations
Current Forward P/E levels on the S&P 500 matter less than the path they have gone through for all of 2026.
From nearly 24x down to a current ~20.2x.
More often than not, this is the market’s way of saying sentiment around future earnings quality (and growth) is declining in real time, otherwise participants would be more than willing to continue paying higher multiples.
Zooming into the plumbing that makes up these underlying EPS expectations, there are a few issues that become obvious right away:
Rising yields and interest rates
Heavy concentration and loss of correlation in profits
Non-cash items (accruals) making up a larger share of these earnings
All of these create the perfect cocktail for a downward revision of both current and future earnings.
Because ~60% of the S&P is now dictated by how the AI trade, EPS concentration is naturally around the same amount.
Rising yields also have a direct effect on accruals, as they lower the valuation of these balance sheet items (like GPU-backed loans, financed equity stakes in private AI companies, and more.)
In other words,
Rising yields put a large amount of current AI earnings at risk of a downward revision, these earnings represent ~60% of the S&P 500…
One thing goes, and everything gets dragged with it.
Click here to understand the truth behind all these accrual buildups across the AI trade (they are very close to being fraudulent.)
News
A Wendy’s Franchisee operating over 314 locations has filed for Chapter 11 bankruptcy, an event that could spill over to the rest of the company as warned last year in my Twitter.
Japan Tightens Again as interest rates rise on top of a joint operation with the U.S. to strengthen the Yen, though the real effects will take place in the bond carry trade, where U.S. Treasury yields must keep rising just to remain competitive.
The U.S. and China will meet this week to discuss AI, Iran, and rare earth minerals, I believe this could pose as another catalyst to the diesel spreads normalization trade I pitched last week.
A New Security Incident at OpenAI affects Microsoft this time around, sparking the debates to slow down AI while Trump and Huang (with major vested interests) call this a hoax and want no slowdowns whatsoever.
Movers & ES Levels
Robinhood 📈 Pushed past 12% after Bitcoin crossed $80,000 again, a direct benefit in the Hood thesis pitched to you when the stock was only $75.
SanDisk 📈 Rallied more than 10% ahead of its official addition into the S&P 500 index, pricing in the future effects despite supply debates becoming more pronounced across the memory space.
Nike 📉 Lost another 2.4% after Mbappe publicly made a switch from Nike wear to On, perhaps the type of push this brand needed to cement its aggressive market share and financial growth.
Nucor 📉 Slipped 6.3% after posting weaker than expected quarterly results, a direct hit to the previous assumptions made around data center and AI supply chain demand going unfulfilled.
Now let’s get into some ES levels for today.
We managed to not only take out $7,700 but also $7,725 along with it as a win for the buyers to start the week.
I would point back to the fact that the market feels the recent 25bps rate hike just wasn’t enough to slow down everything that’s happening around the AI exuberance.
We are, however, approaching a very important cutoff in volume placed at $7,765 where sellers have become aggressive over the past quarter, so bulls will use that level as a target to place aggressive bids and ram through it.
As we build the tape toward that high, I would lean on $7,725 as support for now.
Sellers have two levels in mind if they want to gain any ground this week.
That’s $7,725 and $7,685.
I cannot be a bear unless we begin trading within - or below - this range, so the tape remains bullish for now.
Portfolio
Friday was options expiry day, so I marked-to-market all of the options portfolio we currently have on.
Happy to see a decent amount of gains coming out of the Chinese tech call spread idea!
We are now on track to make this fourth and final quarter the best of the year, especially as we fill the pipeline with strong ideas such as the diesel normalization and more Japanese exposure.
Speaking of Japanese exposure, the long/short equity names in that idea are doing very well this week, I suspect we’ll see an exit of that trade soon.
Our AI exposure continues to be a dud, providing me with invaluable information that the narrative is starting to fall apart.
This gives me confidence that the put spreads we have on memory names will pay off in the coming month or so, and even if they don’t make a move lower, the short leg of the spread has already financed over 60% of the cost of the trade so far!
Here’s the positioning update for today’s premium members:
Subscribe to our premium content to read the rest.
Become a paying subscriber to get access to this post and other subscriber-only content.
Upgrade