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Good morning partner,
Few things to cover this morning:
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Yesterday’s Session
With light data releases and not much to talk about other than the Trump-Xi summit, I do expect to see more auctions like yesterday’s.
Auctions that resemble a broader equity risk-on theme, confirmed by the agreement between hyperscalers and semis/memory names alike, which have previously been the mirror image of each other.
The only sector that didn’t join the party was energy.
Crude prices are now consistently closing below $100 again, getting thrown in to a correction as market expectations begin to shift for the rest of the year.
This offers me a great deal of information.
A day when all equities rally together, but energy falls behind, says a lot about the market’s outlook for both oil and diesel prices.
I do believe participants are now betting on an oil/diesel price normalization by or after November’s midterm elections.
Let’s take a look at Yesterday’s leaders and laggards:
Communications, Cyclicals, Defensives.
As markets agreed to rally together, it is important to know which sectors led on the day.
Hyperscalers brought the comms sector higher, but I am more interested in the consumer space catching a bid out of nowhere.
We all know the U.S. consumer is still beaten down on worsening sentiment on top of rising fuel and food costs as a result of the Iran war.
This makes the consumer sector a coiled spring in my opinion, with lots of swing opportunities when/if the situation resolves.
Which makes absolute sense to see consumer cyclicals and defensives lead on a day when the energy trade is suffering from lower crude prices.
However,
Not all consumer names will come out winning, as Sunday’s weekly plan showed you - through factor performance - which type of company is most likely to reap all the gains.
Crowded Exits
The gap between home sellers versus buyers is hitting records.
In any other market, I would say this is normal if we had accommodative financing rates and rising home prices.
However,
The average home price in the U.S. has actually declined over the past year when adjusted for inflation, and 7% mortgage rates aren’t doing much to help the situation.
Don’t get me wrong though, I do believe housing (like the consumer) is another coiled spring in this economy.
It’s just tougher to time much slower to pay off.
But trust me, a proper REIT portfolio could be the perfect foundation for ~8% dividend yields and double-digit appreciation rates over the next cycle.
We just need mortgages to reset and kickstart the market again.
News
Alibaba Shows Off its latest AI chip to join the global data center buildout race. This is great for our bullish call spread entered at $108, but bad for the AI trade as more supply is lining up to come online.
The U.S. and China Discuss trade and AI for a second day, fueling hopes of a resolution on Iran and erasing some of the fears around AI “killing humanity.” I expect this will go down just as the “kill software” narrative died off.
SoftBank Draws $20 Billion Earlier than expected as liquidity and solvency issues show up, you can’t be surprised at this outcome when the bank has plunged billions into a project that has yet to return even a single dollar back.
Tech Stocks Become as Cheap as they were in the first ChatGPT launch, while this may seem like a deal to untrained investors, seasoned participants know this is directly tied to a collapse in expectations.
Movers & ES Levels
Warner Bros Discovery 📈 Popped over 10% as Paramount struck a regulatory deal allowing for the two companies to merge.
Advanced Micro Devices 📈 Gained 9% to hit a $1 trillion market cap for the first time, the optimism comes as Meta’s new Muse AI assistant comes online and increases demand expectations for more processors.
Novo Nordisk 📉 Lost 9% after disappointing investors on its future growth path, it also delivered worse-than-expected returns for its current reporting period, especially on weight loss products.
HP 📉 Slipped by 4.2% after management pointed to continued weakness in the PC market, probably due to the rising cost of memory being passed down to consumers, my question is when does it all spill onto the rest of the tech sector.
Now let’s get into some ES levels for today.
As expected, those who turned bearish above the $7,700-$7,725 range yesterday got burnt badly.
We remain above that key distribution mark, so I still have a bullish bias on the market for now.
However, some weak points should be discussed in case the sellers decide to end the party early.
$7,810 and $7,775 are two very important levels where support will need to show up today and throughout the week if this rally is to keep going higher from here.
Otherwise, I do expect a revisit of $7,725 as the last line of support keeping us from seeing $7,700 once again.
If you’re a buyer, you’ll want to seek action around these levels for longs.
If you’re a seller, I’d rather lean on $7,285 or $7,838 for potential resistance, but know you’d be selling into a very clear bull trend.
Portfolio
A pretty nice move in most of the portfolio holdings yesterday, especially the Chinese call spreads.
I do expect to close that trade soon this week, for a ~45% gain overall.
In other areas, the broader AI rally has been hitting the memory put spreads to a point where another roll may be called for before the month ends.
With that third financing roll, the long cost of the puts will be covered by over 80% or so is my expectation, with the final roll coming in November for 100%+ coverage of the initial cost.
In other words,
My bear thesis on memory may take longer to play out, and I have been wrong for an entire three months…
And still will make a profit from the trade.
When markets seem to ignore all fundamentals and lean on hype instead, you need strategies like these by your side.
That’s where Offside Premium members excel.
Here’s the positioning update for today’s premium members:
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