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Good morning partner,
Few things to cover this morning:
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Yesterday’s Session
It looked like the S&P 500 was ready to roll over as it approached the $7,725 level given throughout this week as buying support.
In fact, the heatmap shows that only healthcare and consumer defensive names were able to catch a bid from all this behavior, which naturally should have resulted in a deep red day for the index.
Except there was one event, almost choreographed to save the market from dipping further:
NVIDIA announced a $150 billion share buyback program
I have a lot to say about this, but will boil it down into a few main points here.
Management knows the retail narrative is now “Low P/E = Opportunity” so they are buying their own stock to make it seem like it is - in fact - an opportunity.
The truth is they are buying back stock at ~24.3x P/B, which will yield roughly (1 / 24.3 = 4.1%) to be below the current bond yield and a mediocre result after inflation.
What matters is that markets are right to discount NVIDIA’s forward P/E to this new low, along with all other AI stocks.
Over 60% of all NVIDIA earnings are now rooted in unrealized equity gains from Anthropic and OpenAI stakes, as well as interest income coming from their GPU-backed loan portfolio.
If you think NVIDIA is still a chip company, you should sell now.
Let’s take a look at yesterday’s leaders and laggards:
Healthcare, Defensives, Energy.
As explained above, this is the clear culprit of a broader equity de-risking day.
Which was only saved by the NVIDIA buyback announcements, otherwise we would’ve had a much worse close.
Energy’s rally is directly explained by the pop in oil prices, while healthcare and defensives can be connected to the inflation and yield dynamics creating a “growth shock” in the economy.
I say we’re potentially back to the growth shock view because of what sold down the most.
Materials, attached to the data center construction boom, took the biggest hit as these projects won’t expand or get the necessary financing unless both yields and inflation normalize.
In any case, I don’t think participants are ready to let the AI trade die off just yet.
Which is why I took this dip opportunity to add more risk to a data center cooling long/short idea we’ve had on since last month.
Contagion Effects
I like to keep up with what the bulls are saying about the market.
If you don’t take the counterparty into account, then you will have a hard time finding success in this business.
When it comes to credit risk and yields, one bullish argument was that we didn’t see high-yield credit spreads widening according to the underlying AI credit risk.
So in effect, there really was never any credit risk for AI.
My reaction to that claim was simple, and it shows you just how complacent the AI bulls have become…
Credit Default Swaps (CDS) have been clearly spiking for individual AI stocks
Broader credit spreads did not widen because only 10% of the economy is taking on credit
Well, even with that 10%, spreads are widening.
Which means,
The handful of AI companies issuing most of the economy’s corporate debt have become risky enough to widen the spread for the entire asset class!
This had been present for months, but is just now beginning to show up thanks to the rising bond yields as pressure.
News
Worsening Subprime Auto Loans create a rising probability for expiring leases to go back into the wholesale environment, which is bullish for our OPENLANE (OPLN) thesis.
NVIDIA Boosts Buybacks to $235 Billion after a recent addition to the program, directly tied to the capital cycle symptoms of rising M&A and buyback activity near the top of valuation ranges.
China & U.S. Agree to Cut tariffs by some $60 billion until June 2027 as truce, I believe this may have a positive impact on some farming, machinery, and even electrical equipment.
Retail Traders Buy Just $1 Billion of individual stocks to make for the worst buying spree in two years, after all who is really left to buy when the average American is struggling to pay bills and everyone bought into the February dip?
Movers & ES Levels
Kodiak Sciences 📈 Spiked over 177% as a new eye treatment successfully passed regulatory trials, if you’re looking for lottery tickets in the market, look to biochem as your best friend.
Palo Alto & CrowdStrike 📈 Rallied 4.6% and 2.6% respectively after OpenAI hacks on the U.S. government created increased pressure and demand for these cybersecurity firms. This was the next leg of the AI trade pitched last Friday.
Getty Images 📉 Crashed over 40% after seeking rescue financing from lenders, most will blame this on AI but the business was already a failing model even before the release of ChatGPT.
Boeing 📉 Slipped 6.9% after a software glitch was said to have some negative effects on its latest aircraft models, perhaps a dip-buying opportunity in the making for this industrial player.
Now let’s get into some ES levels for today.
We barely scratched $7,725 overnight just to see a major rebound off of it.
This confirms the importance of the level as support, and the willingness from the bulls to do whatever it takes just to keep closing above $7,700.
There is one problem though…
They did this in the overnight session where there is little competition (if any) and the tape shows only passive buying, no aggressive bidding.
I do think the odds are rising for a move lower at this point, though I cannot turn bearish until we see a ram and close below $7,725 for now.
Bond volatility, credit spreads, and economic data this week may get it done though for now I just stay put.
If I had to trade, I would use $7,725-$7,700 as support and $7,800 as first resistance or vice versa as an initial selling point.
That balancing range is the working book for now though, do know that after economic data we will most likely expand on this balance.
Portfolio
Yesterday’s dip on industrials/materials provided a great opportunity to add to an already winning trade, which is proving to be the right choice in the pre-market session.
Even though the long leg makes up nearly 10% of the portfolio, the short leg has financed most of that cost so the net position long/short only represents ~2.5% of the portfolio.
In other words,
Since I am not certain on the timing of data center construction, or how long the AI trade can continue to work…
I will not risk my capital (and yours) by pretending to be right, the correct choice here is to pivot into strategies that allow you to control tail risk outcomes.
Long/short is one of them, and you’ve seen plenty of examples of why and how it works for us over at Offside Premium!
I expect to squeeze out another 1-2% for the portfolio on that addition and rebound.
Everything else looks under control and favorable as we approach options rolling season.
Here’s the positioning update for today’s premium members:
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