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Good morning partner,
Few things to cover this morning:
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Yesterday’s Session
A lot of the fragile points in the AI trade are coming to light just as the market tries to defend a new all-time high record now.
The session clearly showed a return of the tug-of-war for most of the auction, as AI-related stocks sold while hyperscalers recouped some ground along with other cash flow quality sectors.
What’s interesting is the way the semis/memory complex behaved on the day Samsung was supposed to report earnings…
Maybe they know what to us has become very clear, that the state of the chip market is not as healthy as everyone would make it out to be.
In my Micron earnings analysis, I pointed you to the biggest risk to the memory trade coming in 2028.
Massive oversupply as these companies all rushed in to capitalize on record prices and margins.
Samsung just showed us just how fragile this can become.
I will lean on this rotation back to cash flow quality for now, especially after a successful U.S. bond auction yesterday showing renewed confidence in stabilized bond yields in the coming months.
Let’s take a look at yesterday’s leaders and laggards:
Energy, Defensives, Real Estate.
Tough auction for the markets, as renewed Iran fears caused a whole lot of rotations to take place across the index.
Let me turn your focus to the bottom here in Financials as the biggest laggard, because it doesn’t really make sense to see the sector fall this much.
The 10-year vs 2-year yield curve in the U.S. is steepening again, which directly broadens the profits banks can make on interest spreads, so the financial sector should not be declining right now.
I believe the reaction comes from a much deeper reason, found in the banking exposure to GPU-backed loans which are mostly underwater now.
Underlying chips depreciated by 50% or so this year, and NVIDIA asked insurance companies to absorb some of these loans as a result…
Do not let this clue go unnoticed.
Click here to get caught up on this loan problem.
Real estate was one of the leaders, and I believe the action can be credited to the unexpectedly bullish bond auction that brought yields lower.
You know housing is one of my “coiled springs” where I’m actively hunting for opportunities for the rest of the year, and this is absolutely an encouraging sign.
In fact, I even bought more stock in one of the companies supplying the housing rebound, it’s decently higher than that second entry already.
Banks Dictate the Market
JPM vs GS Performance Ratio, Offside Capital
Gauging the market can sometimes be as simple as tracking relative performances between industry and sector leaders.
As we begin to see some tail risk spread across the financial sector, I revisited the J.P. Morgan Chase (JPM) to Goldman Sachs (GS) spread and noticed a pretty significant shift in trend.
JPM is now beginning to outperform GS, something we haven’t seen since the 2022 recession and S&P 500 bear market.
To keep it simple:
GS outperforms when the market (and the economy) run hot
JPM outperforms when the economy shifts into a defensive stance or slows down
Because GDP and PMI data already demonstrate that it is the “real” economy that’s now breaking out, and beginning to replace AI as the growth driver…
I am confident that this JPM vs GS trend will continue to extend for a while longer, and the effects could be felt in the S&P 500.
This is yet another piece of evidence that gives me confidence on the PMI watchlist I built for you last week, where a handful of names are aligned with what’s happening in the industry rotations behind this JPM vs GS move.
We’ll be putting on these positions as research and price action confirms my beliefs.
Within it, you’ll spot our latest take on a position I added to yesterday, with several more about to be a part of the portfolio soon.
News
Bessent Leaves AI on its Own as he declined (again) to have the government involved in regulation and development of AI, if you think about this decision from their perspective, of course officials don’t want to be associated with a sector that is currently failing and might bring the economy to its knees.
Apollo Rotates its Risk on GPU-backed loans to over 160 counterparties as the private credit market begins to tank. I covered this entire dynamic in a previous post, where now chip companies need insurance firms to cover up their losses.
Investment Banks are now stuffing your 401(k) pension with the same private credit loans Apollo is getting rid of, I know I already mentioned this but more headlines on the topic make me think of the same hot potato game Wall Street played with subprime mortgages in 2008.
NVIDIA Director Mark Stevens sold roughly $947 million worth of stock last quarter, joining the CEO and other tech giants like Jeff Bezos in a massive dumping wave. For the benefit of the doubt, they may just be cashing in on the recent runs to all-time highs (or it could be that they know something is coming.)
Movers & ES Levels
Constellation Brands 📈 Gained 2.3% after reporting strong quarterly results, adding to the momentum I’ve mentioned in the real economy rotation, specific to defensives and food items broken down in my Services PMI analysis.
Micron 📈 Rallied by 4% after D.A. Davidson analysts hiked their price target on the stock, even though a semis industry strike is breaking out in Taiwan and Samsung just missed on every line of their quarter.
Webull 📉 Lost over 19% after Congress pointed to potential national security risks tied to the company’s relationships in China, in reality I think this may be due to the spread betting and crypto markets going cold again for them.
Caterpillar 📉 Sank 5.8% after a reported farming equipment competition inquiry from the government. I don’t buy this, it’s too much a coincidence that this “AI supply chain” company went down the same day we had a tug-of-war auction won by the hyperscalers and not the receiving end of the capex.
Now let’s get into some ES levels for today.
Yesterday I gave you the $7,825-$7,850 range as an initial balance to trade for now as the market makes up its mind on AI and yields.
I specifically mentioned I would personally wait this out until next week when options expiration Friday hits the tape and new put/call “walls” are made clear.
Here I am reiterating that view, as the $7,800-$7,850 broad balance can also be seen as the dealing range where these pre-expiration option gammas get balanced out.
In other words, choppy price action as rotations get built into next month’s expiration for options.
If you must absolutely trade, keep that 50-point or so range in mind, where a break in either direction could be a shift in option walls which will become clear next Friday.
Portfolio
We remain rangebound between 7-9% in the net portfolio performance since June 2026.
I am pretty happy with the additions made yesterday to the PMI rotation portfolio, as the price action and order flow demonstrated those executions to be near a heavy accumulation level.
Telegram members also know I am looking to start a few other positions in the coming days, as statistical models suggest we may be building a bottom for them soon.
Oh, and for those who have been asking about TLT…
I got something special coming as part of a Premium analysis update for bonds, which could very well have a place in the portfolio sooner than I thought.
Here’s the positioning update for today’s premium members:
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