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Good morning partner,
Few things to cover this morning:
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Yesterday’s Session
An interesting session to say the least, as the entire AI complex got a second blow to the knees this week.
First it was Samsung’s earnings confirming that the memory space may be running into an oversupply situation.
We know this to be the case, and are expecting the big hits to come in 2028.
Then yesterday OpenAI announced its annualized revenue rate was only going to be $50 billion rather than the $70 billion they once promised.
Because token prices are down 60% this year, these AI companies need to increase their users by 150% above their old targets just to get back on track to $70 billion.
So AI-related names took a hit yesterday while hyperscalers gained a bit of ground.
That’s the tug-of-war I have been covering all quarter long.
But notice the ones who got hit the most in the neoclouds.
The simple reason is that these companies rely on OpenAI and Anthropic to make enough money and repay their compute commitments.
We know from a thorough analysis that this won’t happen, so money leaves the neoclouds first as their debt can collapse on themselves.
Let’s take a look at yesterday’s leaders and laggards:
Basic Materials, Industrials, Real Estate.
Another consecutive day where money rotates out of the AI complex and is rushed into the industries I spotted for you in my PMI analysis.
From manufacturing, you understand that wood products and other materials are leading the breakout, which may now be tied to a housing rebound.
That’s where industrials and materials come into play (construction and supplies.)
I will say there’s a bit of data center construction still left to influence the industry, but its share is falling more and more each time.
Real estate is the one that interests me, since it’s where capital has chosen to rotate into for two days in a row, especially with more supportive bottoms in the TLT bond ETF.
This only tells me I need to step on the gas and finish building the housing materials portfolio, where our first buy is already showing strong price action building into a new rally.
The second position may be opened today as Telegram price levels have been met accordingly.
Different Technicals
Good traders understand price action and gaps to fill when sudden liquidity inefficiencies happen.
Great traders know to look past that publicly available view and look into order flow and time series statistics.
In my own “rate of change” model, I have spotted a pretty strong setup in the TLT bond ETF, where a negative 2.0 standard deviation is usually met with reactive buying pressure.
Over the past two days, that has been the case here at the lows of the ETF.
Do I think the bottom is in and it is now time to buy? Not really.
However,
I do think that time is getting uncomfortably close, and I will be watching the order flow like a hawk for a few days and spot the entries for members.
By the time we end up buying this, we’ll lock in a 5%+ dividend yield and roughly 50% of upside in one of the easiest swings out there.
Don’t even get me started on how we can hedge this by buying EURUSD…
For now though,
You can access the PMI watchlist for this month and keep an eye out on the names I am currently digging deeper into for potential buys.
News
Crude Oil Headed Lower after Trump mentioned no intentions of striking Iran before the midterm elections. In reality, oil shipping volumes are at par if not above the pre-war levels already, so this has now become a political stronghold and great news for our diesel spread trade.
OpenAI Accounting Practices were blamed for the $20 billion revenue shortfall, at the end of the day revenue is revenue, so I really don’t see how people can buy into this excuse for token prices crashing.
PepsiCo Earnings show that our initial thesis for the company remains intact, a perfect international diversifier against the local Ozempic crisis in the United States. Click here to read our thesis for PepsiCo.
Trump Reportedly Bought millions in Meta stock and SpaceX bonds back in August of this year, this could be a good thing to consider for the Offside Portfolio once a proper opening hits us.
Movers & ES Levels
Chipotle 📈 Climbed by over 6% after Starbucks expressed its interest in taking over the company, while this is great news for Chipotle, I would much rather focus on the same thing happening to CAVA.
Palantir 📈 Gained over 2.4% after Goldman Sachs analysts upgraded the stock pointing to growing demand in their AI systems and cybersecurity for government data. I still think cybersecurity firms are essential to the success of the AI race.
Oracle 📉 Fell by over 5.5% on the news of OpenAI missing its revenue targets, dragging NVIDIA and other AI-related stocks down with it. I covered Oracle’s specific accounting red flags and how it shows you the way other AI companies could end up.
TSMC 📉 Slipped 3% even after posting a 51% jump in quarterly revenues, I believe at the end of the day that expectations for these companies have gotten too aggressive to be met, so even aggressive growth like this is met with disappointment.
Now let’s get into some ES levels for today.
Brief break below the $7,800 bottom I have been giving you all week, only to recover back to the top of my range at $7,850.
This is exactly what I was talking about in terms of whipsaws coming before the options expiration Friday hits next week.
We won’t really see an auction that makes sense until that event is past us and we begin to see where dealers are building their gamma walls.
For now, if you must absolutely trade…
I will continue to lean on the $7,800-$7,850 range as the most predictable, with anything above it going to $7,900 being more of a punt just as below $7,800.
As volatility dries up coming into next week’s expiration and potential macro events, I expect this range to hold until an exogenous event comes in to tip the scales.
Portfolio
Pretty flat and boring day yesterday for the portfolio.
Except for the fact that our latest buys are reacting beautifully to levels given in the Telegram community, proving the ideas behind them are beginning to work.
I do expect to execute on another PMI rotation name today, as the price I was waiting for was just crossed yesterday, it would be a great way to end the week to be honest.
The AI long/shorts continue to work their way into deeper profits, and next week I will be rolling the put spreads on memory for another round of financing.
Everything else is looking under control.
Here’s the positioning update for today’s premium members:
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