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Good morning partner,
Few things to cover this morning:
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Friday’s Session
Another tug-of-war day won by more of the real economy complex rather than the AI concentration that sits on the other end of the spectrum.
Notice that the semis/memory baskets ended up lower while value stocks and cash-flowing businesses like the hyperscalers gained on the day.
That’s the strongest theme we’ve been covering in the daily auctions so far, and the truth is it will take an abrupt move to trigger more rotations like these as at this point an “orderly” rotation is unlikely to take place now.
That being said,
With the factor performances covered in Sunday’s weekly plan, I can confidently say that the signals spotted on both the GDP and PMI breakdowns this month have yielded very interesting areas to look into and consider.
Some of which are already showing signs of a bottoming process before going on stronger runs higher from here.
As more research gets done through the PMI watchlist, expect to see more deep dives and portfolio additions for the rest of the month.
Let’s take a look at Friday’s leaders and laggards:
Cyclicals, Healthcare, Materials.
Whenever we have two market extremes, such as this tug-of-war, spotting where the market chooses to go on rotational days can yield strong signals and implications.
Such as consumer cyclicals, which is one of my “coiled springs” waiting to get released along with real estate.
Of course, all of these springs are currently being kept down by the pressures of inflation and higher bond yields, so there will need to be a catalyst to cement both a bond market move and constructive price structure in these stocks.
Given that materials and real estate were among the top leaders connected to consumer cyclicals, I would lean on the thought that there could be a bigger connection to be made in retail spending around housing goods and services.
Not an outright bullish call on the housing sector, but definitely an encouraging sign.
Especially as wood products and furniture were the two industries with the largest PMI composite score this month.
An entire watchlist has been built to take advantage of these breakouts, screened with stocks the market is already beginning to pay premium valuations for.
Tipping the Scale
AI Complex Exposures to OpenAI & Anthropic Financial Success, Offside Capital
They say you can’t fake price action, and two massively important news showed us where price action is choosing to go this month.
OpenAI and Anthropic missed their financial targets by a wide margin, proving that AI doesn’t operate in a vacuum as many had thought before.
If these AI companies aren’t able to meet their financial targets, then over $1 trillion of cloud compute commitments may just go into default.
This beta exposure scale shows you who is most exposed right now:
Neoclouds, Memory chips, Energy infrastructure
All the way on the other end, you have the areas people are deeming as “dead” like:
Software
I point this out to you because the days of easy money in AI are over, you must now learn to implement a tail risk hedge either through options or long/short equity strategies.
It’s exactly how I’m currently betting on memory’s selloff, and even though my timing has been horribly wrong…
The trade is still designed to profit.
News
NVIDIA Chips Flood the Market as there are 55% more second-hand providers in the market compared to the beginning of the year. This looks like the wave of Rolex watch flippers when prices went above retail.
Trump Strikes a Deal with Russia over 300,000 tons of diesel fuel to be shipped into the global marketplace, just the type of supply shock I was looking for in my diesel spread trade thesis.
J.P. Morgan Calls for a generational opportunity in fixed income ETFs, a view I would have to agree now that the TLT bond ETF is beginning to build up signs of a potential bottoming process.
The Combined Mag 7 Size make them the second largest economy in the world, which begins to have effects beyond Wall Street and into global living costs and economic tail risks.
Movers & ES Levels
Humana 📈 Rose by 11% after federal data showed better than expected signups for Medicare advantages, a result of healthcare inflation driving people to seek insurance and health plans more than ever.
Fastly 📈 Gained nearly 16% after an Oppenheimer price target hike citing better AI-powered web traffic, a new industry that is taking off as more agent activity browses freely.
Apple 📉 Gave up close to 2% after it cut new iPhone 18 production guidance due to weaker sales, rising costs and a weak consumer managed to affect the strongest commodity company in the world.
Telecom Companies 📉 Lost over 10% on average after falling into the prospects of competition from Starlink, which could make the case for SpaceX at a more reasonable price and a very small allocation to portfolios.
Now let’s get into some ES levels for today.
Some markets are closed today due to the holiday, just as the prospects of AI tail risks begin to emerge and threaten the S&P 500.
Over the weekend, new developments in the Middle East can be taken as good or bad depending on how Ukraine and the EU react to Russia’s diesel shipments.
I will continue to lean on the $7,800-$7,850 range for now, especially as we get closer to options expiration Friday, where the usual behavior is an initial selloff toward Wednesday and then a recovery by Friday.
Last week, I opened a hedge in the portfolio through S&P 500 futures based on these levels.
If you’re a buyer, lean on $7,780-$7,800 and target $7,850 for now unless we break this range due to options expiry.
If you’re a seller, know that the odds are probably not in your favor this week as options dealers need to collect their premiums.
Next week is another story, especially as we’ll get banking earnings to potentially shift the sentiment around AI financing and the health of the economy.
Portfolio
The latest buys in the portfolio have been working beautifully, reiterating the importance of the “bunts” rather than home runs as the market decides on the next rotation.
If anything,
The price action around the recent ideas we’ve been putting to work reiterate the GDP and PMI signals we got from last month, as institutional volume has been showing up to support the stocks in our list all around.
The best part is that there are still several ideas currently in the research pipeline, and will likely see their place in the portfolio sooner rather than later.
This week is also very important for the memory put spread options roll…
By Friday, I would have financed another round of short puts through November, financing close to 80-90% of the initial long costs in August.
Premium members will see that execution and even a potential roll of the strategy running up to April of year as the original thesis is as strong as ever now.
Here’s the positioning update for today’s premium members:
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