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Good morning partner,
Few things to cover this morning:
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Friday’s Session
Another day of aggressive rotations happening inside the equity markets, with capital being lead straight out of the entire AI trade and anyone that has to do with the technology and its financials.
Where is that money going?
Clearly, where I already guided you toward in my GDP and PMI analysis earlier this month.
Defensive, real economy sectors with some of the best “coiled springs” in the market.
I believe that these industry dynamics are truly not that bad considering just how depressed the consumer and credit market is right now.
Meaning,
These are only being kept lower by higher 10-year bond yields and uncertainty around fuel prices as a result of ongoing Iran and Hormuz escalations/
Despite all of this, our recent PMI stock picks in these coiled springs have held up their ground relatively strong compared to the S&P and AI decline.
Most of them finished the week in the green in fact.
With the potential rotation beginning to accelerate, history shows that these are the same asset classes that tend to outperform, as all institutional capital realizes it’s where yields still live.
Let’s take a look at Yesterday’s leaders and laggards:
Energy, Defensives, Utilities.
Part Iran, part economic outlook within the United States.
Outside of the obvious themes helping energy companies raise their future prospects and earnings, I think the better signal can be found by the connection between GDP and PMI data.
Price action has turned those economic signals into a sharp recovery for value and quality factors expressed through the defensives sector.
Again, exactly where I was turning your attention to weeks ago.
I believe this could be the start of a bigger move, unless something in the macro takes a turn to help expand the sentiment around AI financing and data center debt issuance.
Which we know is the main reason why the selloff began in the first place!
As of now, take the end of the week auction as a message of where participants wanted no weekend risk for their books.
Technology, Communications, Cyclicals
If this is more a long-term view than a knee-jerk reaction, then the slowdowns seen in GDP and the quick rotation to defensive industries will likely explain why these sectors sold off the most.
It’s got everything to do with credit, rates, and prospects about where the economy is headed.
Follow the Money
Forward P/Es can tell you a lot about where the market is looking to go into next, and where it wants to bail out of first.
Right now,
Industrials are trading at the top percentiles of valuation relative to the S&P 500 as investors flooded into AI-related buildout stocks, believing that “bottlenecks” would somehow make these all trillion-dollar capitalizations.
That idea hasn’t gone so well, just ask Caterpillar.
Where I think the market is looking to go next as it sells out of the AI trade is simply born off two normalization events:
10-year bond yields coming back down
Fuel prices normalizing post-Hormuz
That’s why the consumer discretionary sector (cyclical) is now trading at the top of absolute valuations (23x Forward P/E) while still only being at the 30th percentile rank.
In other words,
Lots of room to rally and justify that premium valuation once the consumer comes back.
However, waiting around for that turn may hurt the overall returns of your portfolio, so I want to go for a safer bet instead.
A bet not only backed by GDP and PMI tailwinds, but also one where institutions cannot go into due to the company’s size.
In a market where AI liquidates and all that money goes into defensive areas, I want to own the companies that can really deliver life-changing returns.
The ones I can sell to institutions later when they become big enough on rallies.
News
Carlyle to Buy $7.7 Billion of consumer loans from Truist bank, one of the capital cycle signs I love to see as I begin considering a future search in the consumer sector for opportunities.
DeepSeek Released its Latest AI model, quoting it is faster and more powerful than the competition in Anthropic and OpenAI, not to mention roughly 90% cheaper to accelerate the customer migration threats to AI.
Big Banks Block AI Agents from moving money within customer accounts, which is another hit to the future AI trade growth engine after robotics in healthcare also erased some high hopes.
AI Insurance Becomes a new constraint to the industry, as some projects and adoption at big enterprises may have to be paused while insurance companies figure out how to properly underwrite these risks.
Movers & ES Levels
ExxonMobil 📈 Rose over 2.5% after signaling its refining business profits could make this a stronger quarter, I am more interested in future guidance as refineries now operate at 97% capacity with little room for profit growth.
Alcoa 📈 Gained 2.5% as aluminum prices helped the company report better earnings than what Wall Street expected, this is part of the primary metals trade I pointed out to you in my PMI breakout analysis.
CoreWeave 📉 Lost another 12% as its bond yields keep rising, pricing in an over 60% chance of default in the next year or less, the big question is what happens to the companies waiting to get paid by CoreWeave next?
Palantir 📉 Slipped 7.8% even as the market rotated away from AI and into software stocks, the problem is that Palantir sold its investors on an AI-only story for its growth trajectory.
Now let’s get into some ES levels for today.
Initially, $7,700 is now the main cutoff level, not seen since last month when the distribution was shaping up in the market profile.
For now, $7,680-$7,700 is my main support range, where I would start to buy if the auction and order flow looks supportive.
Should that be the case, I see a run toward $7,750 where last week this support had turned resistance, making it a good initial profit-taking area.
For sellers, this is exactly where they want to pretend to be asleep and suddenly wake up with aggressive orders.
The reason I say that is because the last two sessions have been made up of an orderly “sell the rallies” sort of behavior, rather than an all-out selling waterfall.
That is especially important considering Friday was options expiration day, and we still managed to lose $7,700.
If I were to trade this, sell $7,750 and wake up when we see $7,685 or so and see whether a new low will be taken or not.
Portfolio
One thing has become clear this month, in almost every single aspect of my work.
AI is no longer the trade it once was, and the easy money has now been fully wiped out.
What is left is the late-stage speculative manias and busts carried by whoever is left to play this.
Which explains the underperformance in the portfolio’s long/short AI trades, getting outperformed by boring real economy names instead.
Speaking of which,
These names have been responsible for some of the profits we have realized so far, which have amounted to $15,200 now!
I expect my recent picks and buys to deliver outsized returns after nearly a quarter of playing" “bunts” rather than home runs.
The home runs are beginning to show themselves again, and in the areas you would least expect to find them.
Just how I like them.
More on this coming to Premium.
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