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Good morning partner,
Few things to cover this morning:
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Yesterday’s Session
The AI rotation continues to accelerate in a (so far into it) orderly selling of equities across the S&P 500.
What this means for your portfolio is that the easy money of the early days in the AI race are over with, where now you have to lean back into fundamentals and valuations that make sense.
We are now roughly 2% off from the all-time highs in the index, so nothing can be called out with confidence just yet.
However,
Were we to hit 10% off the highs, and this will probably start to become an accelerated de-risking scenario for the broader market rather than the orderly scheme we’re seeing here today.
That said, there are two ways you can play this:
Rotate into long picks backed by economic data
Implement long/short spreads into your AI exposure
Why?
If the AI trade continues to chug along, at least you will be protected from the sharp downside whipsaws that have been coming about.
Otherwise, you are free to run into an open field of upside to be found in the real economy rotation scenario I’ve been pointing out to you.
It’s the reason why my PMI stock picks have outperformed the market this month, and most other AI names for that matter.
Let’s take a look at Yesterday’s leaders and laggards:
Energy, Defensives, Healthcare.
It’s been three consecutive days since we’ve had the same sort of leadership in the market.
The continued Iran conflict, and recent escalations, have brought the energy sector to lead the market during most days.
That will soon begin to rotate as November’s midterm elections have an impact on the decisions around the Middle East, where I will be to take profits on this long/short diesel spread trade.
What is more interesting to me is the secondary leadership in defensives, showing me that this isn’t (at least yet) a broader equity selloff or de-risking scenario.
If it were, then money wouldn’t be flowing anywhere.
That gives me confidence to keep buying into a particular section of the defensive economy, a section that historically cannot be affected by broader market volatility:
Food items or services
Small to micro-cap companies
You see, food is pretty much carrying the manufacturing PMI along with wood products right now.
GDP prints last quarter showed you the economy is turning defensive.
Smart retail tends to pivot into this sort of defensive, everyday necessity-type companies.
But why small to micro-cap?
Institutions usually cannot buy these companies due to their size, so when the VIX trends higher or credit gets tighter (forcing institutions to de-risk), they won’t be selling these companies simply because they don’t own them in the first place.
It’s why they outperform during market drawdowns.
And I just started buying into them last week.
Macro Upside Opportunities
Do you want to buy what “smart money” is buying?
Look to Chinese equities right now.
Mainland funds, some of which are tasked with deploying international capital, have been buying Chinese stocks over the past quarter.
Mostly the big tech blue-chips like Alibaba and its peers.
The reason these inflows started in July is pretty simple:
The financials behind AI were challenged for the first time this year
Which triggered the rotation in the United States, hitting the neoclouds like Oracle and CoreWeave at first.
But,
It also means net outflows from AI-driven indexes like Taiwan and South Korea…
That creates the need for that capital to go into the next best thing offered across Asian markets, and that’s China right now.
Despite all of this bullish tailwinds, there is still one problem in China’s stock market.
A problem that has kept it stuck over the past decade while every other market just rallies past it.
The government knows it, economists know it.
And that’s why it’s starting to get fixed at the industry and country level alike, with most of the recent data prints pointing in that direction.
More importantly,
If the rotation out of AI does accelerate, and that takes a broader effect on the S&P 500, emerging markets and domestic micro caps is where you want to be in!
I’ve already given you the latter in my latest buy last week.
Yesterday, I gave you the emerging market breakdown.
News
A Brazilian Chicken Disease threatens to disrupt the supply and export of poultry for the entire industry, creating an unexpected bullish catalyst for my latest buy in the U.S. food sector.
$45 Billion in Computing Commitments are on the table between Anthropic and Nscale, expanding on the circular financing scheme for compute deals backed by GPU-loans, just after Anthropic’s latest financials showed further weakness.
MSCI Could Eliminate Indonesia out of its world indexes, creating an opportunity for billions of dollars to find their way to Asia’s next opportunity set, likely to be China according to this analysis.
Trump Seeks Meeting with Russia’s Putin to discuss Ukraine, likely after extending the carrot rather than the stick through buying Russian diesel exports last week, a net win for our diesel long/short spread trade.
Movers & ES Levels
Cleveland-Cliffs 📈 Jumped by over 10% after posting its best results in over three years, a company that showed up for us as a buy target in previous PMI breakdowns, check it here.
Datadog 📈 Gained more than 5% after an analyst upgrade pointing to demand for its cloud monitoring software, showing us yet again that the software trade isn’t dead after all.
Unilever 📉 Fell by just under 2% after announcing the sale of its bandage brand, which some investors may not have agreed with, rare to see this one fall during a defensive rotation.
Neoclouds & Memory 📉 Slipped by another 2.5% on average to make it a ~25% decline this month alone, the reactions come from the risk chain in AI financials failing to deliver. Click here to understand the risks for memory.
Now let’s get into some ES levels for today.
Yesterday I gave you the resistance around $7,750 which was tested and rejected, clearing up a path for the weekly balance.
At first glance, it looks like $7,765 is where aggressive sellers decided to step in.
Buyers know this, and it makes the level a high-interest mark for buyers to hit and potentially ram through today.
On the other end, there have been relatively little buyers below that level all the way until $7,685 where I would like to see the auction go before any big trading decisions get made.
That said, the range established for trading remains $7,685-$7,750 with the important cutoff point set at $7,700.
If any buyers are going to show up, it will be at $7,700 or otherwise as a last resort at $7,685.
You can ride along with them if you’re a bull.
Portfolio
The AI rebound today has led to some recoveries across a select few names in our long/short book.
However, it isn’t enough to justify a clear “comeback” in the theme, so I will be watching these names closely in the coming days and determine whether cutting them is worth it.
When it comes to recent purchases, specifically the PMI picks from this month, I am pleased to see them rally past AI and the S&P since we added them to the portfolio.
Apart from that,
The projects that have me the most excited are some of those “buy and forget” names in a very niche area of the market.
The type of company you know won’t be:
Affected by AI
Influenced by institutions
Small enough to offer double-digit yields on options premium
I just bought one last week, and there are a handful of others I’m currently digging through.
More on that later.
Here’s the positioning update for today’s premium members:
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