Morning Digest 10/27

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Good morning partner,

A few things to cover this morning:

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Yesterday’s Session

A pretty strong snap back rotation into the AI trade is what yesterday’s auction brought us.

More importantly, there were other non-related sectors that also caught some bids as the 10-year bond yield closed another day below the 5% mark to ease off some fears of rising capital costs.

With the FOMC meeting coming up tomorrow, and an ongoing earnings season to show us exactly what is happening underneath the AI trade…

I suspect this tug-of-war will continue to present itself as an opportunity to rotate risks in and out of this area of interest.

Nonetheless,

I have studied enough market history and fundamental drivers (with math to back it up) to understand that this isn’t a war worth putting capital at risk for.

You see, there’s a reason why Buffett decided to leave Berkshire Hathaway the same year he mentioned the possibility of a “lost decade” in the S&P 500 index.

Just like he did in 1999 when his cash pile reached then record levels.

When the market gets this concentrated, retail investors like you and me have a hard time finding winning ideas.

Unless they are rooted in economic data signals and more complicated long/short equity and option strategies.

Which, unfortunately, is out of the reach of 90% of the retail crowd who only has time to buy and hold, adding in the occasional deep dive when quarterly earnings come out.

So I went looking for the areas that outperform during such scenarios when the S&P 500 goes nowhere for ten years.

Here’s what I found:

I even posted an entire research report on the topic.

And judging by the amount of negative comments received in social media…

There’s a high probability that we are right, as the frustration and fear from an unknowing retail crowd showed through the comments.

Click here to read this lost decade report and get a link to our free webinar in November.

Let’s take a look at Friday’s leaders and laggards:

Technology, Industrials, Cyclicals.

Leaders were self-explanatory from the return to AI leadership to start the week.

Where I’m most interested is in reading the leaders outside of the AI complex.

Specifically consumer cyclicals and real estate.

Why?

Because these are the sectors the market is choosing to reward outside of the booming comeback in the AI corner.

My “coiled springs” which I’ve mentioned several times this month, reiterated by the latest PMI reports as activity and earnings growth broke out in:

That’s why, to repeated social media hate, we have managed to outperform the AI complex and the S&P 500 since we bought into these picks.

At some point you just can’t fight the tape.

When the market begins to reward what the data clearly shows, you either listen or continue to fight for your potentially losing positions to turn back in your favor.

We’re professionals, and cannot afford to wait.

Next week’s PMI will refill the pipeline of ideas in our watchlist, and I’m looking forward to delivering another round of upside picks for you.

Like West Fraser Timber, or Weyerhaeuser.

And my proudest pick this month in Vital Farms.

Better Treatment?

Over 82% of daily U.S. stock market participation comes from institutional capital.

Leaving very little, if any, edge to be found and exploited from retail investors like you and me.

Inefficiencies are the root of all returns in all asset classes, so you are almost always better off playing a game where retail dominates the crowd’s makeup.

This is the reason why value investing has performed less in the U.S.

You are now getting an average of 0.16% returns for every 1% you risk in value investments within the U.S. market.

Outside? Try 11%.

A near 7x improvement on your investment career by just finding great companies at discounted prices.

And here’s the best part,

You can predict what the next few years of equity returns will look like in a country by following its capital cycle, demographics, and company-level productivity.

That led you to Japan in the 1980s, or South Korea in the early 2000s.

Both of which delivered over 400% returns in the following decade.

Right now, China’s economy is making the same turn, amplified with the leverage of the world’s second largest economy and undercovered companies.

A true powerhouse, filled with retail inefficiencies.

That’s where I believe the big money will be made in the next decade.

If you’re anything like me, you will likely spend hours researching what the economy, and daily life, actually looks like in China.

Click here to read my report on this opportunity.

News

Movers & ES Levels

Now let’s get into some ES levels for today.

Yesterday I gave you $7,650 as the level sellers needed to ram through, otherwise we’d be back to see $7,715 or so.

Sellers failed, and aggressive buyers hit the tape to get us back to those higher ranges.

Where they left an opening was at the distribution’s cutoff level at $7,700 as discussed throughout the week, and I’m calling it a win for the bulls as long as that level holds into the end of the week.

Now keep in mind,

We have the FOMC meeting coming out this week along with some big AI names reporting their earnings this week, which may introduce new volatility to these ranges.

For now…

I will still lean on $7,715 as overhead resistance which, if broken, could get us to $7,750 in a hurry.

Otherwise, $7,700 remains the most important level to keep the balance in favor of the buyers lest they see $7,685-$7,650.

Portfolio

I am building more confidence in the recent real economy and AI-proof picks in the portfolio.

Why?

These have usually lost during days like today, when the AI trade gains momentum at the expense of everything else going down.

The fact that these are holding the recent breakouts, especially with a new PMI report coming soon, could mean the market still has high expectations for them.

In terms of the options portfolio, we are soon to make the final roll of short leg financing next month in the put spreads for memory stocks.

Where I will choose to restructure the trade (or not) onto next year.

My recent buy in the micro-cap space also has some short puts working in its favor for additional cash flow.

After a large move this week, the time may be near to make another selling run.

Here’s the positioning update for today’s premium members: