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Good morning partner,
A few things to cover this morning:
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Friday’s Session
As expected, Friday was the rebound in the AI complex after Thursday’s massive selloff.
I think this is going to be a theme this week as well, especially as plenty of funds and individual investors begin to get liquidated.
With Leopold Aschenbrenner and several participants having to offload their AI positions and cut losses, and some brokers having to buy those positions on liquidations…
Here’s what I would expect:
Phase 1: Initial selloff bringing the biggest AI names into a bear market test (20% off the highs)
Phase 2: First rebound as these tests trigger either an injection of collateral (cash) or brokers are forced to buy back the liquidated positions
Phase 3: People with any cash left feel they are getting a tremendous bargain and buy on the way up
Phase 4: A second bear market test will trigger a broader set of liquidations
We are now in phase 2, and I think we can take advantage of this four-phase cycle to rethink our short AI exposure, maybe even get another Micron puts episode going.
That’s for the shorter term,
On a zoomed-out view, I think this will also create a prolonged opportunity to keep adding defensive AI-proof exposure to the portfolio.
Since, after all, these are the areas that tend to benefit during such rotations.
Let’s take a look at Friday’s leaders and laggards:
Technology, Industrials, Materials.
This confirms what I just said above, and you can begin to see exactly where the money funding the rebound is coming from:
Defensives, Financials, Real Estate.
You can look at this in two ways.
First, if you have any ounce of faith left in the AI trade, you can hedge out your long exposure by buying these opposing sectors and significantly reduce your volatility during weeks like last week.
Second, if all the evidence you have seen from my research makes you believe the next set of opportunities will not be in the AI complex…
Then use these opposite end sectors as your guide, because that is likely where money will flow into if the unwind continues to accelerate.
Even better, you can zoom out into markets outside of the United States.
Data shows that, over 50 years and 36 countries, it is emerging markets that outperform U.S. equities in scenarios like the one we find ourselves in today.
Specifically, it is China that’s implementing all of the right capital and economic measures to make this happen.
Interestingly, this is what Japan did in the 1980s and what South Korea did in the early 2000s.
They both say a 300%+ rally during the next decade.
In a “lost decade” scenario for the S&P 500…
This is where you want to be, or at least consider being.
Follow the Money
According to Goldman Sachs, the bulk of next year’s earnings growth will come from smaller companies.
Most likely, the ones that did not burn their free cash flow into AI projects that then thinned out their future margins and return on capital.
With nearly twice the earnings growth of the technology sector, and three times that of the S&P 500…
I think the next few years will be dominated by smaller firms, especially in the micro-cap space where most institutions (and retail gamblers) are rarely found.
This creates the perfect hunting ground for people who don’t follow hyped up narratives and can actually dig deep into a business.
That’s one of my biggest areas of interest in this lost decade for sure, and so far it has provided a great return with even better upside potential.
I am working on a few such projects after the PMI watchlist for November is traded.
Premium members will have the first deep dive into these companies once the research is done.
For now,
News
Bloomberg Talks China in a rare issue pointing a lot of attention to that market, just as the tides begin to turn in favor of that nation’s stock market as previously mentioned.
NFP Showed 165,000 New Jobs created last month, however, wage growth only printed at 3.1% compared to the trailing inflation rate of 3.7% to create a negative buying power effect. All told, odds of a December rate hike rose to 80%.
Anthropic’s Valuation Lost $300 Billion over last week’s AI selloff, but more importantly after it released its S-1 filing to demonstrate exactly why their previous valuation target is far from sustainable.
Berkshire’s New CEO holds the portfolio in about just 7 stocks, and recently boosted the company’s buybacks as earnings for these holdings slow. I think we all know the slowdown came mostly from last quarter at GOOGL.
Movers & ES Levels
Cloudflare 📈 Jumped 9.9% after beating revenue and earnings expectations, posing another win for the software sector against the “AI will kill software” narratives.
AI Stocks 📈 Rebound hard as we enter into the second phase of the leverage and unwinding rout, be on the lookout as the rest of the phases begin to play out or reverse.
Lyft 📉 Lost over 4% after posting a disappointing quarterly report, showing that Uber keeps winning at both the delivery and mobility game as part of our portfolio.
Atlassian 📉 Slipped 16% becoming the latest company to suffer from shifting into the data center boom as something that had nothing to do with its core business, slowing data center revenues cost it the quarter.
Now let’s get into some ES levels for today.
Last week I gave you $7,330 as the support to buy on the selloff, and it worked.
Falling just five points below that level before a 70-point rebound, this call has proven to work just as strong as I expected.
From here I can see $7,400 as support in the short-term as the lower levels were rejected with aggressive buying.
This is part of the second phase rebound in the AI complex for now.
$7,460 is now the next overhead resistance as aggressive sellers came on the scene to react.
If we manage to break that, I think we can get to $7,500 before another potential step in from the sellers.
For now, keep $7,395-$7,380 as immediate support, and $7,400 as a sort of cutoff level to decide either a bullish or bearish trend.
Then,
$7,460-$7,500 can be treated as a key range to hold and close within for a confirmed rebound and potential bull trend.
Portfolio
We remain at the all-time highs in the portfolio since June 2026.
All with 65% cash and less than half the VIX volatility since inception, which is truly what you and VIP members pay me for.
In the coming weeks, I will be rolling out the research from this month’s PMI watchlist and determine which names deserve a place in the portfolio (and yours.)
The aim behind those picks is to continue to realize some further profits as we go along, and keep plenty of cash available while the next “home run” opportunities begin to show themselves.
Here’s the positioning update for today’s premium members:
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