I am opening it up to everyone today for a preview of what we do each morning…
Good morning:
What’s clear right now is that there’s an interesting thing happening right now… Two major desks released reports this morning that started to showcase the thesis we’ve held for about six months.
Markets are now trying their best to rotate from persistent AI mania into AI bottleneck scarcity…
Meanwhile, we’re seeing a shift toward cyclical broadening.
This current situation is interesting because the liquidity story isn’t tightening. This has created a question of where capital is coming from… As I’ve noted, and referenced Capital Flows, the AI debt cycle has acted as a bit of a firehose.
But there is a shift in risk.
The old trade was “own AI.”
The new trade has become “own what AI cannot get enough of, and short or avoid whoever has to keep buying it at worse margins.”
Three specific areas to watch…
On cyber, demand is in Cloudflare and CrowdStrike… plus Palo Alto Networks, Zscaler, and Fortinet.
Modern Warfare maps to Lockheed Martin, RTX, Northrop Grumman, and Palantir.
Critical Minerals maps to MP Materials, USA Rare Earth, Energy Fuels, and Lynas in Australia. My Postcards this weekend will keep the focus on critical minerals.
Checking in on the Dollar.
The U.S. dollar is strong… holding above that critical 100.80 level.
It’s a very crowded trade, and it’s going to need some help to get to the next level.
That means next week we need to see stronger payrolls, wages, ISM, and Fed rhetoric to cooperate. Otherwise, dollar longs could get clipped, gold may finally started to breath, and emerging markets get a bit of relief… Those directions could happen fast next Friday.
This is not a “risk off” market… But there’s clear positioning in the hedging mechanism. Concentration and winner selection could get a big ruthless in the days ahead.
We’re seeing money flow to AI suppliers over AI spenders. We’re seeing a crowed in the dollar for now, but tactically.
And there’s a lot of focus on currency hedging against Japan. All while money is flowing into Europe/cyclicals on oil relief.
Treat credit and crowded momentum as the market’s smoke alarms.
TRADERS FOCUS
The tech pressure weighing on this market did not improve overnight. We come in red again, and the damage is sitting in the same place.
Futures are lower and tech-led. The Nasdaq is down more than 1% this morning, and the S&P and the Russell are both lower too. In Asia, the Kospi took another hit overnight, led by Samsung and SK Hynix.
This is pretty much the same setup we have had all week. The semiconductors are leading it down, and the names that squeezed back yesterday are rolling over again. Nvidia is under pressure early, and the rest of the Mag 7 are still soft.
The concern right now is the cost of all this AI spending, and how it is starting to bleed into consumer goods.
Micron (MU)’s blowout this week turned out to be a double-edged sword. The memory makers cannot produce these AI chips fast enough, and Micron’s own CEO said he does not know when supply will catch up to demand.
That is great for Micron, but it means the price of memory keeps climbing for everyone who has to buy it.
Apple (AAPL) drove that home yesterday. It announced price hikes across a whole list of products, MacBooks and iPads and more, some by hundreds of dollars.
Apple is not doing this because it wants to. Its hand is being forced in the middle of a selling cycle, and that raises a real question about demand destruction.
If the price of an iPhone jumps by $200, do you buy the new one or just keep the one you have?
None of that is good, and the hits keep coming for the big names. Apple is up a little this morning, but it fell 6% yesterday and took the whole complex down with it.
Questions are piling up around AI, and they cut both ways. Is it getting so expensive that it drives up the cost of everything it touches, including the consumer electronics that are supposed to get cheaper over time?
Or does open source come in and undercut it all? Nobody knows yet, and that is why this whole group is in price discovery.
The real problem right now is that the entire Mag 7 is on our breakdown side. Nvidia (NVDA), Amazon (AMZN), Tesla (TSLA), Meta (META), Alphabet (GOOGL), and Netflix (NFLX), every one of them.
We flagged the MAGS coming into the week, and unfortunately, here we are. These names are spiraling now.
We got a small rally attempt and it rolled right over. You can almost treat it like our one-percent pattern from here, which means waiting for a real blowout before the dip buyers come back.
We want to see it deeply oversold on RSI and MFI, and then the MACD crossing positive again on the daily. Until that happens, it remains a weight around the market’s neck.
That is why the levels we marked coming into the week matter so much. We never got back over them.
When a market breaks down hard, we mark the price where it broke down from. That line tells you when you are back in the clear.
Until you reclaim it, you live with the risk of another leg lower. That is what we call a rug pull.
When funds get caught offside, you often see a hard push to drag price back to where they got trapped, so they can get out with less damage. That is the move that sucks people back in, and it is why we flagged those lines Monday.
So far the Russell has held up remarkably well. You would expect it to take a hit too, but it has not.
The small caps got back over the level we sold down from and have been creeping higher. The trouble is they cannot get much traction with the big names pushing against them.
For now we keep our guard up. Outside the Mag 7, most of the market is hanging in, with metals and crypto the exception, getting hit hard.
Momentum is red on the S&P and the Nasdaq, so we trade it that way.
As for what is holding up, and where we are getting the rotation, healthcare is leading and looks strong this week. And now the financials are joining in.
All 32 of the largest banks passed their stress test, and names like JPMorgan (JPM) are raising buybacks and look strong. Citigroup (C) is breaking out on day two of our list.
The new names this morning are Fifth Third (FITB), Bank of America (BAC), and Huntington Bancshares (HBAN). The banks start reporting earnings in a couple of weeks, so the group has a nice runway.
You can play it through the KRE or the DPST, or sell a put spread on a name like JPMorgan.
That said, let’s remain cautious. These mega-cap names can drag the whole market down with them. It just has not happened yet.
If you have not started moving to cash, there is still time. This market has not felt much pain yet, so there is still a chance to hedge.
Volatility is climbing, which makes hedging more expensive, but it is not out of control yet.
For traders, that volatility creates opportunity, and with Friday, we have options expiring today.
If you want to short the tech move, wait until the QQQ gets back to the top of its range. It keeps failing right around 720.
When it tags that level and rolls over again, take your shot. You can use TQQQ, waiting for a push toward 76 and fading it there.
Use puts if they are cheap, and a put spread if IVR is above 30.
On the Russell side, if you want a hedge against the whole market going lower, consider the TZA. It is still trading under $4.
Buy it in lots of 100, so if it starts to run you can sell calls against the position for extra income. If you want a trigger, the 8/20 cross is your sign that things are getting worse there.
The most important thing we are watching is the FNGD, back above its 50-day. That puts us right back in problem land, so pay close attention here.
The last time the FNGD cleared its 50-day was the middle of December, and from there it ran 75% into April. Over that same stretch, the SPY chopped sideways for a month or two before rolling over, down 8%.
You never know how long a move like this lasts, but it is one of the most significant things we follow, and it is waking up again.
A trade that works well when the FNGD takes off is the UVXY. Over the same December-to-April run, it gained 68%.
If you are worried the Russell stays strong and a hedge there will not do much, the UVXY is another option. Just know this thing decays by design, a little every night, so it is only for the move you are in right now.
The moment it rolls over, you have to cut it, because you cannot hold this thing. But with it climbing back above its 8-day, this is the window where it can actually be useful.
Our gauges line up with all of it. The VIX is back above 20.
The dollar has cooled a touch but sits above 101, still a headwind on everything.
So let’s take it easy here. We can lean on the rotation, but you have to qualify your trades, know your levels, and use your stops.
If you have a few minutes, meet me live at 8:30, and I will walk you through what we are seeing this morning.
Market outlook
Yields steady as May PCE meets expectations; core at 3.4% and headline at 4.1% keep September hike bets intact
Bitcoin sinks under $59K on a fifth straight day of ETF redemptions and $600M in liquidations; CLARITY Act delay risk and Strategy’s (MSTR) selloff add pressure
SpaceX (SPCX) plans to start building an 8-mile natural gas pipeline next month to fuel Starbase, aiming to ramp up Starship launches; in service by Jan. 2027
Apple lifts Mac and iPad prices amid surging memory costs, joining PC and console makers; analysts warn higher costs could trigger demand destruction
Boeing (BA) wins a $3.62B jet order from China Southern, deepening its commercial comeback in a market it had been largely shut out
OnSemi (ON) to buy Synaptics (SYNA) in an all-stock deal valued at $7B, expanding from chips into Physical AI; deal lifts its addressable market by $30B
Fed’s Goolsbee says inflation’s trending wrong but sees services improving; Williams expects readings to ease toward 3.5% as tariffs and energy fade
Momentum - Rotation Widens
For most of this week, two markets have been running at once. A handful of the biggest names falling day after day, and everything else rising around them. The gap between the two only keeps getting wider.
Thursday showed why the big names can’t get back up. Micron’s blowout sent the chips flying overnight, and for a moment it looked like the rest of Big Tech would follow. Then Apple and Microsoft said they’re raising hardware prices, blaming the same jump in memory costs that made Micron’s quarter so strong. The bounce died there, and the largest names closed lower a fourth day running. What’s minting the chipmakers has turned into a tax on everyone who builds with their chips, and it landed as real inflation, a price hike on millions of devices the same morning the inflation report ran hot.
Below them, it’s been a different and far healthier story. The average stock kept climbing, small caps ran back toward 3,000, and value and cyclical names carried the Dow to a record. The money leaving Big Tech wasn’t going to cash, it was moving into everything else, and for four days that broad bid more than covered for what was falling at the top.
This morning, the balance shifted. The selling at the top got worse, our reading on it at the lowest point of the week. And the bid underneath finally lost a step. Small caps opened soft instead of leading, the buying thinned, and the money turned defensive. The trend holding the rest of the market up still stands, but the daily push behind it cooled. A market can carry its biggest names falling as long as everything else keeps rising to cover them. This morning was the first time it didn’t quite keep up.
Insider Buying: Light Filing Day (Blackouts Starting)
The ratio of Buys to Sells: 1:89 ($2M to $247M)
Top Buy: $2M of Prospect (PSEC) by CEO John Barry
Top Sell: $34M of Clearwater Analytics (CWAN) by CEO Sandeep Sahai
Top Insider Buys of Last 10 Days - Form 4 Documents
Market Liquidity
This market has stopped trending and started lurching. Big chunks of value vanish in a session and come back the next, far out of proportion to the news behind them. That has been the week.
It traces back to how the AI boom got paid for. The money that flooded in didn’t just arrive, it arrived on margin, piled into a handful of chip and tech names and held in funds that move at multiples of the market. That cuts both ways. It made the climb steeper, and now it makes the falls sharper.
Underneath, there’s nothing solid to steady it. Even the Fed is divided on what comes next. On Thursday, one official called inflation still too high while another said it’s already cooling. When the people who price money can’t agree, every new headline gets amplified instead of absorbed.
None of this settles on its own. A market leaning this hard on borrowed money stays unstable until it’s forced out, and it rarely goes quietly. And it’s all sitting in a handful of names. The same ones that carried this market up for years now carry all of its risk.
Stay positive.
Garrett Baldwin
Hey Garrett speaking of cyber names have you looked into Rubrik $RBRK
Are today's slides available? Didn't see a link in the MMP email. Apologies if I just missed it. Have a great weekend.