AI's Phase II: The Stealth Bull Market
The Week Ahead - Volume 135
Bull markets climb a wall of worry, built brick by brick by scepticism. The steeper the wall, the higher the climb.
Good afternoon,
Another solid week. I must say, I am feeling very in sync with markets right now… Continue to hold my ES long from 5630. The gold 3100/3200 bull call we picked up at 24 is now sitting pretty around 80, the yellow metal continues to deliver…
As paid subscribers have seen, I have been active in the single stock space recently and will be dropping my Phase II AI basket in this post, which I plan to put on this week.
Paid 34.36 for DKNG, which is up 5.5%
Paid 47.45 for CRDO, which is up 7%
Paid 76.85 for JXN, which is up 10%
Wrote 6/20 GOOGL 150P at 6, LTP 4.6
Got a little bit of spice on for Tuesday… Paid 17.95 for some SPX 5750C for Trump’s big announcement (no bueno - non-event) and also CPI. Yes, talks in Geneva loom this weekend, but sometimes you’ve got to dance with the momentum while the music’s playing.
Weekend Tea Leaves
Following on from prior posts, not a lot has changed. If tariffs are walked back down quickly enough with no economic damage, downside is limited - no?
Who really knows the relevance of Trump’s Truth Social post from last night. This could be nonsense for all we know. However, perhaps this could send stocks a little higher when futures reopen later. It would be helpful to have some colour from the Chinese. Weekend markets (I don’t fully trust them) are green, and Bitcoin was +1.7% yesterday, so there are some signs of further risk on.
Markets need some kind of catalyst for this rally to move through the 200-day - be that Trump’s comments RE China or maybe CPI on Tuesday.
JP Morgan’s Data Assets & Alpha Group said this on Friday which I found interesting “The aggregate level of positioning remains at -0.6z or 20th %ile since 2015. This puts it up a bit from the -1z low in Apr, but the bounce from the trough level is not particularly large yet”.
Translation: There's still plenty of dry powder on the sidelines. The positioning data suggests we're far from stretched, which could provide fuel for further upside if we get the right catalyst. I will go more in-depth on this later on.
FX - No clear trade for me
Looking at USD/CNY, even with high tariffs, China is working hard to keep its currency stable. They fear that letting the currency lose too much value could hurt their economy and lead to money leaving the country. I’m not sure how they will do it, but I expect the Chinese will try to keep USD/CNY 7.25<, maybe back down to ~7. TWI shows how undervalued the Yuan is and against the dollar more so.
I think the dollar is a tough read here, and FX as a whole, too. I think participants will take Trump’s first trade deal as a win for the UK. While the BoE cut in the past week, the takeaway was hawkish as two votes were on hold. Cable remains range-bound from 1.32-1.345.
Single Stocks, Index & Vol
Last week’s action reflected a market searching for direction amid conflicting narratives, plenty of uncertainty and a lack of conviction. While the main indices barely budged this week, beneath the surface, there’s selective rotation as institutional players recalibrate positions (which many probably puked out at the lows). The hesitancy among people I chat to every day (who I’d call smart) is palpable - conviction trades remain scarce as macro concerns overshadow company fundamentals.
Technology and healthcare face headwinds from regulatory overhang and trade policy speculation. Hedge funds have been cautious, maintaining historically low levels net exposures, although they've slightly increased their gross exposure. The systematic community's positioning remains below average but is trending higher. CTAs are buyers as shown below in Goldman’s expected flows model.
With volatility compressing and the VIX curve finally normalising to contango after an extended period of backwardation, I think we’re seeing constructive technicals across major indices.
The S&P 500 managed to hold key levels despite modest weekly changes, while avoiding any 1% down days for nearly three weeks. This steady price action, combined with improving market breadth, creates an environment ripe for continued upside momentum.
Healthcare… Despite recent policy-driven volatility, I am seeing attractive setups in names that have been oversold on regulatory concerns/tariff vol.
Tech…. While software has been the victim of vast net selling pressure this year, with positioning at multi-year lows, it’s an interesting time to be long… plenty in my Phase II AI basket, which I am sharing later in this post.
Small caps… I hate to say it, but small-cap positioning is too pessimistic and there’s potential for mean reversion.