Week of August 3
Time for a test of 7600?
Recap of last week
Last week was extremely volatile. One of the most important weeks of the year, in terms of market generated information. We had the most divisive Fed decision in multiple years, the Leopold blowup, then mega cap earnings. There is alot to digest.
We took 4 trades last week, 3 ES trades, 2 of which were winners for about ~80 points total and a 50 point loss. We also took some 740 spy calls before FOMC, after rolling the call on Thursday morning net net came away with a -2.5% papercut loss. Not a great week but not bad either. Was difficult to trade with the Leopold liquidation and then subsequent tape bomb the next day all the while the market was digesting the Fed.
Overall, a super action packed week, was difficult to navigate, but we come away more or less unchanged P/L wise as the Fed/Leopold stuff made realized volatility a bit difficult to manuever.
Think next week volatility dies down a bit and becomes a bit cleaner to trade though. Lots happened and I think this was definitely one of those weeks in the market where lots changed and you need to adapt fast.
Next move for markets
Up. Last week was really a doozy, after all is said and done I have to return back to a bullish lean. The one thing that was really holding me back from flipping bullish was the emergence of rates volatility and yields breaking out in the back half of the week. As of writing, Sunday morning, it seems that issue has been resolved. Trump has managed to broker another deal (allegedly) and that should put a pin on yields and oil, which I think takes alot of starch out of the bearish thesis. I am aware its the 42nd deal and complete opening of the SoH. Its all abit of a clown show. However, its important to remember whatever your personal feelings about Trump, he is the POTUS, most powerful man in the world and he will always have credibility with the markets. We have no choice but to take his word as face value. The market will, so we will. Right now I am looking at the market in kind of four dimensions. These four dimensions are what will drive index price action in the near future.
SPX ex AI - Call this breadth, or equal weighted SPX, or SPX ex AI. This has been making new all time highs recently and looks super strong. Nothing more to add.
Momentum - Ai infrastrucutre, semis, memory and the like. Leopolds liquidation created a tradable bottom. Many were on the sidelines looking to buy but the downtrend was so vicious. The news of him being absorbed by Citadel gave the coast is clear signal to buy for many. However, this is still in a long term downtrend and this space is full of trapped supply. I am not super bullish here but not bearish either, I think net net I am kind of neutral here. However, I think the days of momentum crashing every single night are probably over. I dont think this will be a big factor in index performance either way, it never was even at its height of influence.
Hyperscalers - GOOG/META were underwhelming. Meanwhile AMZN/MSFT both put up monster reports and delievered 15% one day moves on their T+1 earnings reports. Interestingly, GOOG also rallied in symptahy after the MSFT print. The market has deemed hyperscaler earnings as bullish. They passed the test of showing real growth and justifying their capex spend so to speak. I am bullish on hyperscalers again, and the positioning in this space is extremely low.
Rates/yields - Another Iran deal should stop this ascent of rates. This was a bearish factor that seems to be addressed. Needless to say, this Iran war situation changes by the hour, but as of writing if there is indeed another Iran deal then this should be removed from the market as a bearish overhang.
So where I come away from all of this, SPX ex AI is bullish, hyperscalers are bullish, rates and memory I am more neutral but not negative per se. I think stage is set for a retest of 7600s.
I will start with the most important thing. I want to reiterate that the most important factor for equity returns is earnings. Its cool and sexy to talk about options, gamma, insider trading or whatever, but medium and long term and even short term equities will largely follow what earnings are doing. 2Q has not disappointed at all and MSFT and AMZN had proper blowouts. Given how strong earnings are, you need to give the bulls the benefit of the doubt in every situation. We need to start with the question “Why should I NOT be bullish”.
Furthermore, this is a broad based earnings growth regime. On the right we have SPXEW and you see it is not a super nice and healthy uptrend with price following earnings closely. Alot of these names have no direct AI exposure yet they are growing earnings strongly. This speaks to generally the broad strength of the economy and the consumer. On the left of course is Semis, this space is more emotional and the relationship is not so clear. Again I think this space is highly cyclical, you can argue we saw the cyclical top already, I am not an expert and wont pretend to be. But moving forward I do think some of that huge downside volatility is behind us with the Leopold blowup past us and a huge cleansing of leverage in the system.
Earnings have really been spectacular broadly, but what really is the takeaway so far this season is we ARE seeing returns on Capex now, especially in the cloud computing space. The biggest name in cloud is obviously AWS, with Azure and GCP closely behind. This is where capex is starting to really show fruitful returns and why AMZN and MSFT rallied so significantly last week. This at the very least gives hyperscalers carte blanche to go another quarter or two on their ambitious capex plans without being punished by the market for it. The question for years now has been, will the hyperscalers see enough revenue growth to justify trillions in capex? As of August 2026, the market is saying Yes. That may change next quarter but so far the hyperscalers have delievered. And that is the most important thing to come away with from last weeks events.
But dont take my word for it, my opinion doesnt mean anything. The markets opinion is what matters. Hyperscaler spreads have started to tighten again, which is quite an encouraging sign and speaks to investor confidence in their revenue growth. At the end of the day, these companies are the best businesses in the world, credit investors were going to step in at some point. You can buy bonds from these behemoths yielding like ~6% or so, with very little chance of default. This was never a question of will it turn to junk status or will they be able to pay off their debt at all. It was a question of where do buyers step in and put a bottom in in credit. So far it looks like the bottom is in credit, and spreads should tighten from here, which removes a bearish overhang on the equity market and should continue to support their stocks.
Question is now, if youre bullish hyperscalers you might be wondering what inning are we in? I would say very early innings. This group has been a dog for a long time now, yes they had huge rallies on Friday but overall positioning is outright depressed.
