Week of June 8
Volatility is back, time to lock in.
Recap of last week
Last week we took two long trades in the ES. Both winners.
We went long post AVGO earnings at around 7560s. We sold the next day over 7600, and the rest we got stopped out at breakeven. We didnt make much money to be honest. But what really matters, is we were not long at all, in any way shape or form going into Friday. When many were wiped out.
As Buffett famously says cash is a call option. The market experienced a volaitlity shock, and that means opportunity is abound.
As we enter the Summer months, experienced traders know, it can be a slog. So we got a bit of a gift from the market here, you get a last chance to position for the Summer here.
Next move for markets
Up. I have been crystal clear about my thoughts and views of the market for months now. I will reiterate. Consensus is too bearish on the AI trade. Thats institutions, retail, households everyone. The contrarian trade right here right now is long the AI factor and that defacto means long the equity indices. We are early to this trade. The rally we have seen thus far this year, has been all fundamentals. All of it. There is no euphoria in the market writ large - only in select pockets. Meme stocks and the reddit crowd. That is due to simply the rise of retail trading, no commission brokers and such and I think that is idiosyncratic to certain single names. On the index level, the megacap level, there is no euphoria. There is instead a guarded caution and apprehensiveness. I think price needs to catch up to earnings, number one. Number two, I think the 21x forward PE multiple is too low for this environment. Considering economic growth, easy monetary policy, an executive branch that is both literally and figuratively invested in the stock market. Lastly, most importantly equities need to price in the uncertainty premium here. For the first time in a while its not left tail uncertainty but right tail uncertainty. A short term price target I have for the SPX is 8000 and I think back half of July into August is a reasonable time frame for that.
The market right now is driven by a pure fundamental story. The most important determinant for stock prices in the medium and long term is earnings. When people point out bad breadth as a reason to be cautious or bearish on stocks I laugh. Its supposed to be that way. When AI infra stocks are ripping its because their earnings are exploding. If we had good breadth, that would be bearish paradoxically. It would signify euphoria and excessive risk taking. AI stocks are going up because their earnings are. Why should SPXEW go up, if its earnings are flaccid. The broad market ex-AI doesnt deserve to go up because earnings growth is not inflecting higher. So the bottom line here is bad breadth is not bearish. Its an indicator of the market being in pristine health. The stocks that are earnings the most are going up the most. Its purely meritocratic.
What been the engine driving all this economic and earnings growth? Its been hyperscaler capex into AI infrastructure. The latest estimates continue to be quite robust and show an elevated level for both 2Q and 3Q of calendar year 2026. Things are expected to taper off next year. But, the most common trend with capex estimates, has been they have been drastically underestimated at every turn. Recall what I said in the beginning of this post. Consensus is way too bearish on AI and they keep underestimating growth, investment at every single turn.
I have some general advice in terms of helping center yourself and views on the AI trade. First acknowledge, that you dont know that much and youre not that smart. Check your ego at the door. Good advice for everything in life. I would be deferring to the tech CEOs here, listen to what theyre saying. They arent making it a secret, they arent talking in code or riddles. They keep doubling down on AI at every single turn, with extremely high conviction. The people who seem to be most bearish on AI, and the most skeptical are people with no background in technology. I am not an AI expert, period. I will defer to the people who are. The crowd looks at AI capex and thinks how stupid of the CEOs to invest so much money without promised return. I look at the same situation and think, these hyperscaler CEOs, who are much smarter than you or I, who have the most intelligent people and unimaginable resources at their disposal, are going All-In on this techonology. I wouldnt be fading that to listen to some doomer pundit.
A key market event this week was the GOOG ATM offering and equity raise. This was pivotal moment not just for themselves but Mag 7 broadly. META lately floated a test balloon on Friday. GOOG, META, and most of the other Mag 7 companies have been resolutely buying back shares and shrinking their share count for years now on a consistent basis. This is a cleary move away from that a signal of a regime shift. Everyone’s focused on the equity supply and how the market will digest it and overall see it as a bearish occurrence. I am the exact opposite. These CEOs are not idiots, they know what an equity raise means and implies for shareholders - yet they decided to proceeed despite that. Reading between the lines, the opportunity set for AI is so large and transformative, no sacrifice is too big. I look at the GOOG equity raise and think for the medium and long term nothing could be more bullish than that. What you do not want to see under any circumstances is a hyperscaler cutting back on capex. That means they think the juice aint worth the squeeze anymore. Both Sundar and Zuckerberg both this week just doubled down on the AI trade. They are both billionaire CEOs for a reason, its not because they are idiots. Earnings growth, institutional flows, executive actions by the leaders of corporate America - they are all aligned on the long AI trade and keep doubling down.
From a technical standpoint, many are worried about how the market will digest the supply from SPCX, and later anthropic and openai, along now with GOOG/META. You must remember, fear and doom gets all the engagement and rational thinking takes a back seat. The latest estimates from GS on equity supply should calm you down. We are well within the range of previous years. 2026 is not an outlier in any way. As a matter of fact total issuance has been dramatically higher for most of the past few decades. The couple of years post COVID saw very subdued issuance, which is a good thing as market is coming from a very restrained place in terms of equity issuance. On the other side of that coin is buybacks. Companies are still buying back their own shares to the tune of around 875bn in 2026, which is greater than total estiamted equity issuance. If you just look at the number, and take gross buybacks minus equity issuance you can clearly see the math shatters any perception of an equity market inundated with supply. Lastly, the companies to IPO and that have issued, are SPCX, openai, anthropic, goog meta. These are the greatest companies in the entire world. No hyperbole. This isnt like the SPAC era of 2021 when all these companies were trash. There is alot of wealth in the world, to posit that this equity supply from the highest quality assets in the entire world wont be easily absorbed is laughable to me. Again, these are the highest quality assets in the world, this is like real estate on billionaires row in Manhattan. There will be demand, lots of it.
A picture is worth a thousand words. Equity issuance has been on a steady downtrend for decades now. This is probably one of the biggest reasons why US stocks go up and to the right. Because the supply is on a steady downtrend over many years and decades. 2026 is a tiny bit elevated, but still not an outlier.
The buyback bid that dwarfs the equity supply. This continues to rise despite rising Capex. At the end of the day GOOG/META have been fcf machines for many years. They are not, at this moment in time. But I believe and the market believes they will eventually return to that as AI starts to expand growth and revenues. The theory that equity supply will break the stock market just makes no sense from a simple math perspective. Both aboslute numbers and relative to past years. Buybacks - issuance. Issuance as a % of total market cap. Its all benign.
Now lets circle back to what happened last week. A 477bps down day in the NDX. You dont see those everyday. What gives. To me there is nothing to see really. Equities went up alot in a very short period of time. Positioning got stretched in a way we haven’t seen in 5-6 years. Everyone was in calls, everyone was long, and it took a single Jenga block being pulled (rates repriced due to NFP) for a huge positioning washout. Momentum is historically crowded, all the pods are in the same trade. Its pretty banal. Positioning was too stretched and we saw a liquidation of traders in bad locations. Nothing has changed about the fundamental bull case here. As you can see above the price of calls were stratospheric no one had puts. This was a pure liquidation break, some fear and FUD about SPCX and hyperscaler issuance sprinkled in, and alot of weak hands.
One thing I am asked alot, is after these big down days is “Do you think it will go down more”. I dont know. Its besides the point. I have made my bull case really crystal clear here and a big red day doesnt change a single thing. The AI train is not stopping because stocks had a down day. This is a buying opportunity. I would also pose you a rhetoical question at this point. If you aren’t buying stocks on a -5% down day in the Nasdaq, when will you buy? Yes stocks could potentially go down more, I am ready for that and ready to buy more. You cant expect big returns wihtout stomaching some volatility its part of the game.
I have given my short term price target for 8000 SPX by Summer. So the current spot price of 7380 in the SPX was a screaming buy for me, and buy we did. When the market gets loose and sloppy and people are getting liquidated like what happened on Friday. They can certainly continue lower. I am hoping for lower to load calls. I think a realistic max downside scenario would be 7200 SPX. That would be a buy everything, deploy every single last dollar you have to buy the dip. Like look through your old couch cushions for spare nickels to buy the dip. At a certain point (already reached on Friday) you have to pinch your nose and buy, if it continues lower you buy more. This is not the time to take out the scalpel and look for an entry with 2 points MAE. There is a time and place for that. This is a time to get your hands dirty and blast longs here and the next 100-200 points lower. If we get there.
The latest HF positioning, post Friday close is out. Hedge funds and often all caught up in the same trades, esepcially this year as AI is the factor that is working the best by far. Obviously alot of them got stopped out or the tap on the shoulder from risk. This brings Gross and Nets on a 3 yr look back to 65% and 54% respectively. Quite healthy levels. The trend so far from this cohort over the past month or so is they are buying the highs. From a performance perspective they are having a great year as well. This is all systems go. Smart money is buying the highs which is confirmation and they are performing well and incentived to keep deploying capital on the upside.
My view is people are too bearish on AI and I wanted to add more exposure in my portfolio. I did that with EWY which is very highly correlated to AI infrastructure. A more simple mind may look at EWY and say it gone up so much already, it must be a bubble and hell no im not buying. But the earnings speak for themselves. They are making so much money, and like the US markets earnings keep on being revised higher and higher.
Despite having doubled YTD, forward P/E is in the basement levels at 7x. That is too low. Again consensus is too bearish here and think AI is something you try on for a couple months then get rid of. The market, capex, tech ceos all say the exact opposite. The opportunity here is obvious to me. People dont want to buy because its already gone up alot (bad reason). The fundamentals are just too strong here to ignore. What people also dont know is that ex samsung and sk hynix earnings growth is still a blistering 42%. This is more than a 2 stock etf. This is major economic boom for Korea and that will not disappear overnight. Goldmans target for kospi is 12,000 currently, about a 50% gain from here. They have revised this target up I think 5 times in the last year. They just keep blowing by it. The bears have two things to say about Korea generally. One, its already gone up alot. As long as earnings outpace price appreciation I believe its well justified. Second, is that memory and semis are cyclical, and capex in general is cyclical. They are right about that. To that I would say, you can make a hell of a lot of money in just one cycle.
To sum up, this market is a stone cold fundamentals story. Earnings growth is so extremely strong and that keeps driving the market higher. This is the highest earnings growth for the S&P since 2021, when the market emerged from the COVID lockdowns. Price is too cheap relative to earnings. I also strongly believe after price catches up to earnings, it will go higher again because the 21x forward P/E multiple is too cheap. The year started with SPX at 6950, and actually SPX was more expensive than then it is now. At 6950 in January before earnings season SPX was sporting a 22x P/E. I think a 22x to 23x is a fair a reasonable target for this year and that would be SPX well above 8000 by year end for a longer term view. In the short term, I believe Fridays selloff was purely positioning based. People who sold were primarily forced sellers. Whether it was raising cash for SpaceX, or liquidation based. Nothing changes about the fundamental bull case. Buy the dip with conviction here.
Trade Ideas
Will alert in the chat