Long in the Tooth
S&P 500 vs. Equal-Weight S&P
The past 3 months have been the worst period to own the S&P 500 relative to its equal-weight index since 2001.
While cyclicals, energy, and materials have surged the index has been heavy-weights in the index (mag-7) have been pressured lower by ever-climbing CapEx numbers. Nvidia (capex beneficiary) and Apple (no Capex) have been the 2 exceptions to the rule.
Growth is Picking-up
A large driver of the move in non-Mag-7 names has been upside surprises in economic data. Manufacturing data has been especially positive with ISM back above 50 for the first time in years.
The world is in the opposite state that it was from 2014-2022. One of REAL world growth (manufacturing), while services is facing significant headwinds (Citrini doom-thesis).
Software Rebounds
While Citrini is likely going to be proven correct with a longer-term view, markets has already been pricing this via software equity pain for months.
As we pointed out in our note last week, everyone was “long capex”. This created some great pair trading opportunities. To end the week, software had its best day vs. semiconductors since DeepSeek.
Bull/Bear Indicator
While everyone has bought puts in recent weeks, the longer-term sentiment is still near extremes.
Therefore, the trade is not to buy short-end hedges and remain long, but to starting taking long-term profits and selling Capex longs.
Copper Breakout
Equities are VERY forward-looking. Commodities - not so much. The AI trade is long-in-the-tooth, it is time to take-down exposure. Exposure can be maintained via copper.
Remember, in the Great Financial Crisis, oil and most commodities didn’t peak until the summer of 2008.
The Trades?
Sell the Capex equity longs, namely semiconductors
Sell Korea
Sell “AI beneficiary” equities
Take down credit risk (private equity/credit is a problem)
Retain AI exposure with long copper (less forward looking, has more upside skew if the capex bubble gets bigger)
Don’t buy short term puts, skew is too high
But selling those juicy premiums are so tempting...