A simple recap
What I’m watching
In this first week of August we saw a pretty substantial rally across all assets. Most notably was gold that finally broke out of the chop range that developed for more than a month following a significant sell-off from the speculation top at the start of the year. This rally in gold coincided with weaker than expected labor statistics this week, including JOLTS, ADP and non-farm payrolls, which showed an unexpected drop in payrolls. The weakness in the labor market resulted in a pull-back of rate hike expectations.
Speaking of rate hike expectations, there have been articles about how the Fed might be forced to hike in September if inflation continues to trend in the wrong direction. We’ve heard a few hawks that dissented in July spoke out this week talking about how the Fed should hike now to get inflation under control. I continue to think that it is very hard for Warsh to openly defy Trump and that it is unlikely that the Fed will actually hike rates even with continuously hot inflation. What that means is that the dollar and the long end yields might be taking consistent pressure, which also corresponds to how gold staged a rally this week. The rally in gold might also be influenced by the US and Japan joint intervention of the Yen.
Also notable is that tech broadly rallied this past week. This includes both hardware tech (chips and memory stocks) as well as software tech (including hyperscalers and cloud providers as well as broader software tech stocks). This somewhat deviates from what happened earlier in the year and in July. Before we saw chips rally and software tech sell off. In July it was mainly a chip stock sell-off and software somewhat sideways. Now they are both rallying. My understanding is that the dynamics are slightly different. Chips rallied this week due to extreme deleveraging that happened in July, so this could be just a relief rally. Software tech rallied mainly due to still healthy earnings and that the much feared case in the first half of the year of being eliminated by AI so far seems overblown. This could suggest that the rally in chips and in software tech is going to differ in sustainability. But practically I consider the rally to be slightly overdone in the immediate short term.
In the coming week we will have CPI and PPI, which will be crucial data points ahead of the late August Jackson Hole symposium and the September FOMC.
A position or thesis
I continue to think that SOXX still has ways to go lower. It has been hugging the daily EMA and showing signs of improvement and optimism over this past week. My view is that it is unlikely to continue rallying from here back towards the prior ATH. The more likely scenario could be a chop range that develops over the coming weeks.
As I wrote 2 weeks ago, I continue to think that AI monetization and those associated data center investments must succeed because the alternative is simply too detrimental to the economy so that the government will have a strong incentive to ensure the success of these AI monetization campaigns. It will likely take the form of some sort of guaranteed demand, which will ultimately be inflationary. This will only be disinflationary if the AI investment really turns out to find production growth and monetization success organically, which I doubt will happen. This in my mind means higher gold and generally higher asset pricing, but for stocks it may suffer an initial decline. Also this may affect hardware chips and software cloud operators differently, which I consider software hyperscalers and cloud companies to benefit more because the demand shoring if true likely will be directed to compute instead of directly buying hardware.
What I got wrong or updated
I was in SOXS on Friday. I exited on Monday after seeing the strength. Reengaged on Tuesday after SOXX bounced to daily EMA where it could see some renewed resistance. So far it has not been working out too well. I’m watching this and if SOXX rallies and closes meaningfully above EMA then my thesis of more SOXX sell-off or range trading might not work out.
Also, weeks ago I paired this SOXS with IGV but got out of IGV in a late July sell-off. At the time the technical picture looked like it could resume its downtrend. I did remark at the time that it came to an interesting spot and could consider adding the exposure back. Eventually I did not add the position back, which I couldn’t really remember why. I think it was generally a lack of confidence in those IGV holdings including ORCL. I was debating whether ORCL is a good buy as it sold off so much and its earnings are still somewhat healthy (if we overlook the circular arrangements in the space). The problem is all those circular deals currently are not showing signs of cracks or issues and they could sustain for some time. IGV (including ORCL and PLTR which had earnings this week, rallied extensively) rallied quite a bit over the past 2 weeks, especially over the last week. Like I said in the previous part, I think it might be more sustainable than the rally in SOXX, but short term it might be overdone. I will be looking for opportunity to perhaps reengage IGV, or buy select constituents of IGV.
The Ephemeral Tourist 