The Semis Are Courrecting

After a massive run to the upside, the semis are finally undergoing a well deserved rest. I did warn you about this last week. Many of you chose not to heed my dire warnings and now sit there RACKED with losses.

To put this in context, the $SMH is down 7% in the past 3 session with the $SPY barely changed and the NASDAQ down less than 2%. This points to a very specific and disagreeable cadence in the share prices of $NVDA, $AVGO and other leaders.

So is it over?

One can never know for sure. I will argue in favor of the semis based on the growth prospects. However, they are still incredibly rich in value. Let’s review.

Here are the top 5 semis by market cap and their price to sales ratios and their 3 year avg price to sales ratios:

$NVDA 37x, 28x
$TSM 11.5x, 9.1x
$AVGO 17.6x, 13x
$ASML 14x, 12.7x
$AMD 11.4x, 9.6x

Consider that we are comparing today’s price to sales ratios following a 7% correction against ratios during the bull markets of 2022 and 2023. The valuations have continued to elevated, as money flow concentrated in the sector due to the proliferation of AI. This isn’t going to be a screed about semis; because good companies with strong growth will always be in high demand and you will always miss out on big winners if you avoid them due to valuations.

Nevertheless, it is worth noting the correction in the semis will soon become a topic of discussion. My guess if we trade down another 2% tomorrow, folks will start losing their fucking minds over it.

Presently I have just two positions: $SOXS and $TMF, short semis and long treasuries: +42bps for the session.

If I wasn’t trading stocks every day I’d probably would’ve lost my mind by now, seeing what’s happening in this country. Being able to micro fixate on markets and treating it as a puzzle is my favorite thing to do, even the set backs. The market is never the same, although there are similar currents running through each body of water. But the puzzle is dynamic and it’s wonderful to sit here trying to figure it all out.

The only way you could begin to hate markets is if your risk profile is out of whack with your investments. In other words, if you’re unable to afford losing 20%, you should not have a leveraged portfolio with a beta of 2.5. There was a time in my life, in my 20s, when I’d place my entire account in 2 or 3 stocks. The subsequent result of that era, even though I was a fantastic trader, was tragedy. I wrote two books about the ordeal.

I’d like to remind you that life is long and we have time to create a prosperous financial situation. There will be periods of slump and tumult, but they’ll be followed by ebullience and joy. The key is to always survive so that you can participate in the next big rally. There are many things about this country that sucks and the divisiveness is next level. However, our markets are still #1 and if you’re paying close attention and truly understand them, you can use them to improve the quality of your lives.

At the onset of trading, I was short the semis. I covered those shorts for profit and went to cash and now hold just $FSLR, +35bps for the session. Although the Dow is up strongly, there is some weakness in the NASDAQ. It’s a peculiar tape, with 69% breadth and outperformance in the Russell. It would suggest a focus on domestic companies, and we are also seeing materials and oil trading up. Bitcoin is, once again, dead in the water.

I am going to wait until later to start nibbling back into the market. My intent, as stated last week, is to produce incremental returns until the end of June.

The market is a fashionable exhibition where bidders assess the value of an asset based off a perceived notion. At times it was perceived that kerosene lamps were the future and those stocks were in vogue. In other times, it was the telephone, or electricity companies, or the internet. Today we are obsessed with AI and the chips that power them.

These cycles come and go but the things that remains constant is the overall market trending higher. If you’re not careful and lean too heavily into an area ripe for correction, you can get caught and it will result in terrible underperformance.

For example, the semis might plunge 10% next week, with some stocks diving by 20%, and yet the market might trend up because it rotated out of tech and into staples, retail, oil etc.

When people ask me about portfolio construction I like to bring awareness to their weightings, from the top down.

How much do you have in tech, healthcare, industrials etc?

Here are the weightings of the largest index fund in America, a composite of the overall market. It is the benchmark most funds mirror and you should too. If you’re on an expert level, this might not apply to you because you know when to pivot and switch up. But for the vast majority of you out there, you should be looking at these weightings ad your tour guide to investing.

I’d like for the markets to crack asunder come Monday, perhaps a bit more. I am positioned in a pastiche of healthcare stocks and short the semis at 12% and saddled with a 25% cash position. My intent with this portfolio is to net 25 to 50bps per session. Today I closed up 26bps and nearly +1% for the week, which sucks but it’s better than losing money and better than most traders for the week of chop.

If you’re new to trading, you just have to get used to summer trading sucking like this. If you’re a pro, you need to decide the fate of the semis now: are we oversold enough to warrant a bounce and new highs, or is this day two of a 5 day rout?

No one gives a fuck on day 2 of a sell off. People don’t start to pay attention until day 4 and then they begin to panic after a full week of horrors. I am always going to sell short at the onset of a selloff because of the off chance it blossoms into something wonderfully terrible. You might be thinking ‘well tough guy, if you’re so sure, why not go all in short?’

Because I’m not a fucking idiot and do not trade with ego. Nothing is certain, just opinions foisted out there with varying degrees of conviction. It would behoove me as a gentleman and internet scholar to pretend to know for sure markets were destined for the trash can, as fun as that may be.

Bottom line: the ultimate goal here is to destroy the stock exchange, cause citizen upheaval and truly fuck the ruling elite in a manner that will inspire writers to pen horror stories about the ordeal. We are getting there, but not just yet. As a manager of money, you ought to be paying very close attention to politics these days.

Hagw.

Many people like to say “I am not taking my money to the grave. I am going to spend it all before I die and have fun.” It is this sort of plebeian thinking that keeps bloodlines weak and unable to ascend. The selfish notion that you must maximize hedonism, brushing your heirs aside, all because you feeeeeeeel like you want to have fun.

Anyone advising you to go down this route is either an idiot or simply so narcissistic they don’t know what it means to create generational wealth. This happens more often in the nouveau riche underclass, aka the canaille, who made it to the upper echelons of monetary success but hold grudges against their new class peers and feel the need to express themselves in the gaudiest of ways in order to satiate a deep seated sense of inadequacy born from generational trauma due to an impoverished or less than glamorous upbringing. In other words, they make money and spend it all on cars, homes, jewels, and die poor.

Let me demonstrate the power of compounding returns for you.

Say, for example, you placed $5m in a ‘dynasty trust’ and hired a trust company to oversee after you died and invested it conservatively for the next 100 years. If you did this and never distributed money, it would be worth $11b. Naturally the whole point would be for the money to be used on certain things, such as bloodline emergency expenses, college tuition, grants, gifts etc. For me, I think this is a wonderful idea, gives me a sense of purpose in my life to create value for my bloodlines for future generations.

If you don’t have a lot of money now, you can start a revocable trust and hopefully your heirs can continue the culture of passing down wealth. I really don’t see the point of accumulating wealth without planning what to do with it after you’re dead. Are you just going to divide it and leave it to your children to squander? I realize that might seem like a contradiction; but it isn’t. If in a trust you get to set the rules and make sure the money is being spent smartly, as opposed to how wealth is often squandered by heirs who never understood what it took to acquire it.

The market is acting weird again, with gains in industrials and big weakness in semis. We are lower by another 1.5% in the $SMH today, making it down 4% in two days. We are not, however, oversold and nowhere close to it, according to Stocklabs.

The overall tone of the market is good, unless you’re in semis. The rotation out from semis into other areas is definitely happening. But what people want to know is, is this sell off in the semis a foreshadowing of a larger overall pullback in markets or simply a buying opportunity? It’s really hard to say, since I am bullish, but do believe the semis got way ahead of themselves.

Luckily for me, I was SHORT semis into today and have gains of 40bps for the session. I am moving incrementally now, which is the way I prefer. I do not view this market as wildly opportunistic, but instead hard and a grind. Truthfully, most markets during my entire trading career were ‘hard’ with few exceptions: 2003, 2006, 2009, and 2021 were all very easy. I left out some big years from me, because I know 2020 ruined a lot of people as did 2022. I did very well in 2008, but it was not easy.

An easy tape is a market that you simply know with every fiber of your being is going higher. It’s not a question of if it’s going higher, but by how much.

This tape, unlike 2021, is very narrow, spiteful, vindictive and disgusting. It reminds me of some people that I cannot stand being around.

The semis have topped out and your dreams of participating in $NVDA following a 700% rally will end in tears. My basis on $NVDA is $12 and have no intention on selling, if only for tax considerations. However, the writing is all over the walls, written in blood, and the market is about to crescendo lower in a most heinous manner.

I want to be clear about something: I am still bullish, but feeeeeel we are in for an immediate clubbing. I also reserve the right to change my mind at any time.

Because I was long and fallible just like you, I shed 48bps for the session. I could’ve done things differently and behave more aggressively but I didn’t see the need to really micro fixate on the passing storm.

I closed hedged via $SOXS, 25% cash, with a portfolio filled with low beta stocks.

I am exactly flat for the month of June. I intend to reduce exposure into the final days of the month with modest goals to achieve gains without having to expose myself much. This is going to entail hedging a lot and not trusting trends, buying back inverse ETFs irrespective of price in order to reduce beta and tighten the ranges of my profits and losses. The absolute worst case scenario would be to chase a doomed rally and ride it down 2 or 3 percent before stopping out to cap off the month, which is why I will attempt to keep my ranges under 1% win or loss for each session.

Good Sirs

Last week I recounted to you exactly what would transpire with the semiconductors, giving you ample time to make arrangements, yet there you are bogged down heavily with losses, stupefied and dumbed down by the main stream financial media.

At any rate, I’m not trying to urinate on your gay parade, since I too own them. I even bought some $TSM in a long term account today, feeeeeeling it might bust loose again and attain legendary status by joining the elite club of companies with market caps over $1t. However, just in case, I am also 12% weighted in $SOXS, short the semis, because God knows they’re deserving of a brief, yet somewhat malevolent, decline. That much I can assure you. There is going to be a most heinous drop soon and none of you are going to like it, lest you’re short of course.

Is now a good time to step in and but the dip?

Sir, the semis are still up 12% for June and was up 12% in May. Dare I suggest you look into other areas of the market and quit microfocusing on $NVDA and $AMD? I know AI and Bitcoin and alluring and I realize the industry is undergoing rapid growth; but just think for a second about previous market routs and how you felt “in the shit” bogged into losses akin to ruin.

To be clear, I am still bullish and would prefer not to have even a single down day, but things are stretched here and the downside in the $SMH can be swift and mean if you’re not careful.

I stand before you victorious, +78bps, hedged with a 12% position in $SOXS because I know for a fact the semis are teetering and will soon crescendo into a deep and varied crevasse, whereby all of you reading this will be confused as to how it could happen. The laws of mathematics confronts you, eager to sort these things out. Markets cannot do this forever and the semis cannot gain 5% per day without pausing and crashing for brief sojourns into hell.

Much of this stuff I just make up on the fly, sort of like Juneteenth being a relevant holiday. After all, it’s fun to pretend and we all just want to fit in.

Black Americans enjoy a good life filled with happiness and success, just like anyone else. But they aren’t special and they aren’t victims and they should not be treated like children.

We all earn our way during this brief life and some of us remain amazed and awed by the specter of materialism. I am not immune to the allure of shiny new things, items that I once believed would change my life for the better. They’re like little talismans, purchased for the purposes of increasing happiness. Perhaps this new shirt will impress someone and help me get laid. Or, maybe if I wore those $900 shoes people might think I’m rich and smart and want me to be their friends, especially since I drive in that big old expensive Benz.

This is literally how people justify living vacuous lives, obsessed with things that do not hold real value. I can segue this into what real value is and lecture you to the both of us are annoyed. Not everyone is suited to be a parent and some of us should not breed, for various reasons. Some of us might have a greater calling, to create or to influence, meld society for the betterment of many.

Whatever message you choose to take from this, just know that I try to communicate to help and because of my human flaws; I often project anger. This is because I hate a lot of people and seek vengeance. But none of you are my targets and I wish you well and your families, especially heading into a free holiday by our government scum. If you think about it, Juneteenth is the perfect government mandated holiday and I will use it to have myself a great BBQ, filled with chickens and cows and all sort of veggies, perhaps collards, finished off with some melons.

A lot of people are confused about the market and do not understand how it can keep pressing higher. But it’s bifurcated, isn’t it? You have two markets: the small caps go down and the large caps go up. Why is this?

The answer is very obvious: very large asset managers allocate wealth into the most liquid and biggest companies. We used to call these “hedge fund hotels”. In recent years foreign banks have been increasing their exposure to American equities and you’d have to guess correctly where they might have interest: $NVDA, $AAPL, $GOOGL etc.

I’ve talked about the Yen Dollar carry trade here and how those Japanese banks might be leveraging up into US equities. Well if the ECB cuts and we don’t, we might soon begin to see a Euro Dollar carry with the same dynamics.

This is why it’s important to remember when allocating money your anecdotal experiences in the economy aren’t valid. The only thing that matters is American households have $150 trillion in wealth and it’s being managed by people who know how to walk up stocks and create a profitable environ for all involved.

The very worst case scenario would be to not participate in this phase and instead succumb to deleterious inflation and a decrease in buying power and personal wealth. You can very easily emulate where Joe Manager is looking next: buy companies whose market cap are over $50b and possess strong margins and free cash flow. Keep doing this until it stops working.