Trade of The Week - MacroVoices #505

Key Concepts

• AI Memory Super Cycle: A period of significant growth and demand for AI-related memory chips.
• Cosby Index: The South Korean stock market index.
• NASDAQ 100: The US stock market index comprising the 100 largest non-financial companies listed on the NASDAQ.
• EWY ETF: An Exchange Traded Fund that tracks the South Korean market.
• QQQ: An ETF that tracks the NASDAQ 100.
• Relative Value Setup: An investment strategy that aims to profit from the price difference between two related assets.
• Implied Volatility: The market's expectation of future price fluctuations of an asset.
• Delta: A measure of how much an option's price is expected to change in response to a $1 change in the underlying asset's price.
• Secular Inflation: A long-term trend of rising prices.
• Feedback Loops: Economic processes where an initial change triggers further changes in the same direction.
• Market Breadth: A measure of the number of stocks participating in a market move.
• MAG 7: A group of seven large-cap technology stocks (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, Tesla).
• WTI (West Texas Intermediate): A benchmark for crude oil pricing.
• Dixie: The US Dollar Index, which measures the value of the US dollar against a basket of foreign currencies.
• Reflation Trade: An investment strategy that benefits from rising inflation and economic growth.
• URRA: The Uranium ETF.
• FOMC (Federal Open Market Committee): The monetary policymaking body of the Federal Reserve.
• 10-Year Treasury Note: A debt security issued by the US Treasury with a maturity of 10 years.

Trade of the Week: Long US Tech vs. Short South Korea

Patrick Serezna outlines a relative value trade strategy pitting the US technology sector against South Korea's market.

• Main Topic: Divergence in global tech leadership, specifically between the US and South Korea.
• Key Points:
  • The South Korean Cosby index has experienced a significant rally (over 100% since April lows) driven by the AI memory super cycle, with Samsung and SK Hynix being the primary drivers.
  • Skepticism arises from the narrowness of the Korean rally, its heavy reliance on the memory semiconductor cycle (making it volatile and cyclical), and the inherent geopolitical risk due to the US-China technology fracture.
  • The NASDAQ 100, while having concentration risk in the MAG 7, is considered a broader and more structurally diversified index.
  • Since post-Liberation Day lows, the Cosby has outperformed the NASDAQ 100 by nearly double (100% vs. ~50%).
  • The view is that this gap has likely run its course, with the NASDAQ potentially outperforming going forward, and South Korea facing more severe downside if markets turn.
• Proposed Trade: A long/short relative value setup: Long US tech via NASDAQ 100 (QQQ) and short South Korea via EWY ETF.
• Sizing the Trade: Leaning towards a dollar-neutral structure with equal notional exposure, rather than volatility adjustment, assuming South Korean implied volatility (currently 44%, up from 22%) may normalize.
• Adding Convexity: Suggests replacing the outright short in EWY with a high delta, deep in-the-money put option (e.g., December 115 put with ~90 cent delta) to capture downside participation with defined risk and optionality premium. This also makes the trade more accessible for investors with short-selling restrictions.
• Supporting Evidence:
  • EWY ETF performance: +100% since April lows.
  • NASDAQ 100 performance: ~50% since April lows.
  • EWY implied volatility: doubled in the last 2 months (22% to 44%).
  • QQQ implied volatility: around 20%.

Eric Townsend's Equity Outlook: Secular Inflation and Market Bubbles

Eric Townsend discusses his view on the broader equity market in the context of inflation.

• Main Topic: The early stages of a secular inflation trend and its implications for the stock market.
• Key Arguments:
  • Inflation is initially good for the stock market before feedback loops kick in.
  • The current market setup suggests inflation is not yet fully recognized, leading to a belief that it's not happening.
  • The market can continue higher in the intermediate term, but it feels "bubbleicious."
  • There's a potential for higher prices initially, followed by serious headwinds as inflation intensifies.
• Supporting Evidence:
  • Observation of market behavior in the early stages of inflation.
  • The current "bubbleicious" feeling of the market.

Patrick Serezna's Concerns on Market Breadth and Key Levels

Patrick Serezna expresses concerns about the underlying health of the equity market despite its upward trend.

• Main Topic: Underlying concerns in the equity market despite the S&P 500's bull trend.
• Key Points:
  • Market Breadth: Continues to be poor, with only around 40% of stocks above their 50-day moving average, indicating 60% are in a downtrend.
  • Sector Performance: Sectors like financials are showing weakness and rolling over.
  • Reliance on MAG 7: The market's strength is increasingly dependent on the MAG 7 continuing to rally, particularly semiconductors.
  • Nvidia's Earnings: Nvidia's upcoming earnings report is identified as a potential key pivot point for the rally's sustainability.
• Technical Levels to Watch:
  • The market has pulled back to a 50% retracement of its prior advance and is finding support at its 50-day moving average.
  • A bullish pattern would involve buying on dips and pushing higher.
  • Concerns would arise if the market cracks below 6,700, with a more significant danger zone below 6,600, where systematic traders might deleverage or flip positions, potentially impacting the market by over $100 billion.
  • Bulls need to maintain the pattern of higher highs and higher lows to avoid this danger zone.
• Supporting Evidence:
  • 40% of stocks above 50-day moving average.
  • Financials sector weakness.
  • Technical support levels at 6,700 and 6,600.

The US Dollar Outlook: Potential Bull Continuation

Both hosts discuss the US Dollar Index (Dixie).

• Eric Townsend's View:
  • The Dixie is flirting with 100, at a key resistance level.
  • It's either topping or about to break out to the upside.
  • Headline news and actions of political figures (Trump, Bessant) will likely drive its next move.
• Patrick Serezna's View:
  • The dollar is setting up for a potential bull continuation, which could be a disruptor to the reflation trade assets that have benefited from a weak dollar.
  • Consensus has been bearish on the dollar, making a counter-trend trade potentially significant.
  • Evidence for Continuation:
    • Substantial breakdowns in the British Pound.
    • Euro rolling over.
    • US Dollar Yen making higher highs.
    • US Dollar Canadian Dollar making higher highs.
    • Structural strength against many cross-currencies.
  • A double-bottom and basing formation is developing, with potential for a short squeeze to 103-104.

Crude Oil: Short-Term Downside, Long-Term Upside Potential

The discussion on crude oil highlights a divergence between short-term bearish sentiment and long-term bullish conviction.

• Eric Townsend's View:
  • Crude oil is stabilizing around $60 WTI.
  • Seasonality remains bearish until around February.
  • Expects potential downside of $10-$15 before the next big upside move.
  • Believes the next significant move will be to the upside, but it's not time yet.
• Patrick Serezna's View:
  • The primary downtrend of crude oil is still intact, with lower highs and lower lows developing.
  • A key support line, if broken, could cause short-term liquidity issues and a washout.
  • Asymmetry: Despite short-term volatility risk, the upside is considered more compelling from an asymmetry perspective.
  • Recommendation: Light positioning with downside hedged, and some "skin in the game" to see if bulls can break the 50-day moving average and trigger a short squeeze.
  • Key Levels: A break above $62 could lead to a squeeze into the high $60s.

Gold and Silver: Technical Signals and Consolidation

The outlook for gold and silver is mixed, with technical indicators suggesting potential upside while acknowledging consolidation.

• Eric Townsend's View:
  • On the fence between Ola Hansen's view of the next leg higher in 2026 and a potentially sooner move.
  • Technical Signals:
    • Slow stochastics and RSI have moved from extreme overbought to oversold.
    • Stochastics have flashed a buy signal similar to late August, preceding a significant rise.
    • RSI hit oversold, a signal not seen in August.
  • These signals suggest a stronger buy signal than in August, potentially leading to a $1,000 rise to $5,000 if the dollar doesn's explode higher.
  • The dollar's resolution at its consolidation range high will be relevant.
  • Potential for an earlier-than-expected upside resolution to the current consolidation.
• Patrick Serezna's View:
  • Observes short-term oversold conditions and 50% retracements in gold and silver.
  • The question is whether this is a bigger correction or consolidation from an overbought market.
  • Believes gold can bottom this year but questions if it can surpass its previous high within the calendar year.
  • Suggests a compromise: short-term lows, strengthening off those lows, with a break to new highs potentially occurring in the new year.
  • Structurally bullish on gold and silver, viewing the pullback as a "buy on dip" for a continuation pattern into a new bull move through 2026.

Uranium: Consolidation Amidst Strong Fundamentals

The uranium market is consolidating after positive news, with strong underlying fundamentals but a potential risk from the AI trade unwinding.

• Main Topic: Uranium market consolidation and its outlook.
• Key Points:
  • Consolidation is expected after recent positive news, including US government subsidies for Westinghouse AP-1000 power plants.
  • The bull case for uranium remains strong.
  • Systemic Risk: A significant risk is the unwinding of the AI trade, as the nuclear trade has benefited from AI sentiment tailwinds. A reversal of the AI trade could negatively impact nuclear stocks and uranium miners.
• URRA ETF Analysis:
  • The URRA ETF faded strength after positive news from Cameco, returning to October lows.
  • This price action shows some heaviness but has not broken its primary bull uptrend.
  • Uranium appears to be getting tired after a strong six-month run.
  • The host is currently neutral on uranium, looking for buying opportunities on deeper dips.

10-Year Treasury Note: Range-Bound Trading Expected

The outlook for the 10-year Treasury note suggests a period of range-bound trading until more clarity emerges.

• Main Topic: Short-term outlook for the 10-year Treasury note yield.
• Key Points:
  • A short-term bottom formed around 3.90, with a brief dip below 4%.
  • Since the FOMC meeting, yields have reverted to around 4.10.
  • The primary downtrend of yields is in question.
  • Factors Influencing Outlook:
    • Lack of economic data due to the government shutdown.
    • The Fed cooling ambitions of a dovish stance.
  • Expectation: Range-bound trading is expected through November, with a larger move likely developing around the December FOMC meeting.

Conclusion and Takeaways

The Macrovoices discussion covers a range of financial markets, highlighting key divergences, potential trade setups, and underlying economic trends. Patrick Serezna proposes a relative value trade shorting South Korea's AI-fueled tech rally against a long position in US tech (NASDAQ 100), citing the narrowness and geopolitical risks of the Korean market. Eric Townsend views the current market as being in the early stages of secular inflation, which can be supportive of equities initially, but warns of future headwinds. Both hosts express concerns about market breadth and reliance on mega-cap tech stocks. The US dollar is seen as potentially entering a bull continuation phase, which could disrupt existing reflation trades. Crude oil is expected to see short-term downside before a larger upside move, while gold and silver show technical buy signals despite recent consolidation. The uranium market is consolidating but remains fundamentally strong, with a key risk being a reversal in the AI trade. Finally, the 10-year Treasury note is anticipated to trade in a range until further clarity emerges from economic data and Fed policy.