🗞 You Want Rate Cuts? Careful What You Wish For

WHILE YOU POUR THE JOE… ☕️

68% of stocks are now trading above their 200-day moving averages. 📈 

This may not mean much to you if you didn’t catch our newsletter pointing you to the rest of the market catching up to the S&P 500.

In there, we broke down some statistics as to why stocks would end up melting up and catch up to the rest of the index, and how that could also bring the S&P 500 to $7,000+.

That’s a 17.5% return given with just spreading out two deviated asset classes.

You’re welcome. 🤝 

By the way, that is exactly what we will be showing you how to do inside our new and improved 5-day Email Experience (for free).

We have taken every major chapter inside our flagship program The Sovereign Trader and broke them down into five digestible lessons you can take home today.

One of them is spreading assets like these and connecting the dots as to where correlations could swing next and why.

That’s the beauty of long/short equity as a skillset: you can position yourself before major market moves.

We are launching that experience live this week. You can sign up to be part of the waitlist (and get it first before everyone else) by replying to this email with “Count me in.” ✅ 

Speaking of Correlations, let’s get on with today’s email 📧…

DIFFERENT THIS TIME
Ex-Growth Troubles

Only a fool would be net long or net short in this current market. 🤷‍♂️ 

The reason is that there is going to be a MAJOR shift happening, as we previously stated our preference is now for Mid-Caps with a strict long/short equity approach.

This way we are directly exposed to what’s set to grow, while also covering our risk in case the market ends up tanking.

Best of both worlds, and I think it’s time to take this seriously.

As you can see, September and October are historically weak months for the market, but that’s all in the rear-view mirror..

Let me show you why I think this will happen again by looking at the road ahead instead:

Mag 7 net income growth is set to slow down significantly over the next couple of quarters.

I can tell you why I think this is in two simple dots connected:

• Massive CapEx happening restricts FCF and net income

• This compresses EPS unless additional cash is thrown at aggressive buybacks

And buybacks at today’s valuations are synonymous with suicide, management would be effectively burning the cash you trusted them to handle.

But that’s all for large caps. ⬇️ 

Mid-caps on the other hand, part of the “S&P 493” are expected to nearly triple their net income growth over the next 2 quarters, for reasons we’ve already spelled out in previous newsletters. 🔥 

But wait…

How does this all connect to why we think rate cuts will be bearish for the stock market?

Glad you asked: 👀 

Gold and the S&P 500 have been the two hottest things to own (besides Bitcoin) since COVID-19.

This was a normal relationship until early 2025, since it meant both economic growth due to very accommodative policy and inflation expectations.

However,

Now that gold has outperformed the S&P 500, and more interestingly been flat since Liberation Day pretty much.

I think there’s a new issue brewing in the horizon. 🫢 

Look at where one-year correlations are between the S&P 500 and gold, approaching toppy levels much faster than ever before, compared to two-year correlations in black.

This is because of the record-time recovery made in stocks since Liberation Day.

And that toppy correlation does also mean the two are set to diverge at any given time now.

Though it usually takes about a month or two for this deviation to happen..

Which curiously lines up with the September Fed rate cuts, which are now a possibility made after the Fed’s Jackson Hole speech.

Remember the commitment of traders report in the S&P 500 from our last newsletter?

I showed you that non-commercials (hedge funds and large speculators) were selling out of the index before the Fed spoke last week.

And now they’re doing the same in gold, which would be unusual if you had no idea where the correlation regimes were at today.

Let me give you a quick tip here on correlations. ⬇️ 

If you hold a portfolio and think you are now “diversified”..

You may not be, since you have no idea how your holdings truly interact with each other and where the pain tails may come from.

Let me give you an example from J’s portfolio (if you’re reading this, you’re a G):

By holding a combination of some Chinese tech, European consumer and American consumer stocks, it turns out his portfolio was pretty uncorrelated by default.

Though even he admitted this was pure luck and he had no idea.

The benefit here is that an uncorrelated portfolio can cover your butt in case the market decides to go crazy, and also uncovers some of our macro biases.

Such as knowing that EU and China are doing business now more than ever (hence the high EL and BIDU correlations).

Anyay, here’s how this ACTUALLY benefits you:

With a handful of stocks, J had nearly halved the inherent volatility in each combined asset. 👏 

From 25.5% down to 14.95% on a portfolio basis, while retaining the same return profile.

If I lost you there, don’t worry, here’s the real on what I just said: ⬇️ 

Long/Short strategies eliminate risk while still providing the full payout.

It’s the one thing that I will never forget from working at Goldman Sachs.

In six months, you could be running portfolios like these and forget about what the market may do next.

Get started here, apply for the Sovereign Trader Program ✅ 

Back to the S&P 500 and Gold..

Besides these two, correlations have pretty much fallen out of place.

Which makes me think of the following:

• No opportunities have been found in other asset classes due to prolonged high rates

• Correlation and volatility breakdowns drove everyone to stocks and gold

• S&P 500 became so bloated on Mag 7 that everything else just kind of faded in the background

Which means the pendulum has swung to one extreme.

This isn’t the first time this has happened, though..

• 1929

• 1966

• 1999

You think this time will be different? Good luck. 💀 

If the pendulum swings to the other extreme, it means all the sleeping opportunities outside gold, Bitcoin, and the Mag 7 will probably give you amazgin alpha.

BUT,

In case we’re wrong, that’s why we’re hedging and not going net long or net short.

We just move different, and all these picks are coming your way, so stay tuned my friend.

To your success,

G 🫰 

GO AND MAKE IT HAPPEN
Coming Soon

There’s thousands of you, and this YouTube video has only gotten a couple hundred views so far.

So I’ll just let you know it’s out there lol.

Trust me, you’ll take more from the first 10 minutes than the hours you’ve binged watched YouTube for technical patterns.

ALSO

Don’t forget to reply to this email to be part of the free 5-day email experience waitlist. ✅ 

We’ll give you a crash course on long/short equity so you can cover your butts before the big rotation is here.

To your success,

G. 🥃