Contrarian Considerations

Wanna ride some ponies with me?

Disclaimer: I’m not an investment advisor. I share what I do and why I do it. Nobody cares about your money more than you do. Act like it. This is a free blog. If you follow me in a trade and we get it wrong; get a grip and own the mistake. Nobody has a gun to your head.

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As your friendly Heretic Speculator, I have two high conviction contrarian ideas for your consideration. I hope you enjoy them. Let’s get into the details of each.

Short Semis Via SOXS

The Direxion Daily Semiconductor Bear 3X ETF does exactly what you would expect from the name of the fund; it is a bearish bet on the semiconductor stocks that aims to triple the daily return of the semiconductor index. It is an insanely risky product to be exposed to and I would not recommend having the position on unless you can babysit it. This is not a set it and forget it ticker.

Regardless, the semis have been absolutely on fire this year. And the intensity of the rally has really been condensed to just a few months. My interest in SOXS at this juncture boils down to four main factors:

1. The run in SOXX is showing obvious signs of technical exhaustion

2. Fundamentally, SOXX is trading at a 107% average premium to its 3-year average in key valuation metrics

3. A key hyperscaler is giving bearish AI signals

4. The breakdown of the Japenese Yen against the dollar is a significant catalyst that could put pressure on risk assets broadly speaking

First, let’s take a lay of the land from a technical standpoint.

Notice the declining momentum on display through two metrics; the RSI and the 50 day SMA premium. The RSI divergences are numerous and have been happening for more than two months. The MACD is rolling over. The 50 day SMA is quickly approaching after not having been sniffed since early April. This is a very, very concerning chart for bulls.

Earnings or no earnings, fundamentally speaking SOXX components are egregiously overvalued:

As if a 39 P/E wasn’t extended enough, a P/E of 69 is astronomical. And the P/B and P/S ratios aren’t much better. Consolidating the premiums to 3 year averages in these five valuation ratios, SOXX is trading at double its typical valuation - which was already high to begin with. This is going to unwind. Pure and simple.

And we might have, not one, but two catalysts that can undue it. First, Meta Platforms just made two major announcements that impact the AI hype train; the first announcement from a few weeks back is that the company is capping internal token spend on AI. An indication that using this stuff is incredibly expensive. The second announcement from earlier this week is that Meta is building a cloud business to sell ‘excess compute.’ Which is essentially an admission from one of the major AI ‘hypercalers’ that they overbuilt capacity. Gee, that sounds a little like the fiber build-out in the 90’s.

Yet, we were told by stonk junkie permabulls that this couldn’t be a bubble because there were real earnings. That demand for chips was too strong and that the datacenter shortage was too big of a tailwind. And yet, none of the companies that actually merchandise the technology are profitable. It’s very difficult for me to imagine how either of these developments are good for semis.

Then there’s the Japenese Yen. Yes, we’re doing this again apparently.

Created with TradingView

The US Dollar just broke out against the Japanese Yen and made a higher high than it did during the last Yen carry trade unwind. Keep in mind, stocks absolutely puked their guts out when the Bank of Japan started defending the currency back in 2024. The SPY was down 10% from what were then all time highs in a little over two weeks. Jeremy Seigel was on CNBC begging the Fed for an emergency rate cut. Completely pathetic.

Alas, we could see some legitimate pain in broad market indices if the BOJ gets aggressive. In my view, the combination of these factors gives traders technical, fundamental, and timing justification for a speculative position in SOXS. The move in the semiconductors since the beginning of April has been nothing short of magnificent. In just a single quarter, SOXX shares have returned over 100% in virtually a straight line. But nothing goes up in a straight line forever no matter how compelling the bull thesis is. Just like metal miners and energy stocks before them, the semis are overdue for an enormous pullback.

Downside risk in SOXS is $0 per share if the semis somehow rip 33% in one day. Please be careful with this one if you choose to use it. It is not an investment. It is a trading instrument.

Long Oil via USO

The thesis for long oil is quite simple; the price of oil is now at pre-Iran war levels. Which means the market is assigning zero war premium to the world’s most important commodity despite a middle-eastern conflict that is most certainly not yet concluded. In my estimation, this oil decline has been managed lower through three primary methods:

• SPR reduction

• Shorting

• Jawboning

On the first point, the United States’ strategic petroleum reserve is at it's lowest level since the early 1980’s. Essentially, this administration has done the very same thing that the prior one did; activate reserves to keep the oil price low because high gas prices are a political liability.

The SPR is at its lowest level since April 1983

We’ve reduced the SPR by just under 90 million barrels (over 21%) since the end of February. A three year long rebuild wiped out in just four months. And this is just America. The International Energy Agency agreed to release 400 million barrels of oil among its member states specifically to prohibit price shocks in the market. These reserves will need to be replenished. Which threatens to undue at least some of the oil price decline that we've seen since mid-May. Then there's the shorting.

MarketBeat: As of June 15th, over 117% of USO shares in the float have been sold short

Incredibly, the US Oil ETF has more shares sold short than are currently available in the float. Recall, this is almost the exact setup that made the WSB degens on Reddit so excited about GameStop. So there is a clear short squeeze setup in USO that I think is quite compelling.

As far as jawboning goes, Trump is doing exactly what he did during his first term with ‘trade hopes’ headlines only this time its ‘ceasefire hopes.’ He knows what he’s doing. The oil market has dumped on the same ‘ceasefire talks are going well’ headline for the last several weeks. It has not mattered that the ceasefire has been breached throughout that time.

Aggression often happens during the weekend when markets are closed and then by Sunday nights when futures markets open, things have cooled off and oil keeps going down. Again, he knows exactly what he’s doing. We’ve seen this movie before with ‘trade hopes.’ And no matter how much Trump channels his inner Biden and blames gas companies for pRiCe GoUGhiNG during an avoidable energy disruption, it’s not going to change the fact that physics and economics still do matter in the non-financialized real world.

Then there is also the technical setup for Oil. This is the chart for USO, but I think it makes the general point:

We have an RSI-divergence on the daily chart, a MACD that has seemingly been extended to the downside limit, and a 50 day SMA discount that is at its lowest level since March 2020. Another fun fact: WTI crude just officially closed the gap higher from March 2nd.

Created with TradingView

Unless you believe we have further demand destruction coming through some sort of COVID-like event, I think we’re at or very near bottom in oil. And in case you’re wondering how this plays with the aforementioned Yen carry trade backdrop, I think it still works. If JPY unwind causes a large scale deleveraging, the leverage appears to be on the bear side in USO. Which means margin calls from a Yen carry trade blowup could actually put upside pressure on USO shares as shorts are forced to post collateral or close out positions. I’m playing oil via a long position in USO and various producer stocks.

I see downside risk in USO to be the 200 day SMA. That would put it in the $96 per share area. At that point, I’d likely double up the trade.

Bonus Idea: Long silver via PSLV

This one is nothing new. If you liked it in the $80’s and loved it in the $70’s, you’re backing up the truck in the $50’s. And that’s exactly what I did.

I took four months off from writing on Seeking Alpha. This is my latest through that platform:

Anyone who has experienced a real Silver bull market knows how this story goes. Between October 2003 and April 2011, Silver fell by over 60% once and over 35% two additional times. It did not matter. The metal was in a massive bull market and continued to make new highs until it entered an extended bear. The point is, the bull will try to buck you off. It will make you feel horrified and scared. This is precisely when you want to consider going counter-trend.

Freebie link

I reiterated my ‘strong buy’ on Sprott Physical Silver.

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Tickers Covered: SOXX 0.00%↑, SOXS 0.00%↑, USO 0.00%↑, PSLV 0.00%↑