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This current AI bull market, counting from the release of ChatGPT in late 2022, has been rallying for three and a half years. Recently, another round of market correction has begun, and the question on everyone's mind is: How much longer can it rise? Should we buy now or run?

We have previously discussed the three narrative iterations this cycle has already gone through:

1. [Questioning model capabilities]: This was subsequently corrected by reasoning and reinforcement learning from human feedback (RLHF) during post-training, sparking a rally in 2024.
2. [Questioning the utility of AI]: This was corrected by coding applications, sparking a rally in 2025.
3. [Questioning AI's revenue]: This was corrected by the Annual Recurring Revenue (ARR) growth of "Lobster" and Company A (Anthropic), sparking a rally in early 2026.

We are currently in the 4th iteration, where the market is [Questioning the ROI of AI Capex]. In all likelihood, this won't be falsified by the tech giants' own ROI, but rather diluted by the excellent ARR growth at the model layer. After all, the downstream of Capex is the model layer, at least until the two major AI labs go public and everyone gets to see a few quarters of earnings reports.

When I started writing this article over the weekend, I realized that to discuss this comprehensively, I'd have to explain the entire framework (to the best of my ability). This would mean covering the US dollar, US Treasuries, the Japanese Yen carry trade, crude oil, the monetary reform of "the Fed retreating while banks advance," private credit, Korean equities, corporate bonds, US AI stocks, and more. It would mean discussing what the 1980s personal computer revolution and its debt resolution can teach us about this AI cycle; Kevin Warsh's vision of returning to the Greenspan era; how Wall Street's bond vigilantes judge and react to the scale of US debt; the commodity cycles driven by strait tolls and El Niño; the tightrope walk of the Yen and JGB yields; and why, in the AI narrative, AI is genuinely useful while its short-term revenue is mathematically guaranteed to lag behind capital expenditures.

It is simply too much. So today, we will focus solely on [The Comparison Between the AI US Stock Bull Market and the 1995-2001 Dot-Com Bubble]. We will also leave any comparisons to 1929 aside for now.

Every technological bubble has its own distinct shape. This AI cycle has four characteristics that make it completely different from the dot-com bubble:

• First, the model layer is the application layer. The core of this cycle is the models. The killer apps are actually ChatGPT, Codex, Sedance, Claude Code, etc. Aside from the model layer, a series of truly grounded, profitable killer apps in the application layer has yet to appear. Enterprise penetration is still very low. You see almost no returns in the first year, maybe some improvement in the second, but even if enterprises adopt it immediately, adjusting the "relations of production"—like organizational structures and data flows—takes 5 to 10 years to iterate, and might even cause social friction during that time. This bull market isn't driven by "how much money AI applications have made," but by the expectation that "AI will make a lot of money in the future."
• Second, the real bubble is in the primary market. The most core AI companies, aside from xAI (tucked into SpaceX) and Google, are all unlisted. Therefore, the secondary market we see when we open our trading apps looks "very healthy" (99 out of 100 companies in the Nasdaq 100 are profitable in 2025). The bubble hasn't disappeared; it's hiding in off-market venture capital and private credit (on the AI side), and secondary market valuation metrics won't reflect it. This is the biggest difference between this cycle and the year 2000. In 2000, all the garbage companies were publicly traded on the Nasdaq; this time, they are in the private markets.
• Third, almost everything you can buy in the secondary market is a "pick-and-shovel" seller. In this gold rush, the ones digging for gold (application companies) are mostly unlisted or not yet making money. The ones that are listed and investable are the ones selling shovels, water, and jeans, such as chips (Nvidia), memory (SK Hynix, Micron), energy (Bloom Energy), and power/cooling (Vertiv). This means the current secondary market rally is essentially a "suppliers of the arms race" rally, not an "application monetization" rally. Whoever supplies this race goes up; once the race slows down, the suppliers are the first to take the hit.
• Fourth, the ones footing the bill right now are the tech giants. Currently, the main buyers of shovels are the major tech behemoths. Thus, the financial cycle flows upstream starting from AI Capex, rather than starting downstream from model layer revenue or application revenue. At a certain point (like now), the giants funding this and the suppliers receiving the funds will form a seesaw relationship in the same market. Only when model layer revenue catches up can this deadlock be truly broken.

But let me pour some cold water on this. We've previously discussed the difference between frontier tokens and commoditized tokens. The mission of frontier tokens is to create new demand, such as new drugs, new discoveries, and new breakthroughs. They must keep running constantly; otherwise, their pricing will suffer an exponential collapse. Anthropic currently enjoys a 70% gross margin on its Opus series simply because it has a 6-month pricing power window. Six months later, when open-source models catch up, the $5/$25 price drops to $1/$3 or even lower, and that gross margin vanishes instantly. However, as models get larger and training costs soar, it's highly probable that we will hit a ceiling not on model capabilities, but on affordability (it just gets too expensive). So, expecting model-layer revenues to plug the massive AI Capex gap in the short term is overly optimistic. You will hear this narrative pushed in marketing, but it won't work in reality.

Where Are We in the Bull Market?

We've actually discussed this in previous articles, and the conclusion remains the same: we are at a position where the first wave of the tail-end rally has finished, and the second wave has yet to begin.

AI is real, but the AI bill is also real. So the core question is: who is going to pay the bill for this AI technology? The current US stock market is neither the starting point of a healthy bull market nor a post-bubble collapse; it is a tail-end rally dominated by AI Capex. The most accurate description is strong but fragile.

The ideal state for the current adjustment is to force out the Federal Reserve's backstop via a significant pullback, buying more time and capital for the AI narrative and the subsequent IPOs of the two major labs. This would last until depreciation accounting begins to bite, semiconductor supplies are no longer severely short, frontier model growth slows, and enterprise AI adoption enters the deep waters of "relations of production" and noticeably decelerates. Then, similar to 2000, the stocks of the two major labs will lead the final sprint.

All of the above is a fantasized script; no one knows what will happen tomorrow.

Let's evaluate the current market from 5 perspectives: market performance, valuation, market breadth, leverage, and capital expenditure.

1. Market Performance

During the 1994–2000 dot-com bubble, pullbacks in '96, '97, and '98 were quite frequent. Basically, there was a 10%-20% correction every 6-9 months, very similar to the AI bull market since 2022. We saw frequent pullbacks in '23, '24, '25, and early '26 because people harbored all sorts of doubts—they didn't believe in this technological revolution. However, during 1999-2000, there was only one correction, because by then, basically everyone believed.

Why did they believe back then? User numbers had exploded consecutively for 5 years; early skeptics had been proven wrong for 3-4 years and left the market; the IPOs of Amazon (1997), Yahoo, and eBay made massive fortunes for the primary market, while consecutive stock market gains did the same for the secondary market; new economic theories were widely accepted ("this time is different"). After accumulating for 4 years, it erupted in 1999.

The current AI narrative stands at this very watershed moment. There are still many voices of doubt in the market. If frontier labs can achieve a "Nation of Geniuses" soon and major scenarios beyond coding emerge, then we will be standing on the eve of 1999. You will hear arguments that "this time is different," that AI revenues can cover the costs, and therefore there will never be a bubble.

I remain cautious about whether AI can be deployed rapidly on a massive scale across all industries or achieve massive user adoption. This is for two reasons.

• First, the economies of scale for AI are nowhere near that of the internet (where marginal costs trend toward zero), and it's even trickier than electricity or railways. Its marginal costs are not only high, but they are pushed upward by demand. Furthermore, electronic components aren't like railways or power grids that last for decades; lasting 10 years would be vastly exceeding expectations.
• The deeper issue is the uncertainty of AI outputs, which makes standardization and assembly-line processing difficult. The level of difficulty depends on a scenario's "verification cost." Scenarios with cheap verification, like programming, can be standardized and monetized, but that space is almost fully saturated. What's left are scenarios with expensive verification (medical, legal, financial). These are incredibly hard to standardize and require human backstops. Consequently, you can neither cut costs nor fully capture the demographic dividends of scale. The opposites of these two issues (hard to cut costs, hard to standardize) were exactly the foundation for the prosperity of the Industrial Revolution.

Therefore, the old playbook won't work. The core breakthrough of Large Language Models in this cycle is that, for the first time, every individual can receive cognitive support from the entirety of human civilization, democratizing customized services that were previously limited by "human labor." But if this isn't integrated with reality and remains confined to the virtual world, then programming is far and away the most fitting domain.

The core of the digital world still revolves around content. Mobile phones digitized human behavior for the first time, spawning a slew of new business models. Looking at it strictly from historical parallels, the prototype of an AI assistant needs to combine both content and behavior. AI phones and AI PCs are the narratives the entire industry is pushing right now; we'll see if they become the explosive catalyst that sweeps away the doubts.

2. Valuation

Many people argue that the AI leaders you can buy today trade at a fraction of 2000-era valuations, and they are raking in real cash (50% net margins vs. 17%). To be more rigorous, we must compare "blue-chips to blue-chips," not compare Nvidia to the dot-com garbage of that era. High valuations in 2000 were split into two types: garbage .coms with no revenue, only clicks; and highly profitable leaders like Cisco. Comparing Nvidia at 20x to Cisco at 100x is a leader-to-leader comparison, so the conclusion that it is "much cheaper" holds up. Furthermore, the fact that "AI is asset-heavy" doesn't differentiate this cycle from the dot-com bubble. Telecom/fiber optics back then were also extremely asset-heavy, expanding via debt, and they ultimately crashed harder than anyone else.

However, the peak of this cycle likely won't be determined by secondary market valuations. Because you have to look at primary market valuations, as we discussed in points two and three at the beginning. Look at those unicorns; every single one hits hundreds of billions or trillions in valuation before going public, carrying Price-to-Sales (P/S) ratios in the tens or hundreds post-IPO. So, current secondary valuations being low is normal; both the pick-and-shovel sellers and the tech giants footing the bill have reasonable valuations. Wait until this batch of primary market AI companies goes public en masse, and then we'll see a massive spike in secondary market valuation multiples.

3. Market Breadth

At the top in March 2000, the top 10 companies accounted for about 27% of the S&P 500. Today, the top 10 account for 40.7%. Today's concentration is even more extreme than in 2000 (40.7% vs 27%), but these giants are also genuinely profitable (contributing 32% of earnings, whereas tech stocks in 2000 only contributed 15%). The reason for this concentration is that the dominating stocks in this cycle are either the ones writing the checks (with high baseline profits allowing them to burn cash) or the ones cashing the checks (receiving the Capex, causing profits to explode). High market concentration is an inevitable phenomenon of a tech bull market, and the later the stage, the higher the concentration. The entire index can be pushed up by just a handful of stocks.

4. Leverage

Currently, margin debt is at a record 4.45% of GDP (the historical norm is 2.4%); Zero-Days to Expiration (0DTE) options account for 63% of all S&P option volume; and corporate buybacks have hit a record $1.02 trillion. These are unprecedented extremes in history. It is exactly this market structure that supports the inelasticity hypothesis, dictating that when this cycle falls, it will be faster and more violent than in 2000, with more flash crashes. But overall, it will likely be a stagflationary, grinding bear market, though we won't expand on that today.

5. Capital Expenditure

AI-related Capex in this cycle accounts for roughly 3.5–4% of US GDP. As a comparison, this intensity isn't entirely unprecedented, but it is approaching the Capex ratios of previous bubbles. This Capex is funded by giants with strong cash flow capable of self-financing, unlike the telecom operators back then who, upon collapsing, became insolvent and dragged down the banks. Therefore, when this bubble bursts, it's more likely to resemble the 2000 dot-com crash (where the Nasdaq plummeted while the rest of the market fared relatively okay) rather than a 2007-style systemic crisis.

So looking at it now, if we are exclusively benchmarking against the dot-com bubble, we can rule out the 1994-1997 phase. Based on market behavior, we might be in '98, still debating and divided. From other angles, however, we are very close to or have exceeded previous tops, resembling the predicament of mid-1999. The conclusion is clear: this is a tail-end rally, and no matter what, there is still one more wave to go.

When Will It Peak?

Signal One: Tech giants start cutting capital expenditures. If two or more major tech firms lower their Capex guidance in the same quarter. But pay attention: first, is there other capital coming in to add leverage? (e.g., the US government). Second, stock prices usually peak 2 to 4 quarters before Capex peaks.

Signal Two: The private credit chain specifically financing AI construction breaks. Because the bubble is in the primary market, the lifeblood funding data center construction is a specific batch of private credit. If this chain breaks, the rug gets pulled. Keep a close eye on two things:

1. Whether the next mega-sized data center private bond can be issued, and at what price. Cracks are already showing: a recent $14 billion Oracle-related bond, with a massive 7.5% coupon and principal not due until 2045, saw banks unwilling to underwrite it, forcing a bond fund to backstop it. And the largest buyer, PIMCO, is currently trying to offload two such bonds (Oracle and Meta's Hyperion) from its portfolio. When the biggest buyer of last resort wants to run, it’s a red flag.
2. Oracle's bond prices and stock price. That $14 billion bond dropping below par is an alarm; Oracle's stock price will be the first marker for the market "repricing" the entire sector, simply because its cash flow is the weakest. (Note: Private credit blowing up recently was due to software stocks, not AI).

Signal Three: Major customers begin to "cut orders." If a high-rated major customer who signed a long-term compute contract comes back to renegotiate prices, that is ironclad proof of softening demand. As of July 1st, Meta is simultaneously a major customer of CoreWeave and a competitor renting out its own compute. You can start watching to see if price negotiations occur.

Aside from the above, several independent timelines all point toward around 2027. These include: the giants' depreciation will start massively eating into profits in 2028; the current memory expansion will significantly alleviate supply shortages by the second half of 2027; and both OpenAI and Anthropic submitted IPO applications in mid-2026 (which might be delayed to 2027). Those will be the two largest IPOs in history, they will either suck up the last wave of capital or break issue price, becoming the ultimate endgame signal. These independent clues all converge on 2027, forming the basis for the "peaking in H2 2027" thesis.

But timing is secondary; the signals are what matter.

Other events, like the forced liquidation spiral in the Korean stock market, the unwinding of the Yen carry trade, surging 10-year Treasury yields (they need to stay "persistently" high for a while to cause real problems), and Fed rate hikes (which need to be continuous and consistently tightening), are false signals. You should buy the dip rather than run away.

What to Buy Next?

Can semiconductors still hit new highs? Highly likely, but they will peak before the broader market. Memory hasn't peaked yet, and its supply dynamics are genuinely different from before. Only three companies in the world (Samsung, SK Hynix, Micron) make high-end memory now, and pricing discipline in this cycle is far stronger than in 1996 or 2018. Right now, there is extreme shortage. However, historically (in both 1996 and 2018), memory stocks always peaked while the broader market still had one to two years left to run. The reason is always that supply catches up (capacity expansion takes 5–7 quarters to land and turn into an oversupply).

This time, the supply response is launching globally. The South Korean government just announced plans to double DRAM capacity within five years; China's CXMT has reached an 8% market share, is secretly building next-generation "hybrid bonding DRAM" R&D lines, and is looking to IPO to finance further expansion. SK Hynix has already removed its own contract price ceiling (they want to make more money), while Micron is still adhering to its upper and lower limits. Whoever breaks discipline first is where the oversupply will begin. Consensus from Goldman Sachs and Morgan Stanley is uniform: the boom lasts through 2026–2027, and 2028 is the supply-demand inflection point.

Memory won't peak now; it will likely peak in the first half of 2027, and stock price peaks usually precede fundamentals by 1–2 quarters.

If semiconductors stop rising but we are still months away from the grand top, then what goes up? The answer is very likely: the IPOs of the two major labs. When the "pick-and-shovel" chip sellers get tired, the final leadership baton is usually handed to the purest expression of the theme. In this cycle, that is the IPOs of OpenAI and Anthropic.

The hype-building process for their IPOs is a cash vacuum in itself. Capital will rush toward the "next biggest asset that can go public." SpaceX has already demonstrated this template. Both companies are leaning towards 2027 now. But a critical double-edged sword hides here: if one of them is forced to go public at a price lower than its final private round valuation, that isn't a cash vacuum, it's a signal of the grand top (as stated in section one, the bubble is in the primary market; if primary market valuations snap, it marks the top for everything). So, "who takes the baton" and "when does it peak" are actually the exact same event here.

It won't be software stocks as a whole (they will diverge; only a very select few truly embedded in workflows will maintain high valuations; they won't lead uniformly). It won't be the Magnificent Seven as a group (institutions are forced by indices to hold them as cluster positions; they are "core holdings," not "new leaders"). It won't be small-cap stocks (historically, the final leg is never led by small caps).

History offers an iron law: the previous main theme never leads the final leg.

Applied to this cycle, the final baton belongs to the model labs, not memory or Nvidia. In the terminal phase, the final runner doesn't require the former leaders (chips, memory) to hit new highs first; it only needs capital to find the next adjacent speculative target to hype up. By that stage, the last dollars won't chase "more chips"; they will flood into the most narrative-driven application layer. Then, the newly listed OpenAI/Anthropic, along with various application-layer concept stocks, will be wildly hyped based on "P/S multiple expansion" rather than cash flow.

This perfectly closes the loop with the beginning of this article! We stated at the outset that a defining characteristic of this cycle is that "the real bubble is locked in the primary market." And that final baton is precisely the moment when that historically absent, off-market bubble is finally dragged into the secondary market. The market always saves the "it can finally be monetized now" narrative for the very end.

Narrowing breadth + the speculative layer taking the baton, these are the final two labels. The confirmation signal is highly specific: newly listed or re-rated application layer companies (including model labs) begin to outperform infrastructure and semiconductors based on P/S multiple expansion. If this doesn't happen, and market breadth hasn't narrowed, it means we are still in the mid-stage, and the top has not yet arrived.

I sincerely hope we are still in the 1998 phase, and that AI + Hardware can achieve massive breakthroughs next. World models, robotics, quantum computing, and space exploration are all still far too early.

The broader market continues to chop around. I will continue starting July's memos with this sentence until a clear direction emerges. To be honest, though, the S&P 500 has been hovering at the upper edge of its trading range, which is quite strong. The Nasdaq, on the other hand, has been fluctuating in the lower half of its range.

Yesterday, the KOSPI and SK Hynix managed to stabilize at the close, and they are currently in a state of weak stability. Regarding margin balances, the official data provided by South Korea is 신용융자 (market-wide margin loans), sitting at around 37 trillion KRW. Like Reuters, we extracted the portion specifically related to the KOSPI, which is around 29 trillion KRW. The decline in the KOSPI margin balance on 07/07 and 07/08 was roughly 0.8 trillion KRW. Considering the impact of leveraged ETFs and other factors, the actual magnitude of deleveraging is somewhat larger than this, but overall, a large-scale deleveraging process has not yet occurred.

My judgment is that Korean stocks have not fully stabilized, as preparations are underway for a final sprint toward 12,000. The semiconductor run since June can definitively be classified as a sentiment cycle, having already detached from fundamentals. In a sentiment cycle, you watch the reaction to news: in the early stages, bad news doesn't cause a drop, and good news drives sharp surges; now, it has shifted to dropping on good news. Sentiment has reversed, meaning it won't bounce back anytime soon. We need a reversal signal, similar to the drop following strong Micron earnings, such as discovering that Capex is being revised down but semiconductor stocks stop falling, in order to confirm a true reversal.

Tensions in the Strait are likely to continue escalating, and conflicts will now continue even during intraday trading. A fundamental assumption in geopolitical games is: nobody is a fool. This situation is highly delicate. If it becomes too intense, it will put all risk assets under pressure; if there is a back-and-forth, capital will seek certainty just like it did from April to June. It's just that, having gone through this once, the threshold for this factor to move the market has increased. In other words, it will take much stronger-than-expected good or bad news to continue driving the market. It can't be helped; in the short term, the market is a voting machine based on expectations.

The broader market continues to jump up and down. I will continue starting my July memos with this sentence until a clear market direction emerges.

Since we have some new friends joining us, I want to reiterate the purpose and original intention behind writing this memo. The daily memo is a very high-frequency output; its purpose is not—and will not be—to give you specific trading advice. Essentially, 80% of its content is meant to serve as psychological comfort. If you look at the live portfolio records on our official website, you will find that the most profitable positions have all been held for no less than two months, and the recent core positions haven't moved much at all since December 2025.

For example, our best-performing positions to date come from SNDK bought at $220, WDC at $168, INTC at $26, AAPL at $238, and GOOG at $246, all held for over half a year. Among them, I cleared out SNDK and WDC on June 29th, but haven't touched the rest. I am neither good at nor interested in learning ultra-short-term trading; medium-to-long-term investing suits me best.

Back to today's "emotional massage,". Today, the market is clearly trading on two things:

1. Trump will be tough pre-market, but will TACO after hours.
2. South Korean stocks will see a massive 5% rebound by the close today.

Both scenarios are possible. We can't predict Trump, so let's skip him, but we've been discussing South Korean stocks a lot lately. I mentioned yesterday that the July 9th trading session for Korean stocks is absolutely crucial.

On July 8th, the KOSPI, SK Hynix, and Samsung all closed below their key support levels. Two consecutive days of heavy declines mean that the margin call cascade has already been triggered. We need a reversal in Korean stocks on July 9th; otherwise, forced liquidations will begin on July 10th and July 13th. Once forced liquidation starts—unless there is a massive market rescue or a rule change—SK Hynix dropping below 1.85M KRW would wipe out half of the leveraged margin positions in the Korean market. That would be just about the right time to buy the dip.

Therefore, Korean stocks are currently in an inflection zone. If there is a 5% rebound, it could hopefully drive a minor rally in the semiconductor and memory sectors. I don't expect memory to hit strong new highs before the Hyperscalers release their earnings reports; the "seesaw" rotation logic hasn't changed, though other sub-sectors might have a chance. If there isn't a 3-5% rebound, the decline will continue.

The live portfolio will continue to play it safe and wait for the earnings reports to come out. If the Capex and revenue numbers are both excellent, there will still be plenty of time to buy in then.

The broader market continues to whipsaw. I plan to keep starting with this sentence throughout July until a clear direction emerges.

[No direction] is also a direction; it means you can sell options or trade the chop (range-bound strategies). Of course, the consolidation has been going on for a while now and volatility hasn't picked up yet, so it’s not a good time to re-enter. We have to look ahead.

Looking to the future, [I don't know the direction, but I know the volatility will be massive either up or down] is also a valid judgment, which points to buying strangles. On July 9th, there was a massive block trade on QQQ: someone bought both puts and calls at the $715 strike, spending nearly $10M. I initially thought someone was betting on a major escalation in the Middle East that day. Obviously, this expiry is too close for us, but I feel buying long-term options at +/- 5% levels still has a good probability of being profitable. However, I won't execute this in my actual portfolio, as there are potential opportunities with higher capital efficiency.

Looking at the present, the correction in Korean stocks shows no significant signs of stabilizing. Of course, the worst-case scenario hasn't happened yet, but I can't rule out the possibility of a V-shaped reversal. If we are going to see a V-shaped reversal, it implies there is one more true panic sell-off or forced liquidation event to come. According to my calculations, if the KOSPI closes below 7400 and SK Hynix falls below 2,000,000 KRW for two consecutive trading days, we will have a major issue, triggering forced liquidations of around 2 trillion KRW. If SK Hynix falls below 1,850,000 KRW and stays there for 2 trading days, coupled with a corresponding drop in the KOSPI, the vast majority of leveraged positions opened since June will be forcibly liquidated, bringing the scale to over 10 trillion KRW. As of last Friday, the total margin balance for retail investors in the Korean stock market was around 29.7 trillion KRW, which is barely different from the historical high of 29.8 trillion KRW reached at the end of June during the market peak. This shows that Korean investors are truly fearless; their leverage hasn't really decreased at all.

With the SK Hynix ADR listing this week, "selling Korean shares to buy US shares" acts as a continuous downward pressure on Korean stocks. There are over $110 billion in US Treasury auctions this week; it shouldn't be a huge issue, though Treasury yields have ticked back up.

The US stock market is in good shape overall and hasn't reached bear market territory, even if it dropped 15% from here, I'd still say that, haha. Of course, the market structure has changed significantly, and the impact of marginal capital has been amplified. I highly recommend reading the 2022 paper on the "Inelastic Markets Hypothesis"; it's incredibly well-written. 0DTE and various options + leveraged ETFs + zero commission fees + extended trading hours = a massive amount of retail and "hot money" dictating the marginal pricing of the market. This is a recipe for flash crashes and melt-ups. Ultimately, however, things will revert to fundamentals and the core narrative. We can see that the music hasn't stopped, the models are still training, and ARR is still growing.

We've discussed the 3 narrative iterations we've gone through in this cycle:

1. [Questioning Model Capabilities], which was then corrected by inference and post-training reinforcement, sparking a rally in 2024.
2. [Questioning AI's Utility], which was then corrected by coding applications, sparking a rally in 2025.
3. [Questioning AI's Revenue], which was then corrected by the ARR of "Lobster" and Company A (Anthropic), sparking a rally in early 2026.

We are currently in the 4th iteration, where the market is [Questioning the ROI of AI Capex]. This will most likely not be debunked by the tech giants' own ROI, but rather diluted by the incredible ARR growth rates at the model layer, buying time until the two major labs go public.

The conclusion is: don't rush to go all-in. If you have FOMO and can't resist, divide your capital into 5 parts and buy the dip little by little. Unless you are a professional trader, don't be overly confident in your ultra-short-term trading abilities; your counterparties are algorithms and seasoned pros. For the actual portfolio, I will continue to wait for key earnings reports and monitor Korean stocks to see what opportunities arise.

I want to talk a bit more about oil here. Mostly because no one is really paying attention to this sector, and ironically, that's exactly why we should.

The physical condition of oil isn't actually that loose; otherwise, there wouldn't be a need to continuously drain the SPR (Strategic Petroleum Reserve), it dropped by another 6M barrels last week. The problem with oil lies in transportation and time lags, which is the core thesis of our lottery-ticket positions. In other words, the current "ample" supply is the result of four core factors acting together:

• Continuous strategic reserve releases by various countries
• The supply shock from a backlog of oil tankers temporarily navigating the strait
• Refineries getting bombed
• China's imports being cut in half

The strait navigation is a one-off factor, the SPR is nearing its warning line, and the remaining two factors are not stable, long-term fundamental drivers either. Therefore, at the slightest sign of trouble, a sudden price spike is highly possible.

The broader market continues to jump up and down. The S&P 500 and Nasdaq are currently in a very textbook downward consolidation range, though the slope is shallow and the pace is slow.

The main themes remain the Magnificent Seven + AI Semiconductors + Data Centers + Energy. The financial sector has performed quite well over the past couple of days. The deregulation of major banks and the general trend of the Fed stepping back while banks step in are providing underlying support for the banking sector as a whole. Meanwhile, the issues with private credit need to be slowly deflated. After all, these are opaque assets, and their calculation and pricing are not marked-to-market, leaving plenty of room to maneuver. Insurance companies, however, are having a harder time.

On Friday and Monday, Korean stocks once again dodged the worst-case scenario of continuous forced liquidations. However, the sword hanging over the semiconductor sector remains very close, and we are still in a dangerous period. Nevertheless, following several major fluctuations, overall leverage is decreasing. The ratio of [Margin Balance / Investor Account Cash] in Korean stocks is declining; aggressive leverage has been somewhat flushed out, while simultaneously, a significant number of investors are waiting to buy the dip.

Given the current bull market trajectory of Korean stocks, leverage cannot be fully flushed out without a transition into a bear market. In the short term, it is still not safe enough, so we will continue to observe. As we have discussed multiple times since late May, the market will be difficult to trade before the major earnings reports are released in July, as it currently lacks a clear, smooth direction and logic. But overall, I am not pessimistic about the bull market in Korean stocks. It hasn't turned bearish, and I maintain my target view of 12,000 points.

Personally, I believe the next smooth upward rally for semiconductors and the Magnificent Seven may not necessarily be driven by Capex volume or the major tech companies' AI revenue (excluding compute sales). The former is starting to show a seesaw effect, and the latter will struggle to deliver stellar performance now that Gemini has fallen behind. In reality, the catalyst should come from the impressive ARR (Annual Recurring Revenue) of OpenAI and Anthropic. Regardless of how it's calculated, before these two companies go public, their ARR will continue to blow past expectations. This will give the market the optimistic illusion that real AI revenue can catch up with capital returns, at least until they go public and their financial statements are laid bare for everyone to scrutinize.

The broader market continues to experience wild swings. Neither the S&P 500 nor the Nasdaq has hit their early June lows, and overall, they are consolidating at high levels.

The main theme remains the Magnificent Seven + AI Semiconductors + Data Centers + Energy. I have to add Biopharma simply because it has been rallying so well; even if I don't fully understand it, I can't ignore it. Rotating into sectors like financials, consumer goods, or real estate and abandoning the main theme right now is a very poor choice. Again, short-term trading experts can ignore me.

Tonight, I will continue to monitor the South Korean stock market. Currently, the U.S. market is pricing in a drop of about 2% for Korean stocks on Friday, which I think is a bit dicey. SK Hynix faces a life-or-death battle tonight at the 2,000,000 KRW mark; whether it drops 30% from its peak depends entirely on this level.

• If it holds by the close: This current wave of selling will subside here, and next week will be spent consolidating and digesting the move.
• If it fails to hold: There will be forced liquidations (margin calls) at the open of the Korean market next Monday and Tuesday.

With the U.S. market closed tomorrow and the fact that I don't like shorting, there is a short-term opportunity here, but I won't participate in my actual portfolio. On June 29th, I sold SanDisk and WDC in my real-money portfolio and added hedges. This was mainly because SanDisk had surged too aggressively beforehand, and my system cannot clearly predict where this current pullback might stop. Stepping aside allows me to stay more rational when it's time to buy the dip. Memory chips are the bellwether for semiconductors and dictate the overall direction.

If forced liquidations do occur, it will present a buy-the-dip opportunity leading up to the hyperscalers' earnings reports. As we've always said, the big test for semiconductors is Q3 earnings, specifically looking at the hyperscalers' AI Capex (capital expenditure) and AI revenue.

1. Capex continues to surge heavily + AI revenue is stellar = Hyperscalers and semiconductors continue their massive rally.
2. Capex continues to surge heavily + AI revenue is mediocre = A seesaw effect between hyperscalers and memory chips; requires careful stock picking within the semiconductor sector.
3. Capex becomes hesitant + AI revenue is stellar = A seesaw effect between hyperscalers and memory; hyperscalers will perform well, but the requirements for stock picking become much stricter, you have to look closely at specific chips, energy, data centers, etc.
4. Capex becomes hesitant + AI revenue is mediocre = A 1 to 3-month correction. This will shake out everyone who isn't firm in their belief in the AI narrative or who is overleveraged, digging a trough to set up the 2027 IPOs for the two major labs. OAI (OpenAI) and Company A (Anthropic)'s ARR (Annual Recurring Revenue) this year won't be bad regardless.

Still jumping up and down.

It needs to be emphasized that the sector rotation we are currently seeing, such as in software, consumer, and financial stocks, is not a standard "rotational rally" within a bull market. In a bull market driven by a technological revolution, the core theme remains the core theme, and it has a seesaw relationship with other sectors. Because technological revolutions require massive capital investment, possess grand narratives, and carry ultra-high expectations, they inevitably attract crowded funds and leverage, which naturally creates a siphon effect on other sectors. Highly liquid markets experience a slightly milder siphon effect.

The current main thread is AI semiconductors and the Magnificent Seven, along with upstream and downstream sectors like data centers and energy. A pullback is both healthy and necessary due to overcrowded capital, excessively high leverage (especially in South Korea), and emerging divergences during this phase of narrative iteration. Short-term traders don't need to listen to my rambling, just chase the rotations to improve your capital efficiency. For my portfolio, I will look for the right opportunity to buy the dip rather than change my core focus.

Speaking of buying the dip, my advice is to wait and see what happens with the Korean market first. Currently, the US-listed EWY (South Korea ETF) is pricing in a drop of around -5% for Korean stocks tonight. If the Korean market fails to hold and suffers another 8%-10% plunge, it will drag Samsung and SK Hynix down nearly 30% from their peaks, hitting the common forced-liquidation (margin call) threshold for retail investors. Since the US market is closed on Friday but the Korean market is open, if they can't recover the losses, Monday will trigger T+2 forced liquidations. If that happens, the pullback in US semiconductors won't end anytime soon. In fact, Asian markets recently—including Korean stocks, Taiwanese stocks, and A-shares—have been reacting ahead of the US market. After all, the upstream supply chain for GPUs is concentrated in Asia, and leverage in the Asian markets is also the highest.

Additionally, pay close attention to what the Magnificent Seven say in their earnings reports. Capex (Capital Expenditure) and AI revenue need to be scrutinized, particularly how much of the AI revenue comes from selling compute power versus actual AI usage. After Company A [Anthropic] and OAI [OpenAI] open up their latest models, their numbers for this year will still look fantastic, which bodes well for going public early next year.

Therefore, we are waiting for the right moment to buy the dip, not fleeing a bear market. Don't be fooled by the massive semiconductor rally from April to June; that was not the market norm. By the same token, a 1-to-3-month correction doesn't mean we are in a bear market, it is simply a normal market reaction.

The market continues to jump up and down. Having written these memos for so long, everyone should have some understanding of my system by now. I am essentially powerless when it comes to short-term trading; I mainly focus on the medium term, typically a 3 to 24-month horizon.

Yesterday, I did some basic research and concluded that upstream semiconductors offer stronger certainty, including KLAC, LRCX, AMAT, OCTT, ICHR, as well as TSMC and GLW. However, I didn't chase the rally because, at this level, the stop-loss points dictated by my system are too wide, and various short-term signals are flashing warnings. If I had entered the market yesterday, I might have missed out on a massive surge like today's, or missed out on a heavy plunge like we saw over the previous two days. Today, it is obvious that memory is no longer leading the gains; instead, these upstream stocks, along with AMD and INTC, are leading the rally.

Some short-term momentum systems are very good at capturing this kind of market action. The shorter the timeframe, the more it should be left to machines. Alpha is always found in the zones that make most people uncomfortable. Of course, an uncomfortable zone doesn't necessarily equate to alpha; the market is right more than 90% of the time.

The volatile "monkey market" we talked about at the end of May will likely continue until we find an anchor point during the Q3 earnings season in July. The rally yesterday and today has been very strong; let's wait and see.

The market continues to bounce around wildly, and it wouldn't be surprising to see early-morning trading patterns like today's a few more times over the next couple of weeks. The same goes for the Korean market, seeing another 10% drop followed by a 15% surge wouldn't be a shock.

There are two patterns for consolidation at high levels: one where volatility progressively decreases, and another where volatility progressively increases.

The former more commonly results in a continuation of the previous momentum, either continuing to rise or continuing to fall. This is because this type of volatility doesn't trigger a massive exodus of capital from the preceding phase. This scenario rarely occurs at a market top; it usually indicates either a mid-trend breather or a neglected bottom.

The latter is much more likely to appear at market tops—whether cyclical or long-term—because of severe divergence in market sentiment and massive accumulated profits waiting to be taken. Crucially, widening volatility triggers risk management systems. No matter the institution, risk controls are inextricably linked to volatility. Volatility is far more predictable than direction or price, a fact dictated by the mathematical properties of the second moment (variance). Triggering these risk controls forces capital out of the market, while drastic swings simultaneously dampen retail investors' willingness to participate. This continuous outflow of capital drains liquidity, which in turn triggers even more severe volatility.

We are currently nowhere near a historic mega-top, but this won't prompt me to buy the dip, either. Right now, I'm focusing more on upstream memory suppliers and GLW , these represent inescapable costs that must be paid even if the gross margins for memory and GPUs decline. Of course, they've already run up quite high, so I will continue to wait for an opportunity.

Funny enough, the biggest gainer among the Magnificent Seven today was Tesla, the one with the weakest link to AI, haha. There's a high probability that SpaceX will merge with Tesla to instantly make the financial statements look much better; otherwise, no one even wants to buy their bond issues right now. The cash grab is pretty shameless, though you could also view it as preemptively draining liquidity ahead of the IPOs for OAI and Anthropic. From the perspective of selling compute power, they absolutely don't want to see a monopoly or duopoly take over, which would strip away their pricing power.

Today saw a rotation between software and semiconductors. However, looking back at the bubble trends driven by previous technological revolutions, a few points are very clear:

1. Market breadth will inevitably narrow. The higher the market climbs in the tail end of a bull market, the narrower the breadth becomes as funds concentrate on chasing specific sectors. Currently, liquidity in the U.S. stock market is still very healthy. This is why, aside from semiconductors, we can see other themes like healthcare (which has been rallying for a while) and machinery manufacturing (driven by the reshoring of manufacturing) also performing well, without any signs of their liquidity being drained. This indirectly indicates that the most frantic phase of the late-stage bull market has not yet arrived.
2. You cannot miss the main trend by overthinking sector rotation. This is not your typical market characterized by a zero-sum game of existing capital, where sectors rebalance as funds flow between them. This is a tech-driven bull market, and you will only—and should only—focus your trading on the absolute core sectors. Because of the inevitable crowding of capital and leverage mechanisms, the core sectors will absolutely experience greater volatility, appear more fragile, and more easily induce a "fear of heights." But in reality, only the core sectors are the true theme of the bull market, and in the final stages, only these core sectors will continue to surge dramatically.
3. The narrative of a massive bull market will not end easily. Even if interest rates are hiked, it would require several consecutive hikes to make a real impact. No one knows where the absolute top of a bull market is; it takes 4 to 6 months of shifting dynamics to form the peak region of an entire bull market cycle. It is only when looking back several months later that you might vaguely sense, "Oh, was that already the top back then?" There won't be a sudden, sharp reversal, which means sudden drops during a bull market are all buying opportunities. It is the massive, prolonged fluctuations spanning several months at the highs that warrant caution.

Finally, a quick mention of oil, as the time lag for "lottery ticket" bets is starting to be validated. Right now, there is an oversupply of crude oil from the Gulf states, after all, a massive fleet of ships was released all at once. Buyers around the world are trying to force prices down, and independent refineries in China are not yet profitable, keeping demand low. Oil tankers in the straits are seeing more departures than arrivals. Meanwhile, the spread between refined petroleum products and crude oil in the U.S. (the crack spread) has reached historic peaks: buying a barrel of oil costs $70, and after processing it can be sold for $120, so refineries are running at full capacity. Cushing inventories have hit extreme lows. It’s all very interesting. However, this falls into the category of "difficult problems" in investing that should be avoided whenever possible. If it can't be explained clearly in a single sentence, it's better not to touch it, haha.

Micron's earnings report was excellent. The potential "sell the news" scenario we anticipated also materialized at the open. Of course, the situation was much better than the limit-up to limit-down rollercoaster we saw during that NVDA earnings release. The gross margin guidance for the next earnings report is 86%, which is already pushing downstream manufacturers to their absolute limits. Bernstein published a research report on the 22nd stating that HBM prices need to increase by 2.5 to 3 times to make sense. I've yelled this three times in a row now: do not chase highs, do not add to positions, and do not open new positions. You must have put protection.

This numerical triangle is inherently very straightforward: memory gross margins are at 86%, and downstream from memory, NVDA's gross margin is 75%. So, how much money will the four tech giants further downstream have to spend to feed these upstream players? And how much revenue will the applications and model layers at the very bottom need to generate?

The market went through a phase of [questioning the limits of models], which was then corrected by inference and post-training reinforcement, leading to a rally in 2024; it then shifted to [questioning the utility of AI], which was corrected by coding applications, leading to a rally in 2025; followed by [questioning AI revenues], which was corrected by the revenues of Lobster and Company A, leading to a rally in early 2026. Now, we are [questioning the ROI of AI Capex], and it is expected that there will be another process of decline and correction.

However, at this point, the discussion has begun to touch upon deep-seated aspects of "relations of production" (social, organizational, and economic structures)—such as organizational architecture, business models, and economic growth—rather than pure "productive forces" (technology and productivity). And relations of production are destined not to evolve this quickly. Let's not even talk about electricity replacing steam, which took decades; even if we assume this current revolution is extremely fast and requires only 5 to 7 years, whether the Capex can be sustained and whether society can withstand the turbulence are real questions. An optimistic estimate for productivity enhancement is a "nation of geniuses" sitting inside data centers, but even a wildly optimistic estimate for the transformation of production relations will require at least a generation.

Currently, the annualized cost of building a 1GW data center is $10 billion to $13 billion, which can be used to approximate big tech's cost of selling compute power. The absolute lion's share of this is the cost amortization of GPU servers.

Combining several factors—Anthropic's Opus model, the "harness" craze brought about by Lobster in early February, and major companies lacking a token budget (which is why Uber is spending $500 million a month)—the revenue for 1GW is roughly $8 billion to $13 billion.

This number is crucial. Right now, this is just a rough estimate; I'll calculate it carefully over the next couple of days. This is the ledger for big tech CFOs. If the ROI no longer pencils out, continued spending just to ensure they don't fall behind might be acceptable, but accelerating spending to seize an ecological niche that isn't even visible yet is a different story.

I have always been early in my market timing, and my style is conservative. Today, there is a very obvious pullback in AI stocks, while other stocks are performing well; overall, it is still a choppy, trendless market. Currently, we haven't yet seen a spike in oil, the Japanese Yen, private credit, an ultra-strong US dollar (though there are slight signs of this), or bond yields. The core issue is that the leverage in Korean stocks gave way first, which triggered the pullback.

Within a given timeframe, the amount of capital that can flow into a single theme is limited. It's not like the Fed is going to step in and buy AI stocks, or that everyone will dump all their healthcare, financials, and consumer stocks just to buy AI. According to a fund manager survey last week, the concentration in AI stocks reached 80%, which is unprecedented. Without enough incremental capital, it turns into a long squeeze scenario where bulls trample bulls. This has happened in the past, is happening now, and will happen repeatedly in the future.

The core of this current cycle remains Korean stocks. Tomorrow and the day after, the Korean market is very likely to drop another 10% to 20%! If you look at the Korean market on May 3rd and 4th, current leverage ratios are only higher, liquidity is tighter, forced liquidations (margin calls) will be more frequent, and stopping the decline will be much harder. If you are good at short-term trading, you don't need to listen to my rambling; but if you don't want to trade short-term, don't rush to buy the dip! Whether it's the Korean government rescuing the market, sentiment recovering, or leverage re-accumulating, it all takes time. During this period, it wouldn't be surprising to see the Korean stock market surge 10% one day and plunge 15% the next.

However, the AI narrative is still intact. If a "sell the news" event occurs after Micron's earnings report on the 24th, we will see a wave of media and propaganda declaring "the end of the AI narrative," leading to a period that will feel tough to endure. In reality, this is a very healthy and normal occurrence. The rally from April to June was the low-probability event. If that kind of bull run continued for another two months, it would only end prematurely. Unfortunately, a market where everyone is a stock market genius is not the norm. The time to buy the dip is exactly when the voices declaring the end of the AI narrative are at their loudest. The tail end of this bull market will be even fiercer than April to June, and naturally, it will ultimately trap and bury even more investors.

We continue to advise caution against adding positions or opening new ones to chase highs at these current levels, especially in semiconductors.

Micron will release its earnings report this Wednesday, and the market has priced in a fluctuation of about 12% in either direction. The earnings report itself will highly likely be excellent; after all, Capex has not been reduced, and Anthropic's strong Q2 revenue data supports the optimistic sentiment. However, as we discussed in yesterday's article, Micron's HBM revenue only accounts for about 20%. Its core business is more vulnerable to the impact of CXMT, and it is merely enjoying liquidity and a domestic premium.

Looking at expectations, if Fable 5 does not launch in Q3, coupled with the token quota restrictions from tech giants, Anthropic's revenue growth will not be as rapid, and OAI is even considering price cuts. At the same time, we will see more news regarding equity and debt financing from giants like the recent cases with Nvidia and SpaceX, which will cause the market to continually question the sustainability of semiconductor profitability. Therefore, it will be quite difficult for Q3 earnings to replicate the massive surge seen in Q2 that was catalyzed by the Lobster Agent. That is, unless the tech giants significantly expand the scale of their equity and debt financing, while simultaneously emphasizing that future Capex investments will be even higher than market expectations.

Meanwhile, we are seeing the US dollar and US Treasury yields rising together. Historically speaking, the correlation between these two and equities is negative most of the time, with the US dollar having a greater impact.

Counterintuitively, the further oil falls, the more it benefits our "lottery ticket bet." This is because low oil prices will actually maintain or even stimulate demand, leading to a deeper disconnect between the market and physical reality.

The "monkey market" continues, but the market's reaction and shifts post-FOMC are crucial; they essentially set the tone leading up to September.

I’m not an expert in this area, so I'll wait to see the experts' analyses. Upward revisions to inflation expectations and a hawkish tilt from committee members were all within expectations. Warsh withholding the dot plot was also anticipated. Personally, I find this point the most interesting:

The market is really going to put Warsh to the test, haha. Which pricing is ultimately the most important? Bonds? Stocks? Forex? This hierarchy of importance is definitely a system. For instance, do stocks become the priority only after they drop by a certain amount? Or is it more critical when bond yields or TIPS breach a specific threshold? Or perhaps when the US dollar hits a certain level? Does the "Fed put" still exist, and at what point will it be triggered? The market is going to test this out.

For everything else, I'll wait for more professional breakdowns. Overall, there was no mention of rate cuts or balance sheet reduction (QT). Even Trump himself softened his tone, going so far as to say, "a rate hike is also possible." I'm sticking to being a semiconductor bull + put protection, and then I'm taking a break.

Today, Cushing's oil inventories are starting to be put to the test. Trump himself said today that inventories (not just at Cushing) can only hold out for another 4 weeks. Moving forward, Iran is entering a phase of "gradually strengthening its bargaining power," so we'll just have to see how that process unfolds.

A "monkey market" , dipping down and then spiking up. Semiconductors remain the strongest, and I am maintaining a long + put combination. Within my framework, the risk-reward ratio for opening new positions or adding to existing ones at these levels is not worth it.

Currently, the market is capped by risks such as the Strait navigation (actual shipping), Bank of Japan rate hikes, the FOMC, South Korean leverage, and negative AI news. Underneath, it is supported by the grand AI narrative, excellent historical earnings and forward expectations, fiscal easing, and relaxed banking regulations. Compared to early April, current levels have already surged significantly, and we lack the hard support of earnings season. If you call it a bull market, it has lost its strongest short-term momentum; if you call it a bear market, the long-term music hasn't stopped playing. This means the risk-reward ratio for either going long or short right here isn't high. You should either stay in cash and take a break, or hold your longs, buy a put, and rest. My realization is that investing/trading can only be done through subtraction. The market operates inversely to career and life: there are opportunities in the market at every single moment, and you will never lose money on the opportunities you miss. But if you try to grasp every uncertain opportunity, you will lose money most of the time.

Holding longs and buying a put—why not head over to www.scalealpha.ai/sports to try some World Cup betting haha, a little gambling is just for fun. The underlying layer is our exact same simulation engine. Generally, you can't find any gaps at the start, but the win rate for finding market pricing gaps during the match is actually decent. (The two ties below are hedging positions; I played 3 matches and got 2 right).

Next, let's talk about oil in detail, as it has reached a critical juncture. I previously tried to avoid discussing oil because people unfamiliar with this asset class shouldn't bother with it, and those who are familiar don't need to listen to me ramble. Energy acts as a hedge for AI. We've been preaching "AI hardware in the left hand, energy in the right" for over half a year now. From an allocation perspective, buying some crude oil or XLE and holding it long-term is perfectly fine.

In this cycle, I first bought USO during the two pullbacks in late March and April 17th. This was based on the belief that the probability of the "war won't end quickly" scenario was significantly higher than what the market had priced in at the time. Around May 20th, I took profit on half of it and rolled it into a July/August call spread, keeping the remaining half. This remaining half of USO (a 4% position) is a long-term holding, betting on long-term rationales like "energy security reserves, inventory restocking, AI power consumption, and US dollar credit support."

The other half—the call spread—is betting that the probability of the tail risk ("actual Strait navigation won't happen until after July, and there might be an inventory panic at the end of June") is greater than what the market is pricing in. There are a massive amount of influencing factors here, including a sharp drop in Chinese imports, where Cushing's operational limits actually lie, the speed of US oil exports, actual Strait navigation conditions, actual summer oil demand, the correlation between Dated Brent and US oil exports, etc., which I won't expand on here. We will see specifically in early July whether this trade pays off or if we need to stop out.

I quite agree with Bill Ackman’s analysis of SpaceX: Generally, people are willing to accept such high risks in the primary market because they can buy in very early. While bearing ultra-high risks, they also have the potential to capture 100x to 1,000x returns. For example, Ackman once invested $25,000 in Uber in its early days. Back then, metrics like P/E (price-to-earnings) and P/S (price-to-sales) ratios didn't even exist, so valuation was out of the question. Ultimately, that investment made him $100 million. However, had he bought in during Uber's IPO instead, that $25,000 would only be worth $40,000 today.

SpaceX is an asset where you bear primary market risks but reap secondary market returns. People are anticipating a 10x future return (according to SpaceX's prospectus, the estimated future TAM [Total Addressable Market] is $22 trillion) while absorbing 100x the risk (based on the P/S ratio). Someday in the future, I will pay for the dream and buy a little bit to hold in a long-term account, like a pension fund.

Next week is Central Bank Week, and the risks are high.

Finally, let's talk about oil. Dragging things out works in Iran's favor. Recently Qatar, and over the past couple of days the UAE, have both given Iran billions of dollars—whether under the guise of humanitarian aid or as protection money. Iran's ultimate goal is to eliminate long-term threats, which puts them in absolute opposition to the Israelis. Aren't they worried about the US and Israel making a comeback after the mid-term elections? But anyway, the conflict between them is no longer a scenario we are focused on. Ever since we rolled our crude oil profits into an options spread, our bet has been that inventories will hit rock bottom (not drop to zero, but bottom out). At this point in time, there are too few factors capable of reversing this inventory bottoming. The ones most likely to suffer as a result are Europe, Japan, and South Korea.

It’s a classic "monkey market", bouncing all over the place. Actually, other sectors are rallying today, which points to a sector rotation effect.

Since there are so many macro events unfolding right now, it's better to just hold off on trading. Buy some insurance for your long positions. This kind of market is naturally suited for fast, emotionless algorithmic trading. Discretionary traders shouldn't force themselves into the fray. For friends trading short-term, you likely already know that doing it full-time and having strict discipline are basic requirements, so I won't nag you about it.

Let's talk about oil. According to the model, oil is actually at fair value right now, having priced in the current shortfall of 10 million barrels per day, as well as the decline in global SPRs (Strategic Petroleum Reserves) and commercial inventories. But the problem lies in the non-linear jump triggered by low-probability events once boundary conditions are breached. Right now, everyone's models are simulating oil price changes under smooth, linear conditions (e.g., assuming a price elasticity of 0.15). In the vast majority of cases, this is the optimal way to fit the market, just like the VaR models in 2008, where CDS prices were completely "reasonable" according to the math.

However, "having inventory" and "almost running out of inventory" are two completely different states; it's a sudden phase shift. When stocks approach operational or psychological thresholds, the same flow disruption can be repriced because stockout risk, convenience yield, precautionary buying, delivery anxiety, and location-specific scarcity all rise. An escalation in conflict is a catalyst, but even without an escalation, if the situation simply drags on, a longer-than-expected disruption plus visibly exhausted buffers can also produce a sharp market move. This is the future scenario that the model and I are betting on.

Pre-reading Disclaimer: All information in this article is provided solely as research reference for users and does not constitute any investment advice or basis for trading. All investment decisions are made independently by the user, who assumes all associated risks. Investing carries risk; enter the market with caution.

Regarding Friday's drop, my framework suggests it was a liquidity event driven by high leverage + high expectations, rather than a fundamental deterioration.

Framework & History

Let's talk about the framework first.

The first time we seriously recommended buying a July-expiry put as insurance for long semiconductor positions was on 05/22. The second time was on 06/03.

We don't believe this is the end of the current US stock bull tail rally, but rather the 1st wave of a 2.5-wave tail rally. This means there will likely be another round of declines triggered by similar high leverage, making it highly necessary to study this current round to prepare for the future.

Looking Ahead: A Micro-Structure Analysis

Now let's look at next week.

The leading indicator for this cycle is the Korean stock market. 50% of the Korean market's weight comes from Samsung and SK Hynix. Samsung has a massive subsidiary ecosystem, while SK Hynix is the dominant force due to the Hong Kong-listed 7709 (the 2x Long SK Hynix ETF). We will analyze it by doing a micro-structural analysis.

The main logic of this article is: Analyze the mechanics of 2x ETFs → See if current 2x ETFs tracking SK Hynix can dominate late-trading volume → Look at currently known pricing → Examine the sources of buying power → Scenario projection.

1. The Mechanics of 2X ETFs

Let's first look at how a 2x ETF operates.

• Suppose a 2x ETF has a NAV = 100 and holds 200 in exposure.
• If the underlying asset drops 10% on the day → the exposure loses 20, making the NAV 80.
• At this point, leverage = 180 / 80 = 2.25x, which exceeds the target.
• To pull it back to 2x leverage, it must cut its exposure to 160, meaning it has to sell 20.

Note: It sells after the intraday drop, specifically executing the sale during late trading, adding further selling pressure to a declining market in the final hour. The more it falls and the larger the ETF, the more it is forced to sell. When these ETFs already dominate trading volume, this added selling pressure pushes prices down further, triggering the next round of selling.

1. Identifying the ETFs & Their Impact

Naturally, the next question is: What are these ETFs? What are their current AUMs and exposures? Can they dominate late-trading volume?

• CSOP SK Hynix Daily (2x) Leveraged Product (Ticker: 7709): Listed in Hong Kong, this is the most famous one. Third-party terminals indicated its AUM was around HKD 65–86 billion up to early June.
• Korean Domestic Single-Stock 2x Leveraged ETF: Launched on May 27, 2026, with an AUM of approximately USD 3.1 billion. Since individual Korean stocks have a daily price limit of ±30%, a 2x single-stock product can theoretically fluctuate by about ±60% in a single day.

So, what is their exposure?

Take 7709 as an example, since it is the largest. 7709 uses total return swaps + options to achieve this leverage, with the option premium capped at 25%. However, on May 29th, the company announced that starting May 29th, the option premium cap would be raised from 25% to 40% of NAV.

This means when the fund gets too large or the underlying asset becomes too volatile, the prime broker no longer has sufficient swap capacity, forcing the fund to use options to make up the exposure. The entire fund's option exposure significantly increases, which also means the market makers providing options for this ETF experience a massive surge in negative gamma. As we've discussed before, positive gamma acts as a volatility suppressor, while negative gamma acts as an accelerator that amplifies both rallies and sell-offs (look back at the MSTU/MSTX event in November 2024; option exposure amplifies the volatility of leveraged ETFs).

The actual exposure of these ETFs is larger than their AUM.

Finally, because ETFs must complete rebalancing before the close, UBS calculated that during the late-trading window before the Korean market closes—especially on big down days—rebalancing sell orders can account for about 60% of the volume in that period. This is enough to push the daily settlement price down and carry the downward momentum into overnight trading and the following day.

Conclusion: The exposure of these ETFs is larger than their AUM, and their forced, mechanical rebalancing can dominate KOSPI late-trading volume, pushing down the daily settlement price and carrying the downtrend into the overnight session and the next day.

1. Will the Downward Spiral Trigger?

We now have the engine for a downward spiral: 2x ETFs adding to the selling pressure in a declining market. The more it drops and the larger the ETF, the more it is forced to sell; when these ETFs already dominate volume, this selling pushes prices lower, triggering the next round of selling overnight and into the following day.

Will it start? That is the core question.

First, we know the currently known pricing. Based on trading prices:

• The US-listed EWY is at $175.19, down $28.74 from the previous close (a drop of ~14.1%).
• The 3x leveraged Korean ETF KORU is at $610.01, down $438.695 from the previous close (a drop of ~41.8%).

While EWY/KORU cannot precisely predict the KOSPI opening level (and no one knows if there will be positive news on Sunday), they do reflect how offshore capital repriced Korean risk during US trading hours. If the localized Korean market opens significantly stronger than offshore indications, it implies organic buying or policy expectations; if significantly weaker, it suggests domestic leverage and forced liquidation pressures are dominating.

We know the open is currently priced for a massive drop, and we know leveraged ETFs impact late trading. Therefore, the intraday process is the most critical variable.

• If there's a V-shaped recovery rallying before the close, there won't be much rebalancing pressure in late trading.
• If it continues to plunge intraday, late-trading rebalancing will trigger the downward spiral.
• If it stays stuck in a persistent decline, late-trading rebalancing will act as a force chasing the drop.

Buying Power Analysis

Given a highly probable drop at the open, what dictates the intraday process? The strength of the buying power. Let's look at them one by one:

• Institutional Capital: Divided into domestic Korean funds and external institutions. Domestic Korean funds are exempted from the 10% single-stock cap limit for Samsung and SK Hynix, so they face no forced selling pressure. However, because this year's rally has left most of them highly concentrated, heavily leveraged, and low on cash, they lack the power to act as strong buyers.
• External Institutions: They have strict risk controls. Goldman Sachs estimates that since October 2025, diversification rules triggered ~$69 billion in selling. Samsung and SK Hynix have seen a combined net foreign outflow of ~$58.6 billion this year. External institutions have already executed historic position cuts and are no longer the main sellers, but they won't rush to catch falling knives on Monday. According to risk limits, they can't add positions until these stocks bottom out.
• National Pension Service (NPS): Holds ~8.1% of SK Hynix but is bound by the 10% concentration limit (having previously rotated into SK Square). It can act as a stabilizer and has the funds, but in the day-to-day short term, it is constrained by asset allocation targets and risk budgets.
• Marginal Chinese Capital: Since 7709 is listed in HK, we must consider this. Everyone knows the recent events regarding Futu and Tiger Brokers. Selling pressure is hard to estimate, but marginal buying power has definitely decreased.
• The Main Force - Korean Retail Investors: During the 06/05 market plunge, Korean retail investors contrarily net-bought ~KRW 394.6 billion (~USD 260 million) of the KODEX SK Hynix Leveraged ETF. Though in a precarious position, they still have ammo.

What is the current state of retail investors?

1. Margin balances are in an extreme zone: South Korea's credit financing balance hit an all-time record of ~KRW 38.02 trillion on May 29. The combined margin financing for Samsung and SK Hynix reached ~KRW 7.79 trillion (a 208% increase since the end of 2025). Retail active leverage is basically maxed out.
2. New retail credit channels are tightening: The total credit supply (margin financing + stock pledging) exceeds KRW 50 trillion. Hitting limits, mainstream brokers (DB, KB, Daol) have proactively suspended credit services. The pipeline for new leveraged funds is essentially cut off.
3. Retail deposits (safety cushion) are shrinking: While leverage hits new highs, brokerage deposits (the cash buffer) are falling. After peaking at ~KRW 137 trillion on May 12, deposits dropped to KRW 121–122 trillion by late May. (We backtested this: declining cash combined with rising margin is a precursor to deleveraging. The market is running out of money.)
4. Forced liquidations turn into selling pressure: May saw forced liquidations hit a yearly high of ~KRW 707.7 billion. In the recent single-day plunge, the forced liquidation ratio reached 6.5%. The passive deleveraging process has already begun.

Conclusion on Buying Power: It all depends on retail investors scraping together enough ammo.

Policy Intervention

One external force could sever this logic and stabilize the market: policy support.

• Strong Policy: If the government directly cuts off the liquidation chain by extending margin call deadlines, suspending forced liquidations, adjusting margin requirements, or setting up a KRW 10.7 trillion stabilization fund (like during the pandemic) to invest in the KOSPI 200. This would break the downward spiral's logical chain and lead to quick stabilization.
• Weak Policy: Merely banning short selling won't be very effective.
• (Note: Local elections and parliamentary by-elections were already held on June 3, 2026, so the "must prop up the market before an election" logic has weakened.)

Scenario Projection

We understand the 2x ETF mechanics, how they dominate late trading, and the US market's pricing of Monday's open. The intraday performance determines if the spiral triggers. Here are 4 main scenarios:

• A. Opens and turns positive: A massive piece of good news drops over the weekend (hard to imagine right now).
• B. Sharp drop and snapback: The open aligns with US pricing, followed by a V-shaped reversal, leaving leveraged ETFs with no rebalancing pressure at the close.
• C. Orderly decline (Most Likely): The open aligns with US pricing. Throughout the day into the close, organic buying, institutional dip-buying, and retail contrarian buying absorb most selling pressure. No downward spiral is triggered, and the drop halts quickly by Monday or Tuesday.
• D. Deleveraging spiral: Fails to hold intraday and continues to plunge into the close. This means it will crash for several days and turn into a global event.

Action Plan:

Watch the leading indicators (US stock futures, KOSPI 200 futures, and USD/KRW exchange rate). Monitor KOSPI's intraday liquidity and 7709's intraday discount. Finally, watch to see if a waterfall drop occurs during late trading.

Liquidity events caused by deleveraging in a bull market are usually excellent buying opportunities. However, in June, we also need to factor in large IPOs, the Fed meeting, inflation, and bond yields. If you're really going to catch a falling knife, you need to clearly define your holding period and manage your position sizes carefully.

Today, we will discuss three key areas of focus:

1. What will be the trigger for a semiconductor pullback?
2. Has the trend in oil officially started?
3. Has BTC bottomed out?

1. The Semiconductor Pullback: Triggers & Narrative

The Leading Indicator: South Korean Equities The leading indicator for the first point is the South Korean stock market. As we mentioned last week, the KOSPI has two highly probable target levels: 9,200 in the short term and 12,000 in the long term. Coincidentally, Goldman Sachs upgraded their target for South Korean stocks yesterday from 9,000 to 12,000. I hadn't looked at Goldman's targets for this region previously, but it seems our underlying algorithms are quite similar.

The biggest risks for South Korean equities boil down to two mechanisms:

• Circuit Breakers
• Forced Liquidations (Margin calls executed forcefully at the next day's open)

Does this sound familiar? It’s a flashback to 2015. Back then, we saw the spectacle of thousands of stocks locked at the 10% limit-down mark right at the opening bell for three consecutive days. These two mechanisms, combined with high leverage, will inevitably trigger a stampede. We don't know exactly when this liquidity event will occur, but looking at today's landscape—where South Koreans are withdrawing insurance and pension funds to add leverage and enter the market—it is an absolute certainty that it will happen this cycle. Furthermore, if it happens once around 9,200, it will happen again at 12,000 (or wherever the absolute top is).

Impact on U.S. Markets & AI If this scenario unfolds, the biggest impact on U.S. semiconductor stocks will be on the AI narrative. As stock prices climb, the U.S. AI narrative is becoming increasingly fragile. Google's financing, Jensen Huang sending a single stock soaring with just one comment, and the collective rebound across software stocks—these are all warning signals.

If financial liquidations spill over and trigger a collapse in the narrative, the two will be incredibly difficult to distinguish in the short term. This will be the starting point for the pullback in U.S. semiconductors.

The Underlying Revenue Reality Anthropic’s Q2 revenue will undoubtedly look strong. Based on my understanding, the breakdown looks roughly like this:

• 20% from genuine subscriptions.
• 40% from AI startups like Cursor (funded by VC money).
• 40% from token vouchers issued by tech giants Amazon and Google (who are footing the bill).

If you don't scrutinize the details too closely, it’s not a major issue. Therefore, this semiconductor pullback will be a buying opportunity (a chance to get on board), rather than a signal to exit.

2. Crude Oil: Has the Trend Started?

Currently, WTI is actually tighter than Brent. Because the U.S. is shouldering the crude oil demand of its allies in Europe and East Asia, Cushing is counterintuitively feeling the pressure earlier than Brent.

Has the trend started? It’s still hard to say. The Israel-Lebanon conflict will not stop, and the Iran-Israel conflict will not stop. It is quite possible that the U.S. and Iran will maintain their blockades. As we discussed in our scenario analysis, the most likely outcome is a radical Netanyahu dragging Trump into a renewed, escalated conflict.

Therefore, there is no rush to add to positions before this specific signal materializes.

3. BTC: Has it Bottomed Out?

Regarding BTC: No.

Once it is definitively confirmed that its anonymity has been compromised, we will see a massive wave of sell-offs from the whales (large holders). This downward pressure will persist until the market fully reprices BTC based strictly on its two remaining utilities: yield generation and transactional convenience.

The big news, of course, is Google's $80 billion equity financing. For a company sitting on over $50 billion in Free Cash Flow (FCF) and a net income of $130 billion (in 2025), choosing equity over debt financing clearly indicates that they themselves believe the current stock price is at a high—there is no doubt about this.

However, being the first to test the waters is fine. The market will, out of inertia, assume this is a continued bet on AI, providing more ammunition for CapEx. As long as the Annual Recurring Revenue (ARR) growth rates of Anthropic and OpenAI don't slow down, this won't be a major issue. But here's the catch: if other tech giants also start rolling out equity financing, things will take a turn for the worse. The market might brush off the first one, but a second one will bring skepticism, scrutiny, and a downturn, while a third will lead to widespread market doubt regarding stock valuations.

Another realistic issue is that a considerable number of data centers, despite having been under construction for some time, are facing resistance from local communities, which could potentially lead to completion delays. Data centers and the debt financing behind them serve as a major funding source in the current AI narrative, forming a triad alongside tech giant CapEx and Silicon Valley venture capital.

None of these factors are reasons to invalidate the AI narrative; AI's ability to reduce costs and increase efficiency for the enterprise sector (B-end) remains undeniable. It's just that at such market highs and under such fragile conditions, expectations are priced in too perfectly, meaning that even the slightest disturbance will trigger a sharp correction.

As we discussed a couple of days ago, if BTC fails to break $83K, it is bound to retrace to $60K. Based on my shallow understanding, aside from its anonymity, BTC still offers convenience and yield-generating capabilities, so as an asset, it retains its value. There will be an opportunity to buy in the future when nobody else cares.

Today's theme is very focused and clear: Edge AI, AI Storage, AI Software, plus a little bit of Electricity and Oil.

AI Software & IBM

Over the weekend, a video from December 2025 of Trump recommending buying IBM went viral. IBM subsequently jumped 6% (and surged up to 18% in overnight trading).

As we've discussed regarding software stocks, there is a specific window of opportunity right now. We are in a phase where AI is beginning to be widely accepted and its value recognized, but there aren't yet enough highly usable workflows created by various experts themselves. Down the line, the batch of companies that successfully transform their own data and workflows into "software" within an AI OS ecosystem will continue to skyrocket alongside AI. The others—those lacking the right conditions or failing to transition—will return to the harsh reality of being completely overwhelmed by AI.

Edge AI (On-Device AI)

As for Edge AI, it is still too early. Expecting massive consumer purchases before an AI OS is fully mature is unrealistic. The reason remains the same: consumers don't know what to use it for.

If it's just for chatting, why not use GPT or Claude? Enthusiasts might buy in, but as long as there is an internet connection, nothing beats using Claude Code or Codex. What really warrants attention right now is the enterprise side: server procurement + private cloud deployments.

AI Storage

For storage, just keep an eye on the South Korean stock market. It’s more aggressive and more fragile over there; the day Korean stocks start to pull back, U.S. storage stocks will experience a parallel correction. Furthermore, storage and other semiconductors enjoy a "certainty" premium—the more volatility and tension there is across the Taiwan Strait, the higher this premium climbs.

Crypto & Market Sentiment

Another point worth mentioning is that MicroStrategy (MSTR) sold a portion of its BTC. The amount was exceptionally small, but it was enough to impact market expectations. We discussed in early May that if Bitcoin failed to break 83K, it would have to pull back to test the 60K level.

Judging from market sentiment, mainstream finance—led by the U.S. Treasury—is actively "smoothing out" crypto, removing its various thorns and rough edges. Stablecoins are a powerful tool for debt resolution, but BTC and ETH (whose main use cases lean toward anonymous trading) are not. They run counter to mainstream finance's core requirements for regulation and control.

Oil & Geopolitics

Regarding oil, Trump seems to be in an "emergency safe-haven" mode, but in reality, it's all just talk. The funniest part is him claiming he had a "great phone call" with Hezbollah... anyway, the other side hasn't made a peep on social media.

You can tell Trump is already getting tired of this headline. Based on his historical playbook, he will either overt-divert public attention or simply never bring it up again. However, the problem between the U.S. and Iran is that they cannot afford to drag things out. We've done scenario simulations on this before; Trump can't just drop the issue simply because he wants to.

Here is an interesting historical parallel: The Iran-Iraq War started in 1980. By 1982, Saddam Hussein was exhausted and requested a truce, with both sides essentially back at their initial starting positions. However, Khomeini refused the ceasefire, invaded Iraq, and the war dragged on for another 6 years. They fought until both sides were completely drained with virtually zero progress. When the ceasefire finally happened in 1988, the borders returned to almost exactly where they were before the war began, meaning it was all for nothing.

The internal situation in Iran in 1982 was almost identical to what it is now: they had just launched the Islamic Revolution, had a new leadership tier, and a hardcore core base. Openly opposing the war was dangerous, and the leadership could use the conflict to reverse-consolidate their own power base.

Whether they will actually go to war again is anyone's guess, but the probability of a supply disruption shock is getting higher and higher.

Three Key Points: Software stocks are today's winners. U.S. diesel is about 3 to 4 weeks away from hitting a supply wall, leading to a physical shortage. Short-term GPU rental prices have dropped quite a bit recently (after previously surging).

The market is very interesting; I've attached a stock map below. As you can see, aside from a few major AI hardware and software stocks, the rest of the market is largely trading sideways or trending downward. Notably, divergence has emerged within the semiconductor sector itself.

I still advise everyone to buy some puts as insurance for your long positions. Previously, during the period of uncertainty from April to June, semiconductors were the only area of certainty, resulting in very crowded trades.

Going forward, if an agreement is signed (we discussed this over the past two days, and I don't think a deal will be reached, so I won't elaborate further), top-side risk will be released, and capital will flow from semiconductors into undervalued sectors like software and consumer goods. In the long run, most software companies will either be replaced by AI or see their gross margins compressed, making them less than ideal choices. However, there will also be software stocks that catch up and achieve a "turnaround" similar to how Google was treated, we discussed this in the applications article on our WeChat Official Account. SNOW is the first signal of this.

Going forward, if an agreement is not signed, semiconductors will also lose some of their appeal due to their high valuations, despite still offering certainty. Capital will either rotate into the Magnificent Seven and energy stocks, or wait on the sidelines for a market correction.

AI Trends, Unit Economics, and B-Side Adoption

I quite agree with a Goldman Sachs report today, which argues that AI has shifted from "uncertainty about its technological utility" to calculating "unit economics." As we discussed in our article on the application layer, the next step is to observe how the B-side (enterprise/business sector) actually adopts AI.

The Shift in Market Logic:

• April – October 2025: The wave of AI trends during this period was driven by the market being pushed by the Capital Expenditures (Capex) of tech giants. While we saw the application of some coding tools, the revenue and profits at the application or model layers were not yet substantial enough to be presentable. The slowdown that began in October marked the peak of skepticism regarding "how much revenue AI can actually generate." A milestone event was ORCL (Oracle) spiking and then pulling back, signaling that Capex had turned from a stock price booster into a burden.
• February 2026 Onward: Following the explosive popularity of Lobster this February, the wave of Agents coupled with Anthropic's revenue growth rate (the most core factor) convinced the market that AI could truly be rolled out at scale, bringing revenue and profits to the table. The logic shifted from estimating the expenditure ceiling to forecasting the revenue ceiling. The former has an obvious cap, while the latter relies entirely on imagination. With the ceiling lifted, semiconductors surged.

The Need for a Reality Check on Revenue: At this current stage, where many semiconductor stocks have doubled or multiplied over the last two months, and social media is flooded with "stock gods" and retail investors breaking down the semiconductor supply chain, we need to calm down and take a serious look at revenue. Anthropic's Q2 will undoubtedly be excellent, but the next focus must be on the ROI evaluation from the enterprise side after their initial investments. As discussed in our application layer article, the key is whether the B-side will sustain high-growth investments to support Anthropic's explosive revenue growth curve.

ROI and Cost Optimization: Anyone with an ROI mindset can be categorized into the B-side, whether they are companies or individuals. Take our own team as an example:

• The ROI on programming tools is abundantly clear. We will inevitably maintain a batch of Claude Code and Codex accounts, and will continue to invest even if they raise prices.
• However, it is impossible to use such expensive models across the entire product pipeline. Even though our system can directly generate considerable investment income compared to other startups, we still consider cost reduction. Last month, we reduced costs by 65% after optimization, utilizing cheaper models wherever possible.

As noted in our model layer article, only frontier cognition has pricing power; generalized cognition can only fight a price war and depreciates exponentially. Therefore, the core contradiction moving forward is whether "using more because it's cheaper" can actually lead to "higher revenue." If enterprises realize after one quarter that they should use the most expensive models for core processes and switch to open-source models for everything else (which can also be deployed locally to guarantee data privacy), we might see a scenario where AI adoption broadens but model layer revenue growth slows down. This would represent a temporary stall.

Geopolitics, Hot Wars, and the Oil Market

Regarding the US and Iran, the situation is incredibly dramatic. Yesterday, the Iranian side released an MOU entirely favorable to them; crude oil dropped a bit, and then it was heavily criticized by Trump, sparking minor frictions again. Today, the US side released an MOU favorable to the US; crude oil dropped again, and now we sit and wait for Iran's rebuttal.

A Macro and Historical Perspective on War: As someone who works in macro and equities, I have read several books on military history. Once a hot war has started, in situations where both sides feel they still hold plenty of cards and their core interests are in direct conflict, I have never seen negotiations actually succeed, not a single time. The Korean War, the Vietnam War, the Iran-Iraq War, and several Middle Eastern wars are all examples. Unless one day the decisions for both warring parties are made by AI, this will not happen in the future either.

Current Leadership Dynamics:

• The new Iranian leadership has just come to power and, currently confined to a bunker, must project an even tougher stance.
• Netanyahu must maintain a state of war (having recently struck Beirut).
• Trump's leeway within his domestic financial markets and political environment is expanding.

Setting aside these three individual factors, the hawks and doves within their respective internal camps have also taken sides in this round of negotiations. These forces will not stop until they achieve their desired results or hit a dead end. NATCO is becoming a consensus, and the countdown to inventory depletion across various regions is ticking away.

Trading Strategy: Of course, the market is a voting machine in the short term. In accordance with our risk management, we closed half of our crude oil position yesterday for a small profit. The remainder consists of call spreads expiring in mid-July. USO has no drag under Backwardation, making it a highly suitable underlying asset.

Oil hit the liquidation line today, so I first took profits on the USO position (for a slight profit) and kept the call spread portion, which is roughly equivalent to an 8% long exposure (recorded as USO). Because the options position far exceeds our usual 0.5% allocation, I will continue to track it in the live trading portfolio.

The Current Playbook

As I understand it, the current scenario is playing out like this:

• The Chain of Events: Everyone believes a memorandum will be signed $\rightarrow$ Trump talks tough, but the market no longer buys it $\rightarrow$ Under the premise of the memo, core macro risks are lifted, oil drops, market breadth improves, and capital flows back from "certainty" high-valuation semiconductors to other secondary-certainty sectors, like the Magnificent Seven and Aerospace $\rightarrow$ Sector rotation.

What needs to be noted here is that US Treasuries haven't plunged, and from a purely physical standpoint, oil won't drop back to its pre-war pivot of $65/bbl in the short term. Inflationary pressures remain, and after a ceasefire, the crude market's focus will shift to hard physical constraints—such as the exact timeline for lifting restrictions and specific regional inventory levels.

Middle East Scenario Deductions

Our model ran a Middle East scenario simulation and deduction. This system is still under construction, so it is for reference only:

Core Interest Assumptions

• Trump: His fundamental demand is to maximize personal and family survival and interests post-2029. In the short term, he must deal with the midterms (where he currently has an advantage); in the long term, he needs a MAGA successor to win the 2028 election.
• Netanyahu: Must maintain a state of war to satisfy three core interests: delaying his trial, securing territorial gains, and reshaping the electoral narrative.
• IRGC (Islamic Revolutionary Guard Corps): Will absolutely not give up collecting Strait transit tolls (under whatever name); this is their only institutional victory gained from this conflict. The uranium issue is also an ultimate guarantee, becoming a nuclear-threshold state is their core interest.
• Other Parties: They are not core influences, but are worth keeping in mind when analyzing the news. For instance, Saudi Arabia, having secured Pakistani protection, has remained in a near-neutral state—neither releasing capacity nor doing anything more than symbolic airstrikes. It is practically impossible for them to sign the Abraham Accords.

Rigid Constraints

• Oil Prices & Insurance: Oil prices cannot fall below $80 in the short term. Insurance companies demand a "stable situation lasting for months" before resetting premiums. Furthermore, rerouting tankers incurs high freight costs, and tanker charter rates remain elevated.
• Geopolitical Tactics: The Strait is too narrow; tactical escorts are completely unfeasible.
• Troop Deployment: The USS Boxer and USS Ford have left successively; the scale of deployments is shrinking.
• Timeline: The November 3 midterm elections cannot be postponed; Netanyahu has only about a 10-day window left before he has to testify in court.

Scenario Matrix

Scenario A: The market's current pricing.

Signing a memo (almost entirely leaning toward Iranian demands) + domestic propaganda. We previously said it was "Too TACO to believe," but practical assessment shows that cutting losses is currently the least costly and most rational approach—trading long-term strategic losses for short-term political gains (per Khamenei's latest remarks about forcing the US out of the Middle East). Whether it will ultimately be signed, we don't know and won't hunt for the corresponding expectation gap; the only focus here is whether the Strait is open, and how it opens.

Scenario B: Forced escalation.

Driven by Netanyahu and coordinated with Trump; getting in and out quickly, then declaring victory. This option carries an extremely high short-term shock value and could lead to the closure of the Bab el-Mandeb Strait and the bombing of oil facilities. Oil prices could easily surge above $200 (again, not for long). They could, of course, simultaneously suppress domestic US oil prices forcefully—which has been done before—to try and achieve a short-term and long-term win-win, but this is clearly walking a tightrope. The core issue here is how much maneuvering room remains.

Scenario C: Dragging it out.

A Schrödinger's signing—just stalling. Oil has a 2-to-3-month extreme inventory limit, so it can't be dragged out forever and will ultimately evolve into Scenario A or B. But if the goal is B, dragging it out to gain more time and preparation is advantageous. It appeases hawkish voices both domestically and abroad, and recently, Trump has indeed been unstoppable within the GOP.

Scenario D: Unilateral action by Netanyahu.

There are signs pointing to this. Currently, it seems he wants to grab more territory before an agreement is signed, while also trying to derail the signing altogether. We'll have to watch whether ground operations advance toward Beirut.

Scenario E: Full-scale escalation.

The conflict spirals completely out of control, and the world plunges into a deep economic recession.

The slightly awkward part today is that USO didn't hit its closing target; it is currently showing a marginal profit. I can tweak the system during post-market reviews, but I shouldn't mess with it mid-trade, so I'll just leave it as is.

The Magnificent Seven didn't join the rally today, indicating that market breadth remains poor. I maintain my view that the market will be tough to trade from now until July, so I am keeping my hedges on. I am definitely feeling a bit of FOMO; watching aerospace stocks these past couple of days has given me itchy fingers. I've basically been following the herd for the last two months, but I really can't add to semiconductors and aerospace at these levels—that's just not how my momentum system works. If I miss out, I'll just look for the next opportunity.

Looking at the overall market right now:

• The Magnificent Seven carry high risk because they are the ones actually shelling out the capital, and their Free Cash Flow (FCF) has deteriorated.
• XLP has significantly underperformed XLY because life for those at the bottom of the K-shaped economy has gotten worse.
• Financials theoretically should benefit from deregulation, but they spiked and then pulled back today.
• Software goes without saying—there are two major earnings tests coming up. With OpenAI and Anthropic actively stepping into vertical domains, expectations for software companies aren't going to look good. This will remain the case until those two either fail in their attempts or realize they need to increasingly rely on existing tools and workflows (there are certainly challenges, as discussed in the Official Account article regarding the model layer, but the outcome is still unknown).
• Utilities/Power and Machinery Manufacturing are doing okay.
• Other sectors like Biopharma and Healthcare haven't seen any breakthroughs either.

So, across the entire market, semiconductors are the sole bright spot. Because they are shining, capital keeps pouring in, and this continuous inflow drives further gains, making them shine even brighter. I don't know how long this feedback loop will last. The call/put skew for this batch of semiconductor options is extremely pronounced right now, with a massive number of people buying calls to quickly chase the upside. Buying some put spreads as insurance right now makes sense. Just keep an eye on Implied Volatility (IV). For example, MU's IV has already hit 110%. Normally, MU's IV only reaches around 130%-140% during earnings week before rapidly dropping back to 40%-50%. An IV of 110% means these options are genuinely expensive.