July 2025 Market Memo

Performance:

Please contact us to inquire about our performance.

July Investment Summary:

In July, we maintained a cautious stance. We executed several swing trades (KWEB, GOOGL), while becoming more pessimistic about the market's trajectory. We established small positions in October put options, with exposure under 0.5%, to prepare for potential significant volatility.

Market Overview, Analysis, and Outlook:

Macro Environment

August 1 marks the tariff deadline, but the market seems to have developed immunity to tariff news, with its impact diminishing. Meanwhile, the Federal Reserve remains cautious, and we cannot rule out potential harm to the nation and economy from intense political struggles. We are not policymakers or participants, but our goal is to avoid becoming victims.

Our view of the U.S. market remains unchanged—we continue to approach it with patience and respect. However, several important factors are being overlooked by many investors:

1. The market cannot sustain broad-based strength. We are seeing divergence in the performance of most individual stocks from the indices, especially with MSFT and META earnings reigniting market enthusiasm for big tech, particularly the AI sector, which has been a persistent hotspot.

2. Persistently high U.S. Treasury yields. The 10-year Treasury yield continues to hover between 4.2% and 4.5%. Without a notable decline in yields, current U.S. equity valuations lack any long-term appeal.

3. The divergence between U.S. Treasuries, equities, and the dollar is being ignored in the short term. Additionally, potential escalation of conflicts between the Federal Reserve and the federal government could emerge as a new gray rhino event.

4. The Leading Economic Index (LEI) has been weakening continuously, with forward-looking economic data showing fatigue—this is completely overlooked by the market.

Capital Flows and Market Behavior:

1. Based on information from various investment banks and research institutions, there is a consensus that retail investors, hot money, and speculative sentiment are at high levels, with leverage continuing to rise. Investor enthusiasm for the market is elevated.

2. Market sentiment is euphoric, with renewed speculation in computing power, semiconductors, and AI-related themes.

3. Starting in August, systematic volatility-related funds like CTAs still have some buying interest, though with limited room. However, stock buybacks are resuming as most companies exit blackout periods and enter open windows.

4. The strong U.S. stock market without pullbacks is generating widespread fear of missing out and fear of underperformance, compelling investors to chase in.

U.S. Stock Market Outlook

We were bearish on the U.S. stock market last month, and this month's memo reinforces that view. As Warren Buffett said, "Be fearful when others are greedy." How do we quantify true greed? All the indicators we see point to greed: the market has been in risk-on mode for over a month, valuations are severely overextended, hot themes are being rotated frantically, retail sentiment is fervent, and leverage is high. This all points to a simple conclusion—we should exercise caution.

We hope our investors will join us on this path and not be dazzled by short-term fireworks, which could disrupt our rhythm.

Future Outlook and Strategy:

Based on sentiment and macro analysis, we fully shifted into defense starting in June, aiming to preserve profits from the strong performance in April and May. In August, we will continue to focus on the Chinese market or trading opportunities where capital is concentrated, thereby reducing our portfolio's volatility and risk. At the same time, we will maintain a certain level of hedging to mitigate fluctuations.

Risk Management and Dual Response Strategy:

In response to market conditions, we’ve implemented a dual-layer strategy:

1. Significantly increased cash holdings, while lowering trading frequency and shortening trade cycles for opportunities.

2. Using derivatives strategies in small sizes to hedge against volatility.

3. Avoiding pair trades or traditional hedging, while maintaining a large cash buffer and modest Treasury exposure. When short-term trading opportunities arise, we will act with small, tactical derivative positions.

Wei Cheng
CEO and Chief Investment Officer

Tranquil Tide Wealth

Written on July 31, 2025