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Editor’s Note: It’s been an ugly week to own AI stocks. A hotter-than-expected inflation print sent rates jumping, and the most leveraged names in the trade took the worst of it – CoreWeave has now fallen more than 40% since mid-August, and Oracle hasn’t fared much better.
Here’s why I’m handing today’s issue to Jonathan Rose: he called it. Back in August – with CoreWeave trading near $106 – Jonathan went on his live show and named it and Oracle as the two AI stocks most exposed if the market turned. He even titled the episode “AI House of Cards.” And he wasn’t guessing.
After years trading on the Chicago exchange floors, Jonathan watches signals most stock investors never check – like what it costs a company to borrow money. Those signals were flashing in August. The stock market caught up this week. Below, he tells the story of how he spotted it and how you can learn to see the same warnings before the crowd does.
One more thing: Jonathan just released his free $10K to $100K Challenge presentation, where he lays out the full strategy – how he finds unusual trading activity, evaluates the opportunity, and defines his maximum risk before entering any trade. Watch it after you read this; it’ll make even more sense then.
Now, here’s Jonathan.
In October 2015, a natural gas well near Los Angeles started leaking methane.
And I don’t mean a little leak. This thing was a catastrophe.
The leak came from an underground storage facility tucked into the mountains just above LA’s sprawling San Fernando Valley. Soon, a rotten-egg stench was drifting through nearby neighborhoods.
Residents reported headaches, nausea, and nosebleeds. Thousands of families fled to hotels and temporary housing, with no idea when they could return. Two local schools had to be relocated.
The leak wouldn’t be stopped for 111 days.
But something about the coverage bothered me. Every article talked about Southern California Gas Co.
OK. But I had an additional question: Who owned SoCalGas?
The Important Company Wasn’t the One in the Headlines
Turns out the parent company was Sempra (SRE), a publicly traded utility.
I pulled up Sempra on my screener and found something that stopped me cold. Somebody had made an unusually large bearish trade against the company.
I had two pieces of information: a major environmental disaster involving a Sempra subsidiary… and a big bearish trade in the parent company’s stock.
I didn’t know who placed that trade or what they knew. But I’d spent years trading on the floors of the Chicago exchanges, where I learned to pay attention when large trades show up in unusual places.
Somebody was putting real money behind a bet that Sempra was going lower.
So I shared a bearish trade of my own with my followers. With it, we risked $200 for the opportunity to make $4,800.
A few days later, California declared a state of emergency, and Sempra’s stock plunged. One of my followers later told me he’d made $9,600 after risking $400.
Here’s another part I love.
I found a reporter covering the leak who hadn’t mentioned Sempra, so I reached out and pointed out that SoCalGas had a publicly traded parent company. She wrote back that she was working on a follow-up.
That’s what I mean when I talk about following the money.
While everybody was watching the gas leak, I was watching the company behind it – and what traders were doing with its stock.
This August, I spotted something similar in a very different business: artificial intelligence.
Why CoreWeave and Oracle Looked Vulnerable Before the AI Selloff
On August 17, I was hosting my daily Masters in Trading LIVE show. We were talking about retail earnings and consumer health.
Then I changed the subject to two AI companies that had me worried: CoreWeave Inc. (CRWV) and Oracle Corp. (ORCL).
Now, I’m still very bullish on AI. I love what Nvidia Corp. (NVDA) is doing. I think artificial intelligence will create enormous opportunities for years to come.
But that doesn’t make every AI company a good investment.
CoreWeave and Oracle were borrowing enormous amounts of money to build AI infrastructure.
CoreWeave rents computing power to AI companies. That means buying expensive chips, building data centers, and spending a fortune before all that equipment generates revenue.
Oracle is making its own enormous investments in AI data centers, with a substantial portion of its future business tied to OpenAI.
Then there’s what’s called “circular financing.”
Nvidia sells chips to CoreWeave. Nvidia also owns a stake in CoreWeave. AI companies sign massive agreements to rent computing capacity. The companies providing that capacity borrow money to buy more equipment.
Big AI Contracts Don’t Eliminate Financing Risk
Everybody announces another billion-dollar deal, and investors get excited.
But I have a question: Where is all this money actually coming from?
When companies borrow billions and funnel money among the same group of businesses, those impressive deals can conceal a great deal of financial risk.
That’s why I called my August 17 show the AI House of Cards.
I told viewers that if the market turned, CoreWeave and Oracle would be among the first companies to get hit. I didn’t want to be long either stock. In fact, I suggested CoreWeave shareholders consider taking their profits.
CoreWeave was trading around $106 when I issued my warning.
CoreWeave’s Bond Market Flashed the Warning First
Now, I need you guys to stay awake for a minute. I’m going to talk about bonds.
I know, I know. Everybody’s favorite subject.
But this is important.
Most investors watching CoreWeave were looking at the stock price, Nvidia, and all those enormous AI deals. I was looking at what it cost CoreWeave to borrow money.
CoreWeave had issued bonds paying 9.6% interest, but those bonds were now trading at prices that pushed the yield to around 15%. That’s a massive jump.
That means investors were demanding much more compensation to take on CoreWeave’s risk. Somebody was getting nervous. And the warning appeared in the debt market before it became obvious in the stock price.
Oracle was showing warning signs, too. The cost of insuring its debt against default had risen sharply.
When you’re borrowing billions to build data centers, the cost of money matters. And when lenders get nervous, stockholders had better pay attention.
Then the AI Selloff Hit the Most Leveraged Name
On October 15, I revisited CoreWeave and Oracle during Masters in Trading LIVE.
CoreWeave had fallen from approximately $106 on August 17 to around $61. That’s a decline of roughly 42% in less than two months.
Oracle had taken a beating, too. Other AI infrastructure names were under pressure.
The immediate trigger wasn’t necessarily a new discovery about AI. Hotter-than-expected inflation raised concerns about interest rates and borrowing costs.
And companies carrying enormous financial obligations were particularly vulnerable. That’s what worried me in August.
Look, CoreWeave has real customers and an enormous backlog of contracted business. Some investors see a tremendous opportunity after this decline.
Fine.
But there’s a difference between having billions in business lined up and having the financial strength to deliver it profitably. And when you borrow heavily to fund growth, you don’t have much room for things to go wrong.
Here’s another thing I told viewers on Thursday. I wouldn’t make a new bearish trade on CoreWeave at $61.
The stock has already been punished. Could it go lower? Absolutely. But a good warning in August doesn’t automatically make it a good bearish trade in October.
Being right about the problem doesn’t automatically make every price a good place to bet against it. The trade has to make sense too.
That’s why I always want to know my risk before entering a trade.
What AI Stock Investors Can Learn From the Credit Market
Think back to that natural gas leak in California.
I didn’t predict the disaster. I figured out which publicly traded company was exposed and found unusual trading activity that suggested an opportunity.
With CoreWeave and Oracle, the setup was different. I was looking at financial risks building underneath two popular AI stocks.
But the principle is the same: Don’t just watch the headlines. Follow the money.
That’s the approach behind my premium trading service. We watch for unusual trading activity – large trades that stand out from the normal buying and selling.
Not every big trade means something, and not every trade works out. But when somebody puts serious money behind an unusual position, I want to know about it.
Then we look for an opportunity where we can define our risk before putting money on the line.
That’s the approach I share in my free $10K to $100K Challenge presentation, which went up just a couple of days ago.
In it, we go over how I look for unusual trading activity, evaluate opportunities, and manage risk as we pursue the possibility of turning $10,000 into $100,000 in 12 months.
It’s an ambitious goal, and I won’t pretend otherwise. But you can learn the process.
But you can learn the process. And you can learn to look beyond the stock price for signs of what might happen next.
