Data Improve. Stocks Drop.

Weekly Plan 7.28.24

The week saw some good anti-inflationary data from the US as well as the other G7 countries, giving the Central Bankers like the FED some breathing room and sort of a Green Light to begin cutting rates in September. I think a September rate cut is coming and this year we will have about 2 rate cuts between 50 and 75 BPS in total. f

Despite this sort of news that confirms, rather than deny the upcoming rate cuts, the markets continued to drop.

I shared in my previous weekly plan how the SPX market was forming a downtrending HVN and how we could remain weak unless we started to take out some of the highs near 5638s.

This level was infact the high of the week before we saw another plunge lower, breaking that weekly low at 5550 and carving out new weekly lows at 5430. Dramatic week, with several 100+ point moves not only in the Daily time frame, but actually also intraday time frames.

The week ahead is an extremely risk event heavy week with inflation data out of Europe, Asia, FED day, Non farm payrolls, consumer confidence numbers- you name it. It should be an extremely active week as well. Now on top of this, you also have the earnings like that of AMD, MSFT, AAPL.

Buckle up.

Levels for this week.

Let us look at some salient points from prior price action and related markets and see if we can glean some key levels for next week:

1. The markets broke prior weekly lows and for the most part remained below these lows, having rejected the key 5540 level multiple times during the week.

2. On the downside, that 5430 level has been holding up quite well thru the week.

3. In related markets, VIX came off on Friday but has remained above psychologically important 15 mark.

4. For the Dollar index, has reclaimed its 104 handle and has been liking it, with several Dollar denominated markets like Gold, Silver, Bitcoin, USDJPY etc remaining relatively subdued on the week, therefore adding some level of support to the stocks at that 5430 level.

5. Now on pure fundamental basis, the American economy continues to defy expectations with about 3% YOY growth, fueled by stronger trading volumes here in North America with Mexico and Canada.

6. Globally, Asia looks much better than it did only 6 months ago with China and Japan doing quite well fueled by stronger exports in Autos and semis out of China for instance.

7. AAPL has almost finished moving its high end iPhone production lines to India which should benefit the Indian companies as well. In this context, I shared INDA low at 38 which is now trading near 55 at time of this post. Continues to look good.

8. Oil has retreated and bond yields loosened a bit last week adding some lift to the regional banking sector as the market makes up its mind about 2024 Election outcomes here in the US.

The sum total of this analysis for me is that this market is in a correction phase with added confirmation needed that we are in a bear market.

There is absolutely some level of rotation from big tech into smaller value plays.

For any one who has been a reader of this blog for longer than a year, will notice that several of the Value stocks that I shared in last year and a half started showing signs of life, after being accumulated for over one year.

What are these?

1. Norfolk Southern which is a TOP value stock for me shared around 190 back in 2023 has now broken out of value area, and is now trading 240s. This is fueled by an improvement in Global freight index, as well as increase in quality of Global Freight reliability as well as easing of some tension in the Red Sea and Suez Canal regions. This has obviously helped a lot of companies like XPO and ZIM as well.

2. Big Tobacco like PM and MO also saw their fortunes get better this quarter with strong rallies driven by new products like Zyn. This lifted PM from that 90 dollar support I shared here few months ago to now trade at 110+. MO has risen from 40 dollar base to trade above 50 now.

3. 3M was another Substack stock which was lingering here at this 90-100 region for several months before a breakout this week, on Friday alone trading up about 25%.

4. Several other VALUE type names such as BMY, BX, BAC etc.

Then on the bearish side, from last week’s plan I shared AMD 137 target when this stock was near 160. We saw this trade down here even before the earnings on Tuesday and found some level of support here at 137.

With respect to TSLA, I shared 115 support level which held quite well on the earnings and the stock at one point rallied back to 125.

Despite these rosy performances by the smaller caps and value type stocks, the elephant in the room remains these massive 2-3 trillion dollar companies which arguably are widely held and are sitting near some really high valuations. Now the market has taken care of some of this fluff- for instance, we saw bearish plays in META at 500 before it shed about 10%. NVDA, along with other SOX stocks like ASML, TSM, AMD, AVGO as well also took some fluff out of this market but I think many of these still remain relatively expensive with respect to fair values.

Some times doing nothing is better than doing something

For over last 2 weeks, I have steered clear of the big techs on long side, with few tactical ideas like TSLA 215 support post earnings. My focus instead has been on small caps and these value type names. This is not going to change this week either. I am going to instead focus on lower beta, value type names which I think will fare better in a dramatic volatility situation (if sell off continues) compared to the likes of high flying big tech names.

This in hindsight was not a bad idea as we saw some pretty good size sell off in big tech stocks. Now based on my methodology, which is based on quant strategies, the shift from being bearish to long or from long to bearish is influenced by various factors - charts being just one of them. This is why even this week, I am not yet ready to get back on the tech high horse. We all saw what this market did with GOOG earnings, which arguably were excellent earnings. So I need to see some sort of firm up in the tech stocks. I thought this week had a few signs of life in big tech, but this needs a confirmation with a second week follow up.

Technically, this market is now consolidating here below 5540. This is not a sign you want to see if you are a bull at 5500. You want this market clear 5540, not stay below and certainly not stay below 5430.

With Powell on tap on Wednesday, he will have to field questions about political influence on this decision making. This means he will have a fine line to walk in how he communicates the FED action over the course of next 10-12 weeks. I think if there is a sell off in wake of FED into 5330-5340, this could be supported for a move back to 5430. Not saying we will get there, just sharing what I am thinking if we do get there.

My key levels for the week

So we saw that bounce at SPY 5430 level as called earlier in the week and we closed the week at 5500. Technically, I think this close in SPY at 544 is itself a bit weak. So my key level this week will be this 5530-5540s.

Scenario 1: I like to see some resistance come in near 5540s for a move down into 5460s. A close above 5540 invalidates this scenario.

Scenario 2: Daily closes below 5460 may confirm that the 5430 bounce has been invalidated and we may try and break that 5430 again to expose 5370s below. A couple of closes above 5460 invalidate this scenario.

Are we in bear market now?

This is a very interesting loaded question and anyone who claims to know a sure shot answer does not know any answers.

I see it 2 ways-

1. I think if we hold 5430 after all the impending drama this week, this will be a sign of strength, accentuated even more by if we close above 5540. This certainly invalidates any sort of bear market theory and should in theory lead to a retest of 5650s.

2. Now where the rubber meets the road is if we trade 5250, and it does not has to be today or this week, but as long as we trade it, lets say in August. I think, #1 we will likely see a large bounce at this level and #2 this will have heralded a near bear market that should then take us down into 4700s next. But if we do not get to 5250, I think this is not a serious sell off but just some volatility release.

3. Please if you are a new reader, read through above segment again and note all the conditional statements. A lot of quant algos use such similar If, then, else statements to build trading programs and should be paid attention to. Look we all want to do well. Nothing wrong with that. For ourselves, our folks, our society. Being observant and focussed is the first step in that direction. Being observant is the first step in gaining a deeper understanding of the world around us, this will bring more understanding than something which is only superficial and skin deep. Find ideas that are in accumulation phase before others find out about them. If you play on long side, you have an inherent mathematical edge. Stocks can and often do go up 10-20X whereas on short side your max gain is capped at 1X, it cannot be more than that. Optimist people make world better. Skeptics and trolls keep us all in check. They add value to the market-system. I like them.

Let us now look at anything else that may make sense given everything else that’s going on

Consulting

As part of this newsletter, I try and share themes BEFORE they become general knowledge. Like what?

1. GME

2. SMCI

3. TSLA

4. DOGE

5. Gold and Silver

6. MARA and Crypto stocks to name very few

I am not necessarily sharing chart patterns and head and shoulders- you can find that content for free anywhere, you don’t have to subscribe to see pictures of heads and shoulders. My value proposition is to share themes which may have been overlooked by others and share them before others find them. If you like this type of content value add, then consider subscribing and sharing as it helps me continue to post ideas.

BTW Head and Shoulders is also an extremely subjective call. You can take it any way you want to. There is nothing subjective about ORDERFLOW levels- either they hold or they fold. There is no confusion about a 5430 or a 5540. It is like ON and OFF.

Ok so back to my consulting spiel.

These companies like ACN and IBM are extremely talented to sell projects that a lot of large Fortune 500 companies may not be prepared to do themselves. These can be multi year, multi billion dollars CAPEX projects that these companies have to do, else their business processes become obsolete in 5 years.

I think the AI consulting spiel is just beginning. It is in infancy. This is why I like the 3 major IT outsourcers - like INFY, IBM and ACN.

Now I have shared these 3 stocks earlier at far far lower prices, you missed it since you were not a subscriber at that time or did not read the whole thing, not sure which one is worst. Make sure it never happens again ;)

Also these type of stocks, especially very well run companies like INFY and ACN can suffer in downturns like every one else, but tend to suffer less than other tech high flyers which can get cut half or more.

This is why I like ACN, INFY and IBM on any pullbacks.

I think INFY has an added advantage of Indian market picking up steam, it is now 22. On the other hand, I like ACN for overall AI consulting delivery. It is about 325 now but my target will be far beyond 425 on Accenture.

Regional banks

KRE was a bullish call for me when this was 35 a while ago. It has since rallied hard and is now trading above 58. From a market perspective, this is a play on Trump winning the elections. Now if you are in the camp that believes Trump wins 2024, then you like KRE.

I like the fact that it took out the recent highs near 55 and now if it holds this 53-55 on a pullback, I think this is headed higher into 70s. While the pundits and experts claim the FED can never cut interest rates again- these small regional banks’ price action is telling a different story: I think these banks will benefit quite a bit from rate cuts, higher bond prices, and a Trump Presidency as it will help cut down some regulations which lower the profitability for these banks. Look at Ally for instance. It now makes about three quarter billion dollars in earnings. Can it make another quarter billion under right type of environment? I think it can. Lower yields also just help offset some of the unrealized losses these banks are sitting on when they bought TLT at 160 and sold home loans at 3%, car loans at 0%!

Healthcare

Generally, when you see strength in sectors like the healthcare and utilities, this is a bearish signal for tech. This is one of the reasons I have been hesitant to talk about any bullish plays in tech until this resolves itself.

On this space, if you look at my call in UNH at 400 in 2023/2024, it still looks good at 570. My target was 600 on this which is now looking quite achievable.

Then I have been a PFE bull also at 27, it is now 30. I think PFE also kind of looks good as long as that 27 holds, as a value play I think it can push higher into 36-40 area.

Other stuff

An unlikely winner in the housing market could be companies geared towards home improvement. If you believe rates will come down and it will cause an oversupply in the housing market, a lot of these potential home listings need some work before that can be put to the market.

Home Depot is an obvious name in this category but look at something smaller like MASCO MAS 0.00%↑

I like if 70 holds on this, it could be a breakout candidate above 80 into 100s.

I also like small industrials based out of midwest, Northeast regions especially in aerospace, defense and specialty metal space. This is not a new take, I shared this last year how small midwestern industrials could benefit from the Biden admin push towards local manufacturing and continued stance on weaning away from Chinese manufacturing of sensitive tech. I do not think this trend is going to reverse anytime soon whoever is in the White House. I think that the market will continue to drift towards more localized supply chain, especially when it comes to sensitive aerospace and defense type of companies.

HWM 0.00%↑ is one such company. They do have earnings on 30th so expect some volatility in short term, but 70-72 will be my key Line in Sand on this.

It is about 80 now, with 6 billion in sales and out of that about 800 million in earnings, indicating a profitable company with speciality products.

Now a lot of these companies are boring, they are not sexy. Retail traders do not even know they exist. Yet there they are, making money, often selling at good PE. MM do not bother about these either, as there is not much volume in options to exploit the moves. In other words, these companies can continue to grow under the radar before others find out about them. Remember when we shared SMCI here at 60 dollars? No one knew about it then. Now every one is in SMCI.

CVNA

One tech I do like is CVNA, if you can call it that. I have been a CVNA bull for years now back when it was 3 dollars and is now 130 dollars. I am not yet ready to call an end to the CVNA advance and the key reason is simple- expansion.

2 years ago, CVNA lots were empty. They were known only in big cities. This is changing now, as more and more folks become aware of CVNA. I think CVNA is a threat to established “used car dealers” as well as Carmax which is another player in this segment.

Do you like used car sales experience?

I do not. I would happily work with Carvana for buying a used car, unless it was a Lexus from a local family owned Lexus Dealer. BTW if you have not, you should try the Lexus ecosystem- from sales to service to anything in between. You will not go back to another brand. A good example of this is recent snafu with the new Toyota engines. The engines were failing. So instead of standard recall procedure and try to fix them, Toyota simply decided to replace all impacted engines. This is a power move and why customers love such brands so much. Yes it will sting in the short term. But keep customers happy and loyal.

Anyways, I digress. Back to CVNA, I would not be surprised if CVNA were to trade into 200 before any meaningful top formation. One key reason for CVNA is the heavy insider selling. But at any rate, that 100 dollar mark on CVNA will be a key level for me as far as line in sand or LIS goes.

~ toc

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