Get ready for another monster week
Weekly Plan 8.12.23
Folks -
In this newsletter today, I am sharing why I think we are seeing the beginning of the end of recent bout of volatility and where I see the market headed short term next in few days.
This is more in line with my shorter to mid term view. For the intraday view and levels, make sure you are subscribed to my chat room below with notifications turned on.
You do not wanna miss this as I am also going to opine on the state of mainstream names like NVDA, AMD, TSLA and many many more! I am also sharing TOP 5 ideas on my radar right now- this includes one mega cap which I think could rally from here.
Very excited for this weekly letter!
Some folks were not able to get in before the most recent price hikes. To help them get in lower prices, here is a one time offer that expires very soon.
10, 000 Ft Macro view
Here are a few factors in play this week which may be driving flows from a macro perspective..
Sentiment
Despite an uptick in gas prices, the consumer sentiment measured via University of Michigan surveys improved this past week.
This sentiment is relatively down from the 2020 peaks when massive stimulus was unleashed by the Fiscal and Monetary measures but has since stabilized- in part due to a very strong jobs market.
PPI/CPI
Producer price inflation did tick up this week. PPI usually reacts much faster than the CPI and PPI is also very sensitive to the energy prices.
I prefer energy prices, in particular the WTI prices to remain range bound, but relatively higher to prior normal levels. I see energy prices pose a major issue for the equity markets if they start peaking above 90 dollars a barrel.
Retail sales
Retail sales next Tuesday should also be a window into the state of the consumer. Hangover from the stimulus laden days of 2020-2021 are hard to get rid of and the consumer has stubbornly held on, often aided by record highs in new credit card debt.
This year the credit card debt rose to a new record of 1 trillion dollars in the US, with about 6 million new credit card accounts opened this year alone.
FOMC
These 3 factors mean that the FED minutes next week can show a sigh of relief for the FED. The way this FED operates is that it is very technocratic in its approach and messaging. They actually message a lot. I think far more than they should. A lot more than they should and most of their messaging is based on past data.
So if I were to take a guess, they will articulate easing inflation pressures and robust jobs data to reiterate their stance about soft landing and they may even hint at no more rate hikes, oblivious to the future trajectory of economic data which is pointing to substantial deterioration in the economy. However for now, in FED’s mind, everything is bright and rosy.
In the short term, this can mean only one thing.
Can you guess what it is?
However in longer time frames, the situation is not as straightforward. Let me explain why.
The main issue that I see is not evident necessarily in the PPI/CPI or sentiment or even employment numbers which tend to be very lagging.
For instance, consumer sentiment is very fickle. It depends on the employment, the volatility in stock market, it may depend on day to day price action in the oil markets.
On top of that Sentiment is a lagging indicator. For instance, the sentiment was highest ever in 2021 when conditions were deteriorating rapidly for the US stocks.
What is more important is lurking in a different set of numbers which directly measure the economic output and activity.
These are the ISM numbers which have been particularly bad in last few weeks and have preceded the sell off in the stocks from my recent weekly levels.
These ISM numbers are showing there could be a demonstrated weakness in the jobs numbers in weeks and months ahead.
On top of that they are showing a marked recession risk in next year or less. This will be exacerbated a lot when you also add to the equation below two things-
Much tighter lending across small businesses as well as new home sales
Potential for higher interest rates for a year or two out.
Now, if a lot of economic models are based on national gas average being below 3 dollars whereas the gas prices nationally now are near 4 dollars, this also weighs heavily on economic activity.
In short, you have a triple threat to the markets longer term-
Perpetually higher energy costs due to the green agenda of many governments, due to war, due to potential collusion between oil producers.
Slower growth due to tight lending and on top of that higher interests cutting down money velocity.
Maxed out consumer with no option when the credit cards are maxed out, savings are depleted.
If I add these up, and sprinkle on it the current stratospheric US equity valuations, it tells me that some of my lower, longer term targets are not unfair prices and could still be tested.
This could further hit some of the fluffiest sectors the hardest - which is real estate in some zip codes, some of the growth names in the US stock market. For example in the US, it is no secret that homebuilders have been on an upswing a lot in past one year. Which BTW was predicted by me last year. when XHB was close to 50.
However, now there are several folks who have put down payments on their new homes but those loans were approved at lower rates and the homes may just be coming online as it can take about a year for a new home to be ready. Especially with the supply chain issues, those supply chain issues are just now starting to ease.
This means some of the banks involved may pull financing as I believe these rates are subject to change unless you paid thousands of dollars to lock your rate. In some cases, the potential borrowers could lose their job. These factors could leave the homebuilders holding on to inventory they can not sell.
If we see a lot of these cases pile up, and we see existing homes come online as well, this could exert a lot of pressure on home values.
Now I am reasonably confident this is what will happen. However, this is not a short term call. Such calls are notoriously hard to time. However, what I can always do is be ready when such a credit or volatility event happens, rather than be vulnerable to such an event by being on the receiving end of this credit event.
Image above shows a community of homes coming online next year in North Texas. This is but one of the thousands of such communities which should be coming online next year.
IMO Texas and Florida are some of the most vulnerable housing markets to violent price swings next year in my view. In some zip codes, prices have tripled over their long term averages fueled by migration from West Coastal cities. I expect a reset to these long term averages and will be sharing when I see that materialize. Stay tuned.
To put context of time frame, this is not a short term call. This is not a weekly or even monthly call. Then on top of that, this does not apply to all geographies. For instance, there will always be a market for a condo overlooking Coal harbor in Vancouver or a brownstone a few blocks from the Central Park in NYC. I do not think those prices dip much, if they dip ever. This is more in line with your typical cookie cutter in Mesquite or Lakeland.
But for now, let us reset to some of the near term price action themes..
AMZN
I like this gap up in AMAZON above 130 area. It is now near 138. This 130 area is crucial area and as long as we remain bid above it, the bears could have a hard time with AMZN.
I think as long as 130 area holds, we could see 160-165 in AMZN. It is my pick as far as these mega caps go.
As far the option prices go, I like one strategy which is to see if we get a dip into 135 area this week due to volatility in the general markets. I think if we do, I personally think for both the October 20 Monthly OPEX, and the September OPEX, 145 and 142.5 calls look interesting. The 10/20 MOPEX 145 call is currently offered around $4.5 but if AMZN were to dip into 135s, this could be an interesting call.
What do you guys think?
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Emini S&P500 SPY SPX
On the general index side, as I said, I think we are beginning to see the end of most recent bout of volatility and the below 2 levels are my key levels this week.