Weekly Plan 1.7.24

When we come up with levels, we are essentially putting a value on something.

Sometimes this value is correct, sometimes the value is off.

When trying to value anything, we lean on themes or in other words, we are telling a story. The quality of levels is related to the soundness of thesis or the story itself.

For instance, when we look at something like an XOM or an OXY.

Let us say my target is 140-150 on XOM but it is trading at 99. This means that my thesis or my story has not yet caught up to the consensus expectations.

Why is XOM at 99 and is not at 130? It simply means that the market or the majority of traders do not believe in the story that it can be 130. The market has made assumptions and a thesis which does not value the company more than 400 Billion dollars.

If the consensus expectation is based on XOM trading at 99, because the oil has seen its peaks in this cycle, then I am wrong. You can draw same conclusions from any of other calls that I have. If I expect 3500 on the SPX, and SPX here is trading at 4700, this just means that my story is either wrong or has not played out. In the case of SPX, the story is that the interest rates could stay higher for longer, there could be a recession shortly which could cut down on the earnings and sales of large mega caps.

The stories are changing all the time.

If they did not, we will not have a market. Your story, my story, the story of your barber- they all need to be changing all the time, else we become stagnant in our views and the markets move farther and farther away from us.

Some stories have a long life span- they could be told over years to decades. Some stories have shorter shelf life from day to day to week to week. Technical analysis, fundamental analysis, the numbers and the charts - all can have their use but they can not substitute for a good story.

To be a good story teller, your story needs to be told in a way that it has some plausibility but at the same time be careful of conformity.

Can TSLA trade 100 again? Probable.

Can TSLA trade 20 again? Possible but not plausible.

For example, XOM at 99 reflects a story which not many believe in. But it still has some degree of plausibility.

Then you have a story like NVDA, this is something everyone (or may be a vast majority) believe in at 500. Else it won’t be at 500.

Both stories are ok. Only one of them has some degree of value left in it.

Why is having a story important?

Let me illustrate with a couple of examples to show why I bring this up.

Let us take an example of AAPL.

One of the BEST and TOP mega caps stocks in the entire world, not just the NYSE.

AAPL earns more than a billion dollars in revenue every single day and has a market cap of around 3000 billion dollars. It trades at a PE of about 30, which in layman terms means that if you buy AAPL today at 182, it will take you 30 years to break even on the investment, assuming the current earnings stay constant. If you buy at 182, and expect to make a profit on it, then AAPL has to increase its earnings in future. This is assuming the earnings increase, not contract.

Now what story I am telling myself that justifies me being an AAPL investor at $182?

It could look like that AAPL AR/VR products will be a mega hit, it will have no negative downside from Chinese crackdown on American tech, in same vein I can say the US-China relationships will remain on favorable terms, and in near term there are no recession related risks to the earnings loss of AAPL. These are stories I tell myself today to justify my investing in AAPL at 182.

Now my stories should have some degree of plausibility. They should be probable. Ofcourse any thing is possible and that is why we have Black Swan events, but minus that, what are the probabilities of what I am describing? Would I say there is a 60-70% chance of me being right? If that is the case, then at a personal level, me buying AAPL at 182 may be a good idea.

However, if instead of growing its market share and increasing its earnings, AAPL instead begins losing its earnings, then I was wrong in my story and thus AAPL has to trade down as the the price I paid was based on discounted future earnings which are now decreasing rather than increasing.

When I share my levels and ideas, I run thru several of these stories. When AAPL was 200 dollars, I was bearish on this stock as the price did not justify my story that I think AAPL is priced perfectly around these levels.

Now, let us say I am a bull on TSLA at these levels, which I have touched upon in my recent posts.

Am I a bull solely based on charts?

I can assure that is NOT the case. There are several theories and stories I have built around TSLA, which gives me the confidence to be bullish or bearish around a certain level. This is the real value in this newsletter. I can assure you I am doing my best in terms of research before I share any level as I never take it lightly. I may be very wrong but I am not lacking due diligence when I share an idea.

Now the TSLA story can go something like that even now the EV penetration is very low in the world with less than 5% of all cars being EV. The market is huge. TSLA is the dominant player in this sector but has headwinds from China, trade wars, recession, high interest rates. Note that in my story, I do not think TSLA has a serious issue from competition. I do think TSLA has headwinds from increased spend on advertisement as it will lower its operating margins which are extremely high compared to its legacy peers.

So now my story tells me in the intermediate term, TSLA could be a 260 dollar stock. It is 235 at the moment. Further I think if the stock sells off due to the general market next week, it may make it more attractive. So this makes me bullish on TSLA in the intermediate time frames as I think the market is under pricing TSLA relative to the story I am telling myself.

Now can I become very bearish on TSLA? Yes I can. But for that to happen, something drastic will have to change in this story. May be the FED increases the rates by a 50 BPS in March instead of cutting. May be the CPI comes in a % higher than expected next week. Now what is the probability of this happening?

Is is likely?

I don’t think so.

We have to develop a way of thinking like this in terms of probabilities. This newsletter helps me document my personal views and keeps me focussed and disciplined. If you are interested in hearing more of such stories, then consider liking, sharing and subscribing to keep this platform alive and kicking. More subscribers we have, the lesser the cost to everyone as no one likes to work in a vacuum.

Back to the SPX levels.

At the start of last week, I had imagined we will sell off at 4850 (around 4800 in SPX). This was quite a good call as we lost at one point about 150 points in the emini index from the Weekly open levels. I had been warning about this level for last 2-3 weeks and it was finally good to see some volatility.

On the downside, the support came in at my Friday level. In fact we saw about a 65 point rally from these levels.

However, I think my best calls were in crypto stocks like MARA this week. I pretty much nailed the entire weekly range in this stock this week.

This is going to be a good post where I share my views on the likes of NVDA, SPY, Crypto, AVGO, GOOG and much more. Stay tuned!

Whether this is a good post or not, do keep in mind this is my personal journal and nothing more. I don’t mind sharing this as a personal blog but it is nothing more or less than that.

On an admin side note, a few folks informed me they lost their access to prior lower pricing due to expired payment methods and asked if I can help them get back in on original prices. Unfortunately I do not control any aspect of billing. What I can do instead is offer a one time huge discount to help you offset some of the increased pricing. Click below link and use the one time discount.

Back to the emini levels now

On emini side of the house, we closed around 4740 on Friday.

I expect some more volatility this week but I think we are now close to some sort of intermediate low as we trade down into these levels shared below next week or may be next 2 weeks or so.