Weekly Plan 2.11.24
Hey traders-
Big events next week like the CPI should set tone of the market for rest of the month. This will be a very important report and should lay the foundation, if we get to 4% by end of the year, or stay near 5% FED Funds Rate.
The main expectation last week was to see resistance near 5030 and see dip buyers come in near 4910.
While we saw a little bit of resistance at 5030, and in fact closed the week only a few handles above 5030, on the downside, we could never get to 4910, and managed to carve out a low at 4940 for the weekly auction.
On other prominent ideas, I expected AMZN to push into 170 as well as META to push into 570 after their earnings. These were both good calls.
On top of that I expected the high flying SMCI to push well above 700 when it was trading below 600. These were all good calls as we see each one of these targets met this week.
Few other prominent calls were my swing low call in Bitcoin at 38K and the bottom call in MARA a few weeks ago. Notably I had taken a bearish view on MARA at 30, and BITCOIN at 40K right after the ETF launch. At the time of this post, they respectively pushed into 47500 and 24 respectively, thus having completed almost a full round trip from my levels within a month.
The main macro background behind the moves in equities this past week were the two US treasury auctions on Wednesday and Thursday.
These auctions actually came in very good, and any brief dips intraday on the auction days were bought up. The bid to cover ratios on both of these were near 2.5, with most of the offerings scooped up on lower end of the yield, meaning they netted the seller (US treasury) better bond prices. If I am not mistaken, Treasury was able to offload 25 billion in 30 years near a yield of 4.36%. Bid to cover ratio for those who do not know simply means the amount of bids received to the amount offered up for sale.
A higher ratio means a better auction from the perspective of the seller which is the US treasury.
The key takeaway from these auctions is that there is strong demand for this debt even now and the fact that these are selling at or near the yield offered is a sign the market expects bond prices to rise in near future.
Objective of the post today is to share a few names which I expect could be supported on the dips. These dips however have been elusive. Volatility has once again condensed to barely any moves in intraday time frames. For those of us who are active in the intraday time frames, volatility is a must. Volatility is what creates 2 way auctions which the active traders then can exploit for gains.
Simply put, if there is no volatility, there is no move in the main index, which in turn means there are very few or even no intraday trades. In my view, no trader can predict when the volatility will return but can react to it once it is here.
The main risk events next week are going to be the CPI on Tuesday and then the Retail sales on Thursday.
Market expectation is for the month over month inflation to come in at 0.2%, thereby leading to a 2.9% year over year change for the CPI. I think this number is expected to come in at 0.2 to 0.3% , leading to an annual rate of inflation at around 2.9%. I think whatever the outcome of this CPI print, it is unlikely now to lead to a rate cut in March. I also doubt due to the recent Econ data, that there is any chance of a May cut now.
This puts my year end FED funds rate target at 4%.
For the retail sales, I expect this number to come in quite soft. One factor weighing in on these numbers will be the sluggish car sales in Europe and Americas. Combined, these 2 data prints could mean the FED holds back on any rate cuts atleast for another 2 meetings.
From FED’s perspective, things are going very well. Employment for most part has remained strong, growth is still there, and they are in no hurry to cut rates as they are fearful of being proven wrong again like they were back in 2022 when Powell infamously said “We are not even thinking about thinking about raising rates”.
Once burned twice shy, Powell is going to be very careful in his approach to rate cuts and therein could lie the seeds of next crisis.
Inflation has to be viewed in terms of cumulative totals rather than these month to month, or year to year metrics. Cumulatively, inflation has accelerated in last few years. While you could argue that cumulative graph has always headed higher, it is undeniable that the rate of this change in recent years has accelerated.
In a way, this ties the hands of this FED when it comes to going all in on easing when next bout of recession hits. This keeps the bearish theory alive and I think once leading stocks like NVDA turn south, regardless of FED rates, the key players in the market will aggressively cut prices to correct recent higher plateaus in inflation and this is what will bring a major sell off in risk assets as deflation takes hold. The cost of services and products paid by consumers has to come from somewhere. It could be from savings, it could be from fiscal stimulus, or it could be from credit card debt.
However, once every source runs dry, the prices of products and services must now come down to bring balance between cost and ability to pay for these costs.
A great example of this is Tesla. Two years ago if you told me I could have a fully loaded MODEL Y for under 50K, I would have laughed you off. This car was selling well over an 80K price tag here in the US. Even a Model 3, some of its variants regularly went for 70K with all bells and whistles.
The situation now is very different. The reasons in this case are being cited as higher interest rates. However, reason can be any thing, the bottomline is that the market forces eventually will force all producers to cut prices thereby bringing profitability down, which in turn will correct the stock prices as well.
Now how does all this translate to related markets in the moment
I view the current rallies in the indices such as SPX and QQQ as a function of a handful of stocks, like META and NVDA as well as super optimistic bets on FED scaling back on their tightening.
There is no doubt that these gains are very impressive but for these gains to last, I want to see other market leaders emerge to replace NVDA and META. Who is that going to be?
And conversely for this market to start dropping again, I like to see some sort of cracks appear in the likes of NVDA. Momentum alone is very strong in NVDA at the moment. However, purely from a valuation point of view, NVDA I think is very over valued. This does not mean it can not and will not go any higher from here. However, if you have been a reader longer than a month or two, you will remember I had a very favorable view of NVDA at 400 and I expected any dips in it to be bought for a test of 700. We are at 720 now.
NVDA also has an earnings coming up in a few days. Normally, I will be quite bullish on a name like NVDA headed into its earnings under such a backdrop. However with the action that we have seen over past 6-8 weeks, I will question that how much of a good news is already priced into these levels? I will share my levels for NVDA as we get closer to the earnings day for subscribers.
Semiconductor industry as a whole is now pushing into 5 trillion USD valuation. Out of this about 1.8 trillion dollar is what NVDA has. Industry PE as a whole sits at around 40.
Compare this to something like AAPL. AAPL makes about the same money each year as the entire Semiconductor industry combined. Now you could argue that AAPL earnings are more or less secure for next several years. I do not know if this same thing can be said about the SOX industry as a whole. Even if the earnings are held and continue to grow, I do think any single stock in the SOX industry will not be the “winner takes all”. This is just the nature of the industry.
This is a valuation issue that sooner or later will be resolved.
Long story short, if this market is going to continue to go up, I think AAPL is more perfectly priced here at 189 than NVDA at 720. Again, this does not mean that NVDA will not go up; it may rise another 4-5% based on insane momentum it carries right now, but I am not a fan of NVDA valuations at these prices. I favor it sell down to 600 or so to have some semblance of value. I will fade NVDA here at 720-750 and my somewhat fair price target will be closer to 600 than here at 720-750.
Now, with AAPL, my view is that if NVDA tumbles here, it has the potential to take down the entire market with it, so something else has to step up and carry the weight of the market.
In my view, this something could be AAPL. Due to these reasons, my key Line in Sand (LIS) for AAPL will be 180. I think as long as AAPL holds 180, it could push higher into 200-210 area.
My levels for next week
Given the technicals and the momentum, my current view remains that these markets could remain supported on a dip. For sustained action lower, I need to see a balancing for few weeks that then breaks to the lower side of the range. I am not seeing that yet.
At the same time, auction markets have natural supply and demand levels. Traders by habit like to sell same level over and over again- until proven wrong. And like to buy same level again and again- until broken. Based on the weekly auction, I think there may be some degree of exhaustion here at 5030 area. And due to this reason, this will remain a key level for me going into next week as well.
Scenario 1: If we trade down into 4976 upon a liquidity release event, I think these levels could remain supported for a move back into 5026-5030.
Scenario 2: 5030 could remain an important level. At start of the week, I like to see some intraday closes below 5030 and that could signal to me that this remains a good resistance. At time of this post, we are trading about 10 dollars above this level but that could change as we head into Tuesday.
For deeper sell off, I will like to see a couple of closes below 4976. These levels are for March Emini ES.
In remainder of the post, I discuss some names like AMZN and where I see them headed next, along with some key levels on them which could act as support, if tested.
In addition to this, I shared my personal levels on DWAC, SNAP, RIVN, CMG, O & CCJ in sections below.