Was last week’s sell-off expected, were we buying too early?No, that’s why
In my last letter, the title was “Prepare your shopping list, but stay hedged” (click this link if you want Review it). I urge everyone to hedge and prepare for a big enough selloff to go shopping. No one can predict the future with perfect vision, but last week was pretty accurate. The question now is, did we act too soon? Technically the answer is yes, but more details are needed. There’s an important point here; no one hits the perfect low when buying a stock, it almost never happens. I have said many times in the past that investing in stocks and trading depends on time scale.It’s much easier to identify quality inventory and hold on to it and let it grow. It’s a painful experience at times, but let’s stay on track for now. What long-term investing does is actually give the rest of the world enough time to catch up with your smart choices. If the stock doesn’t provide a dividend, then at some point to gain value you have to sell the stock. Now, instead of waiting years, you believe that a great stock is about to rise quickly, either recovering from an industry sell-off or from misunderstood news (in your opinion), and you decide that it should be on the rise. Peak value within 2 months. Lo and behold, you were right, you sold. Is this trade or investment? Anyone would say that buying and selling within a few days is a trade. It’s all about time scale, the shorter the time horizon, the harder it is to create returns. For most individuals buy and hold long-term; 3 months to 18 months may be more successful. Sometimes, if you are very skilled, you can create returns in shorter time periods such as 1 week, 2 to 3 weeks, or even a few days. If you approach a stock from the beginning and trade within a few days, unless you really focus, stay on top of the latest data, understand the technicals and read the charts, then maybe you will come out ahead. Chances are you have a full-time job or are just not working as hard as you should, and you’re going to fail. Trading is like baseball, if you bat 300, you’re fine, if you bat 600, you’re a god. Three hundred is just 30%, right, so how do traders make money? The key is to know when you are a loser and cut your losses quickly, then let the winners run away, and finally know when to cash out. No matter how you slice it, it’s still hard to do. Extend your time horizon and build a position over time to understand the business the stock is in. I don’t follow retail, but some of you love shopping, and there are countless deals and investments you can make in the retail space. Understanding the business is an important part.
Consistent short-term trading success is as difficult as qualifying for the NBA
It sounds impossible, like batting .300 in the MLB. So if you are an average player who performs well in the batting cage or can hit the golf ball within 100 yards of par, stop trading quickly and extend your time frame. Here’s the punchline: It doesn’t just mean you hold a long trade for a month. What I mean is tracking your goals, watching price action, and understanding where the support levels are. Understand the industry and sub-sectors and be able to explain in 3 sentences why Intel (INTC) is starting to become a stock worth owning again. I’m not recommending INTC, I’m just impressed by Kissinger’s recent actions. If you’re just following “tips” or yesterday’s news, you should put your money in ETFs. We often have newbies join our Group Mind Investors community and be intimidated by the amount of content I share in the chat room, but on the other hand, we have a lot of members contributing their knowledge. Those who stick with it start to realize that it takes work to be an active investor, even if your investment horizon is 3, 6 months or a year. These new people, if they stay, will bring their own perspectives and everyone will benefit from each other’s knowledge. You may become frustrated if you are unable to monitor the market for 5 to 10 minutes 3 to 4 times a day. I used to have a private email stock newsletter that I sent to friends and acquaintances, and that’s how it all started. The feedback I get is, just give me the stock, why do I have to read all of this? If you are that kind of market player, you will only succeed when the market is bullish for a long period of time. We haven’t really had something like this in a long time. I’m not saying you can never successfully trade short-term, but it usually takes a few weeks before you can trade for quick money. Don’t take anyone’s advice, chances are you bought at the top and could end up watching it lose 20% of its value in an instant.
So after all we bought too early and more importantly will this lead to wrong losses this week?
I really don’t think so, I can’t say for sure in a metaphysical way, but we did pick the location. I will reveal the items and prices I purchased later, but these prices were chosen in advance, using charts and focusing on the one sector that will be most affected by the rapid rise in interest rates in the short term, but in the long term, due to the slowdown in the economy, they will ‘s ratings will return to highs. If you haven’t guessed yet, and haven’t read my previous articles, that’s the name of the big tech companies. I haven’t added or started any locations in Magnificent 6+ in a long time. I feel that if I bide my time, the bearish case for the tech giants will reassert dominance and push their prices down to levels that would be appropriate for re-entry. As for the coming week, we begin our finale…
Friday trading chaos
I’m not going to dress it up for you, looking back at Friday’s closing action was disappointing. I would rather it not spike and just rise above the lows than fall at the last moment. The probability of further losses on Monday morning is over 65%. I believe the sell-off will taper off and we may see strong buying in the first few days. Powell’s favorite key economic data; the PCE is held on Thursday and Friday is the last day before the government runs out of money. They will play timid and provide a brief delay at the last minute by continuing to negotiate a solution. At some point this issue will be resolved, and until then it will continue to be a “can that gets kicked down the road”. I’m counting on market participants to show fatigue, so yes, I think we did the right thing by closing all the hedges and going long the various tech giants – more on that at the end. Aside from the fact that the market is oversold, let’s count our blessings and realize that stock prices should be higher.
There is reason to be optimistic
Let’s take a step back and see this clearly. The Fed is expected to take a hawkish stance. The reason is that Powell has probably completed the raise. Even if he raises in November, the chances of him raising again anytime soon are next to zero. Next year is an election year, and the Fed doesn’t like to interfere in elections unless inflation really spikes. What you should be thinking about is why it was considered hawkish – because they removed the dot plot that led to the Fed cutting rates soon. No one should have taken dot pictures seriously in the first place. Dot plots are almost always wrong. Even in 2024, we at Group Mind Investors have never modeled a Fed rate cut. Most rational individual traders would agree that there will be no interest rate cuts in 1H24, barring a severe recession. I’m holding off on commenting on cuts in the second half of the year because I don’t believe there will be a severe recession next year. If I’m wrong, we have plenty of time to deal with this. So the economy is doing very well and core inflation is falling. Yes, WTI is at 90 and food prices are up, but did you know wheat and corn will cost less per bushel in 2023 than in 2022? In September, U.S. wheat futures fell to their lowest level in nearly three years. I’ve been documenting the decline in lumber prices, which reflects lower homebuilding and home improvement costs. Corn and wheat are used to feed cattle and chickens, so protein costs should be lower. Yes, diesel prices are up, but I believe the longer oil prices stay above 90, the more DUCs (drilled but uncompleted wells) will start producing more US oil. Production will resume in areas abandoned because of low prices, and oil prices will stabilize.
Let’s connect the dots with the concept of “Hawk Pause”
At the risk of being called “Captain Obvious,” the Fed won’t declare “mission accomplished” because Powell doesn’t want to trigger a speculative frenzy in the market. Furthermore, the probability that inflation will not be eliminated is not zero. However, in the longer term, inflation is falling and job vacancies are being filled. The U.S. government has just issued work permits to 500,000 Venezuelans. As I’ve been saying for over a month, there are millions of illegal immigrants, or in more PC terms, undocumented workers who somehow obtained a Social Security number and joined the workforce. Call me a cynic if you want, but this has been happening for as long as I’ve been alive, so let’s approach it with adult eyes. You won’t hear anyone in the media or any economist say this, but there are clearly more workers in the economy than the Bureau of Labor Statistics counts. Last week we hit 200,000 jobless claims, which is a very hot number unless there are more workers than we count. OK? Let’s hope services inflation is no longer an issue. Additionally, another clear sign is the super-hot GDP data. Do you know the easiest way to increase GDP? that’s right, more people. More people working and more people consuming give us more economic growth. So while the Fed is worried about rising GDP, they should welcome it as a result of falling inflation. Combine this with generative AI writing enterprise software applications, and your productivity will flourish.
So what did I buy?
First, I closed the downside trade on Arm Holdings (ARM), I’ve never been long on a PE-backed relist. Other than that, the prices are ridiculously high. Regardless, my closing price is slightly higher than the IPO price in case the IPO bookrunners want to defend that price. If I’m right and we do have some longs entering the market, I’ll be happy to go long the puts. I also closed WeWork (WE) for the second time and Faraday Future (FFIE) for the second time. I then covered my SQQQ and SPXS calls, it was premature but they did their job. Finally, I closed my VIX futures options position on Thursday. Then I bought Boeing (BA) stock at 200, it’s not a large cap tech stock but it has very long term support in the upper 190’s at 197 and if it gets there I’ll probably buy more closer to 195 Point stocks. Why BA? They have a backlog of 4,000 aircraft, and they have a duopoly. For very temporary reasons, the stock was sold off and the price at that time was only 240 points. I’ve lost count of 200 times. Perhaps, if recessionary concerns were real, as I mentioned in a previous post about “recessionists” (click the link to refresh your memory), BA at this level or lower would be reasonable, but I don’t think that has happened yet. I bought Alphabet (GOOGL) at 130, Amazon (AMZN) at 130, Netflix (NFLX) at 386, Oracle (ORCL) at 110 and my big loser at 430 NVIDIA (NVDA). It bounced back on Friday, closing at 416, and I think I should be fine if we rally tomorrow. My sentiment on Meta Platform (META) has not been affected by the price, so I’m giving up on it for now. Let me end this thought, I am not pulling these prices out of thin air, I have been following these names all year long and I also understand that in the long run, regardless of the economic slowdown, inflation comes back down without the economic slowdown. , interest rates will stabilize, and so will the dollar. Guess what? It’s perfect for these names. Another thing about my trade is that I’m bullish on NFLX because there have been rumors that the Writers Guild agreed to a deal with Hardworking. Once that happens, I think NFLX stock will enjoy more bulls joining its camp. Otherwise I might go into META. NFLX’s CFO made some statements saying that its advertising layer has yet to contribute to revenue. There’s no doubt that advertisers want to be in front of NFLX viewers? I think NFLX will do very well as a stock and as a business.
Have a great week and drink lots of water today…
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.