4/25 Daily Note: Do not fear Meta Selloff. However, any real recovery hinges on Microsoft Earnings
A MSFT driven selloff will not bounce so easily. If they perform, tomorrow can be a good Green session.
Hey Guys,
Today is a very difficult trading session, and that is for sure. With a thoughtful understanding of the tech ecosystem, today is made slightly more manageable. But still hard.
I’m going to un-paywall yesterday’s letter so you can see what I discussed with the Community ahead of Meta earnings. Here’s the highlight.
In addition to watching Meta outcomes, I also closely follow Lam Research. Why? This is the CapEx beneficiary of any AI spending.
With Meta’s selloff being premised on AI spending more than expectations, my fundamental thinking is that all that “revenue spend” which exceeded guidance from Meta goes towards Semiconductors. That was in the tune of several billion dollars, so that’s definitely constructive for semis.
In plain english, the tech selloff today is a redistribution of capital from Meta’s capex spending for more AI tools that is supplied by Semiconductors (NVDA/AMD/LRCX/AVGO, etc).
For this reason, instead of getting overly concerned about the selloff, I actually favored a bounce “at some point today” as discussed inside my pre-market plan.
I certainly understand the bearishness after Meta headlines, but on intraday terms, I believed today was an opportunity for Bulls.
My initial index targets were shared before GDP numbers that came out, which flushed the market lower before 2-Way Action emerged at the opening bell. My stated initial targets came within a few points, but were not reached due to this flush.
That being said, we can see that the “intraday bottom” for markets was established in the first 10 minutes.
Unfortunately for me, my first entries were a bit too high in the 17490 NQ region.
I gave myself a chance to average down in the 173XX region given my intraday view that Semicap Equipment name Lam Research along with NVDA/AMD would later support the market.
Averaging down is a strategy that requires significant psychological/mental capital, and I cannot advocate this to most friends.
After we got a bounce towards mid 174XX NQ, my personal quota for the day was well exceeded and I exited.
Although the outcome is nice, I am not quite pleased with my initial entry which forced me to average down. I only averaged down because I saw semiconductors had shown relative strength. Had they not, I would have taken a loss and called it a day early because NQ would have lost 183XX much more easily.
I will be closely examine how to de-risk a first entry if it goes wrong and share my findings with members when I have enough data.
Trading is very psychological, so as much as I will share my best findings, it does in no way guarantee profitability. I spend a lot of time working on mindset. And I try to improve a little bit every day.
Like I said in a previous post, our trading equity curve is somewhat a reflection of our Mind.
This is because the “path” from entry to target can be filled with twists & turns that can take out many traders before the final destination has arrived.
Today is nothing short of a blessing as I will always say.
Meta’s earnings selloff was nothing to fear, in my opinion. The index price action showed it today. In fact, I’ll openly rate Meta a buy in the 400-430 region.
Microsoft’s earnings, however, are a different story. Weak guidance from MSFT will produce a selloff that will not bounce as easily.
If MSFT can pull off a strong report, tomorrow can be a powerful green day.
In either case, expect significant volatility.
Good luck tonight.
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-Larry
Helpful Resources to understand my methodology (this will be updated on an ongoing basis):
Educational Guides: https://larrycheung.substack.com/t/educational-guides
DCF Conclusion Studies: https://larrycheung.substack.com/t/dcf-modeling-fundamental-analysis
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