Approaching the upper end of the counter-trend rally: Refueling or out of fuel? 5 Charts to Consider
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Note: After weeks of relentless volatility, we had a relatively calmer week (on a percentage change wise). This email will serve as a personal journal of my informal thinking, and I provide the expanded detailed form provided inside our welcoming community.
Dear YT Friends & Public Investment Community,
After 7 weeks of consecutive declines in markets, we saw a powerful counter-trend bounce in the week leading up to the U.S. Memorial Day weekend. To members who follow my work closely, we have provided a very thorough map of how to navigate this market, and so far we have been exceptionally prepared for the pivots.
Make no mistake, we are in a macro-driven environment so the winners in this market are those who can correctly anticipate the Federal Reserve’s monetary policy AND how the marketplace is likely to react.
This past week, we witnessed consolidation on an index level across SPY, QQQ, DIA, and KWEB.
But underneath the hood, quite a bit happened if you followed the day-to-day action like I did for our community.
I’m going to make this a relatively brief email because I want to concisely hit at the biggest takeaways. And in upcoming days, when there are further developments, I’ll update you again.
I hope this read is an enjoyable one as you relax this weekend.
Here were some data points that I found particularly important:
More companies indicated their intent to freeze hiring and layoff staff
Fed Committee Members coming out to continue to voice their opinions on the economy
Friday’s job report indicated that the economy is not yet cooling off at the rate the Fed needs to pause hikes
Inside our investment community, I alerted our members to the fact that hiring freezes may temporarily improve EPS and earnings figures, but this cost-saving initiative is by no means enough to offset weak end-market demand if the Fed’s monetary policy drives us into recession.
At SPX 4100-4200, the marketplace has priced in a “growth scare” but not a full downgrade in EPS revisions. This means if companies start underperforming, SPX 4100 is not yet good value. Conversely, we could see a more durable bounce if earnings outcomes figures show resilience. First big signal will be Apple later this summer.
We also had notable Vice Chairwoman Lael Brainard openly share her opinion that inflation is still far too high and that the Fed is prepared to continue slowing down aggregate demand in the economy to stifle inflation. This is important because historically speaking, Lael has been relatively dovish on her perspective of the Fed Funds Rate.
The Friday’s job report has not shown enough evidence to cool the job market to an extent that would significantly lower inflation levels to the point that would take hawkish Fed committee members to reverse their stance.
This WSJ Journal below offers a good summary of her thoughts. If you have access to WSJ, you’ll be able to read it. If not, you can send me a message on Patreon, and I’ll share this article with you.
In the context of her comments, here are 5 sample charts that I’m following out of the many other indicators that I follow. These charts are created from TradingView, and if you want to use advanced charting software, then feel free to click the chart images, and it will lead you to preferred pricing for my readers (courtesy of TradingView).
1.) The Relative Performance of the SPX to QQQ
Brief Commentary (long-form commentary discussed inside our Bi-Weekly Reports):
We can see that since the Fed pivot in November 2021, the SPX has significantly outperformed the QQQ and tech sector. There are pockets within tech that I believe can outperform the SPX. But on a general level, while selective tech can still stand out, I am inclined to believe that general technology may struggle because Wall Street’s DCF models discount these companies more sensitively when bond yields rise.
This implies that investors who are positioned in technology need to do so in a very selective way.
2.) The TLT Bond ETF
Brief Commentary (long-form commentary discussed inside our Bi-Weekly Reports):
The TLT ETF (which is a proxy for bond values) attempted to rally off its 113/shr. lows in the past several weeks. But in the last week, while Stock Markets were choppy/flat, the TLT ETF continued to once again trend lower.
This indicates that inflation fears are creeping back into the market. And this leaves investors with a difficult decision soon.
Trust the bond market’s signals, or the S&P 500 recent week of consolidation.
I am constantly studying the underlying correlation relationship to best inform our community.
3.) The U.S. Dollar Currency Index
Brief Commentary (long-form commentary discussed inside our Bi-Weekly Reports):
The US Dollar’s (DXY) retracement in the past several weeks has been immensely helpful to the SPX’s counter-trend rally. However, it appears that the Dollar is bouncing off the 50-Day Moving Average, and if the DXY resumes its uptrend higher, that will once again be problematic for the broader markets.
The relationship is not always linear, and the dynamic between the US Dollar and equities often changes as the environment shifts. But it is one area that I study closely, and I provide updates on these areas inside our community.
4.) Crude Oil
Brief Commentary (long-form commentary discussed inside our Bi-Weekly Reports):
Energy and oil stocks represent a very small weighting of the SPX, yet holds incredible importance in our real economy. With gas prices now breaching $5/gallon, it is inevitable that consumer dollars are flowing away from consumer brands like $AAPL and into the pockets of $XOM and $CVX.
Lower oil prices a few weeks ago were one of the indicators that told me that the SPX 3880 and Nasdaq 11,000 levels were buyable. However, that was when oil was closer to $105/bbl.
Since then, oil has now trended north of $115/barrel. If this trend continues, I will soon have counter-market strategies to help our community hedge looming volatility.
I do not view uncomfortably high gas prices as constructive for the U.S. economy, where 70% of our GDP is consumption based.
5.) China Internet (KWEB) vs. U.S. Tech (QQQ)
Brief Commentary (long-form commentary discussed inside our Bi-Weekly Reports):
As I’ve discussed on Youtube and inside my Community in the past several weeks, I maintain my constructive stance on the Chinese Internet sector.
I understand the intense pessimism/skepticism that my public audience holds on China.
However, I continue to believe the diverging monetary policy goals between China and U.S. will have onshore China investors start reconsider their fund mandate allocation. This is a long-term strategy. China is not for short-term investors.
Many people think that all Chinese Internet investors have no profitable positions. That is a flawed assumption. There have been pockets of opportunity if you had the right guidance (like the one I provide).
If you read carefully below in a note to my members, I continued to add BABA, KWEB, and JD into May’s weakness on May 20th.
And as BABA approached the 95-100/shr range in the past week, I reminded our community that I had trimmed some positions and was now at a Hold for this sector given that I believe China’s buyside community has priced in a certain level of extent of Shanghai re-opening.
In this environment, you must learn two skills: the ability to pick long-term positions AND short-term positions.
You must know your timeframe. You must know what precisely your goals are. Without a clear sense on your timeframe and planned goals, it is difficult to secure an edge in this market.
If you enjoy this type of writing style from me, share my newsletter with more people so that they are best informed as possible. My style is a combination of Macro, Fundamental, Technical, and Geopolitical analysis explained in the most accessible way possible.
That’ll do for this update.
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❤️ this email if you enjoyed the read. And see you in my next Youtube Video.
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Your Investment Strategist,
Larry
Important note: My public letters are not financial advice. You must do your own research. They are designed for educational purposes only.