Critical Strategy Note: Defending 3800 SPX is essential for Bulls. Eye the U.S. Dollar for clues.
We've touched Bear Market territory. Although we could go lower, we would need a LOT more to go wrong from here to go underneath 3800. Hit the like button for stabilization.
Note: Given the intense stress that my community is going through, I am going to provide some investor education in this email note to help you understand what the Buyside is looking for. If any of the following material below is something you wish to follow closely, we provide even further education on the underlying concepts inside my Community through our analysis reports. This email may get truncated in Gmail. Read it in your browser for full-view.
And also, thank you to Doorvest for sponsoring my newsletter today as well as my most recent video on Youtube (more on them later in this email).
Dear YT Friends & Public Investment Community,
This email note will not recap the news of the past week, and remind you of the turmoil that we’ve been facing. I’m sure you read the news - you already know all about that.
First, let me recap my coverage inside my Investment Community along with other points of consideration so that you understand my perspective and the guidance we have provided.
Back on May 16th (when SPX was above 4000), my Bi-Weekly research report issued on the 16th inside our community discussed the potential for the SPX to reach the 3700-3800 range as we discussed the potential for a large decline coming.
We indeed hit the 3800 level on last Friday May 20th, which marked a bear market, and then recovered to end the day positive in a stunning turnaround.
On May 20th, in early afternoon when CNBC headlines was screaming for the markets to see the 3000-3400 region, I instead issued a note to our Community indicating that…
For now I do not believe that will happen…..I believe we will see a 100-250+ point SPX counter-trend rally should the index get into the range 3650-3800.
And what happened when SPX neared 3800? We saw options-expiration flow push out bearish speculators who bet on sub 3800 and now at the time of this writing we are at 3960 SPX (which is the 4%+ counter-trend rally that I was mentioning).
That said, we are absolutely not out of the woods, and even though my guidance inside our community has been very on-point, it does not prevent me personally from getting hurt in this market because every theme continues to face incredible pressure - from general indices, to China, to Semis, to Retail, and so forth.
This is because I am a long-term Investment Strategist and I don’t attempt to trade every pivot. My strategy is to provide guidance so that we catch the “bigger” moves.
What I wish to do in this email is to provide you several points of consideration that will allow you to think about this market objectively. If you enjoy this email note, share my email newsletter with any person you believe is impacted by the current market environment.
I wish to help as many people as possible during this period of uncertainty.
Here’s what we’ll discuss in this note:
The credit markets, the 10Y, and the U.S. Dollar’s implications on the market
Psychological ways to cope with the market’s extreme volatility
The credit markets, 10Y, and U.S. Dollar
This image below is a visual of the high-yield market in terms of credit spreads.
(For more analysis on this topic, we will be discussing this in far greater detail inside the community)
Essentially, the higher the value of this chart, the greater the financing costs that companies with below investment-grade credit ratings (and there are a lot of these companies) have to pay over treasury bond interest rates in order to secure capital.
Higher credit spreads will make financing via debt very expensive. And it will undoubtedly restrict companies with below investment-grade credit ratings from securing cheap credit to finance their growth strategies
Taken to the extreme, you could interpret high-yield credit spreads as a proxy for bankruptcy risk. Back in March 2020, high-yield credit spreads blew out past 10% as fixed income investors assessed the probability of bankruptcy for companies being very elevated.
As it stands today, the high-yield credit spreads have made a sharp upward trajectory since the beginning of April, and if the Fed continues to raise rates aggressively, the spreads could continue to widen out from here (go higher).
My opinion is that Quantitative Tightening and draining the liquidity from financial markets will have the net effect of further widening out credit spreads. This is why we are seeing investors trying to position their portfolios up in quality so that their investment-grade holdings are less impacted by the sharp upturn in spreads.
This chart has implications for the forward looking performance for ARKK-themed stocks compared to FAAMG Mega Caps given the difference between their credit-rating quality and their ability to finance their growth via debt. These are themes we discuss inside the community.
Up next, let’s talk about the 10Y yield.
(Has this key indicator peaked? We discuss strategy surrounding positioning should it peak or if it keeps rising)
I believe that we are a pivotal moment in both the fixed income and equity markets. The 10Y yield is a proxy of several different economic forces - inflation, outlook on rate policy, and also economic growth.
Particularly sensitive to the 10Y is the technology sector, where the lionshare of valuable future cash flows is set out to be earned in the future.
The 10Y had made a dangerous local high of 3.2% in the past couple weeks. If the 10Y continues on its ascent and breaks the horizontal resistance line, fixed income buyside investors may be pressured to once again sell bonds (which would lift yields).
On the contrary, if we can have the 10Y yield stabilize (having it fall would be a plus), the technology sector will also begin to stabilize.
The next move in the 10Y is likely to happen after Fed Minutes come out for the May FOMC meeting, which I will be analyzing for our community the moment it’s released.
Finally, let’s discuss the U.S. Dollar.
The U.S Dollar’s rise has been a very strong headwind on U.S. companies that have a significant amount of oversea operations, as it reduces the value of foreign currencies.
Roughly 40% of the S&P 500’s companies aggregate revenues come from outside of the U.S.
This means that slowing growth in the U.S. added with an increasingly strong dollar makes up incredibly strong headwinds for stocks.
However, what has happened has already happened. The key is to understand where the dollar goes next.
A portion of my tactical decision to inform our Community that we will see that counter-trend rally at 3800 was because I am seeing the Dollar starting to weaken.
However, as we all know, things can and will change at any time.
A quick note about our Sponsor today: Doorvest
I want to take a moment to thank our Sponsor of today’s newsletter - Doorvest.
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In my analysis of the situation, I personally see several benefits from working with Doorvest:
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Doorvest handles ALL of the property management for you - anytime the resident has a question, you don’t need to worry about it.
To learn more about Doorvest - I would encourage you to read the public analysis that Doorvest has received on media publishers like Tech Crunch and Bigger Pockets for objective commentary on how they help consumers.
And if you like what you see, then go onto Doorvest’s website (www.doorvest.com) and sign up with a full refundable deposit.
Coping with market anxiety
This market volatility has made even the most veteran traders and investors experience anxiety. You are not alone in feeling the pain of this market downturn.
Especially for people who have significant sums in the market (myself included) and retirees nearing retirement, this market environment has forced us to re-evaluate our future plans, aspirations, and strategy.
Here’s what I have been doing to keep myself productive:
Taking cold showers, playing more tennis, exercising regularly
Spending more money on research subscriptions myself to ensure that I know what the biggest players are thinking in the market so that I can advance my Community’s best interests
Thinking about how I can add more value through my content, whether it is via humor, light-hearted commentary to lift moods, or strong insights to help our audience.
My efforts are obviously being noticed. Besides seeing happy members and steady growth, more and more trusted brands & companies are expressing their desire to work with me.
I’m excited about the possibility that I may do a sponsorship relationship with one of China’s B.A.T companies in the future. We’re currently in talks.
That stamp of approval from a B.A.T company says it all - it says that the world’s largest and most trusted companies appreciate the research and strategy we discuss on Youtube.
If you are a representative of your company’s marketing efforts, and love my deep research/insights, and want me to help you grow your share of voice, my Brand Manager and I would be interested in talking to you.
If you are a Financial Advisor…
I am exceptionally proud that my Investment Community has nearly 15-17% of members being Financial Advisors/Investment Staff.
This tells you that my work is being leveraged to help even more clients across the globe as Financial Advisors seek out the BEST resources to help their clients succeed.
If you are a Financial Advisor who is committed to providing your clients the best possible strategic guidance during this time, I welcome you to share the principles that I’m providing inside my community to your clients.
While Financial Advisors cannot republish my work without permission, they are more than welcome to share the principles and ideas from my research provides to their clients to help them navigate this storm.
Some Financial Advisors take this to the next level, and discuss whitelabeling with me to further add value to their clients by putting their logo and brand on my research.
(Thank you Max)
If you are a Financial Advisor and you want to step up your game to take care of your clients during this exceptionally challenging time, join my community and leverage my research.
I am on a serious mission to help my community and all people who wish to learn from me and my strategy to get out of this bear market in the best possible shape.
I want to help you AND your clients succeed. When you leverage my research, simply cite me as an Analyst who you subscribe to.
The membership costs next to nothing if you’re a serious Advisor. And the upside to your reputation is substantial if you are able to help your clients get to a strong position.
Do NOT miss this opportunity to impress your current & future clients.
In my opinion, bear markets are a very powerful opportunity to show your community and the people you serve your true colors.
I intend to keep doing just that.
That’ll do for this update.
If you’re looking to truly understand the investing environment we’re in, and want to support my research/work, let me help you inside my community where I provide macro and equity research as well as career strategy advice. I’m on a mission to help people as many people as I can - hardworking, highly intellectual people like yourselves.
❤️ this email if you enjoyed the read. And see you in my next Youtube Video.
Also, if you haven’t yet opened up a free account with Webull, they’re offering up to 6 Free Stocks - Check it out!
Your Investment Strategist,
Larry