Macro Commentary: Fed shrinking The Balance Sheet combined with China Geopolitical Tension May Eventually Pop the NVDA Bubble
Macro Strategy: Fed reduces critical liquidity and divergence between Semiconductor sub-sectors appear to form. Commentary on downside targets on NVDA.
Note: This is a supplemental update in between monthly reports, and is written concisely. Also, I aim to write in non-technical language. All readers should be able to fully understand regardless of experience level.
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In this note, I will continue sharing my personal views on directional opinions regarding where key ETFs and names may be heading. However, please understand these are my personal opinions only based on my own research and must not be treated as customized individual financial advice.
Members,
I know our friends here are always excited to hear from me about my latest actionable observations on the markets, and so I wanted to provide another supplemental update ahead of the upcoming earnings season.
A couple things we’ll talk about in this note:
The low March Unemployment Rate - its implications and a scenario analysis of the S&P 500 / Nasdaq risk/reward setup as we enter earnings season
An update on the Fed’s Balance Sheet tightening again and its likely impact on stocks
An update on China’s geopolitical setup on Semiconductor stocks and the leading indicators I follow to understand where the sector is going (and what signals I’m closely following to see when the NVDA bubble may begin to deflate)
Quick update on China’s internet sector after Alibaba’s large run - is there still upside remaining?
The first thing that I would like to address is that I’m going reaffirm my macro conviction that the Unemployment Rate is going to soar higher in the coming 4-6 months.
And even IF it doesn’t show up in the Bureau of Labor statistics official data that is released each month - I believe the market will price assets as if Unemployment has already moved higher (in other words, with every passing week, it becomes harder to deny the jobs market actual weakness).
The calculation methodology of the Non-Farms Payrolls is one thing. The economic reality of the situation at hand is another.
In a recent note sent out to our Community, I wrote that I believed that we would get confirmation on Unemployment going higher from the March Jobs Data.
However, the official release eludes my opinion of a weakening job market again as the Unemployment rate came out to be at 3.5%. Supposedly, 235K jobs were added and Wage Inflation was unchanged.
I say “Supposedly” because any long-time follower of economic data knows that it’s subject to revisions every month, and last month’s jobs report was revised upward to 325K from 311K.
Quite frankly, and as directly as I can say within the Finance space which usually hedges their opinions, I’m going to choose to say that this released data just simply doesn’t represent the reality that is being felt out in the real world.
The White Collar recession is not being appropriately reflected in the Unemployment rate. Most of the jobs creation was in the services sector - filled with part-time roles.
This leads me to bring up a scientific analogy: Did you know that Butterflies’ are colorless?
Yes, that’s right - Butterflies have beautiful colors when they fly around you. But when you inspect them closely under a microscope, their wings are indeed colorless. The untrained naked eye cannot observe this.
What I am trying to say here is that I think every jobs report that we receive looks like a majestic Butterfly, but upon closer inspection will reveal that beneath the hoods, things are NOT what they seem.
For this reason, I stay the course on this macro conviction discussed on Twitter below.
However, just because I’m negative on the economy, that doesn’t meant I haven’t found opportunities in the global investment landscape because I am now rapidly expanding the breadth of my coverage universe.
The investments universe is deep, broad, and large. There’s always a Bull market somewhere (whether Tactical or Structural), and I’m constantly on the hunt for these opportunities.
Long-time readers of my Community may remember that back in March, I was among the few Strategists who discussed 3850 as a tactical 3-4% buy zone for the SPY ETF along with other near-term opportunities during the SVB Crisis.
In my recent April note, I wrote to members that 2 Large China Semiconductor firms would likely benefit from the increasing geopolitical turmoil between China and the U.S./West.
One of the names, SMIC, ran up so abruptly that I didn’t even have a chance to build a proper position.
Now, am I to believe that the VIX (which is at historically low levels of 18), and FAAMG Stocks (all of which trade 65-70 RSI), and QQQE/RSP (Equal-Weighted Indexes that are severely weaker than their QQQ/SPY equivalent) will prove to hold up the market to new all time highs as the consensus now expects?
I don’t think so, and this chart here is the beginning of the end for one of the catalysts that have been supporting markets (explained further below).
We’ll discuss the implications of everything I just talked about (and more) and what I’ll be doing to keep my edge (and yours) as sharp as possible in this tumultuous market.
If we get the right levels, with the right vehicle, I plan to fade the market’s optimism and take advantage of upcoming downside targets/potential.