November Investment Strategy: The U.S. Midterm Elections Could be a Game Changer for U.S. Markets. Catalysts for China are coming shortly.
Patreon: November 1st Half Strategy Report (11.1.22-11.15.22). Subscribe on Patreon or Substack to view the full actionable research report.
If you are a new friend on my public email list, join my free public list now for exclusive previews into my research and be on the lookout for occasional premium research I provide publicly.
This research note was sent on October 30th inside my Patreon Investment Community.
Larry Cheung, CFA: Patreon Investment Community Research Updates
November 1st Half Strategy Report (11.1.22-11.15.22)
Title & Thesis: We are approaching a seasonally strong period of the year for Bulls. I do believe that if Republicans win both the Senate and the House after midterm elections, it is possible that the size of this bear market rally on the S&P 500 could catch Bears by surprise. The S&P 500 is getting stronger with its composition changing (read research below). Fed Chief Jay Powell is likely to reiterate verbal hawkishness in November FOMC. However, if his message is that the Fed Funds Target 2023 remains at 4.5%-5%, I am extending my October opinion and believe that the rally has further to run. With FAAMG earnings finished, the market is greatly de-risked from tech disappointment. I expect new leadership to emerge within SPX. Upon any large epic euphoric rally, use this as an opportunity to de-risk.
For context, please make sure to read my previous updates leading up to this one so that you understand my thought process. I strongly recommend reading the past 2 Bi-Weeklys so that you can understand the context of this note.
Quick Recap on Markets in October:
In my Mid-October reports, I discussed the strong potential that we would see a significant tactical bounce with Buyside investors front-running any sign that Rates would remain stable/paused. Since then, we’ve leapt from the S&P 500 3600 region into the high 3800 region, crossing 3900 on Friday 10/28. I specifically discussed rallies in the 250-400 point range in a recovery scenario. This is now materializing. While I do believe a pullback is coming because the rally has been swift, I believe the markets are demonstrating incredible strength with FAAMG earnings largely disappointing yet the broad market advances. That said, I remain on the sidelines on Apple. Their post-earnings price action has been impressive but their organic business growth is slowing down and their share repurchases are artificially holding up the company. Their share repurchases were just as large as their quarterly cash flows.
On company specific notes, our defensive ideas from September continue to shine: Dollar tree has surpassed 155. Costco reclaimed 500. JNJ is near 175. Berkshire Hathaway is now near 300. Our offensive ideas (MSFT/GOOG/AMD) trailed the market, but their recent price action implies that investors still have faith in these names. After FAAMG earnings, I view MSFT/GOOG/AMZN to offer good intermediate/long-term value.
Long-time members & friends now hopefully see the value of intermediate-term investing (a type of investing strategy that is multi-week/multi-month in nature). This time horizon is my personal strength. The confidence (and accuracy) of my opinions is highest in this specific timeframe.
I believe there are many traders in the marketplace who are more experienced than I am when it comes to day-to-day price action/maneuvering.
But when it comes to intermediate-term investing, if you have been a long-time follower of my strategy, you’ll notice that it requires LESS work, and produces BETTER outcomes.
You can see that I’ve gone for the bigger macro opinions based on where I see the environment is heading.
Dollar Tree to be a big beneficiary given weak U.S. Consumer
Berkshire Hathaway as the primary way to play Oil given Buffet is a master capital allocator
JNJ as a top healthcare name and largely considered to be staples
Defending Kroger even after its acquisition plans because it doesn’t matter whether they go through with it or not - KR will still benefit from today’s environment.
My ideas take time to play out (they are intermediate-term after all). If you are a new member, you will see what I mean within several weeks/a couple months. I will be very deliberate in what timeframes I use when I’m discussing my research opinions. If you’re new to our Community, make sure to always read at least the last month’s 2 reports before reading this one so that you get context.
Now, some of these Dow Jones stocks and defensive names that we’ve guided positively upon in our Bi-Weekly dashboards have RSIs that are approaching 70. Objectively speaking, we should expect gains to slow down even though the positive momentum is in the Bull’s favor. Consolidation or a modest pullback here is very healthy, and should be welcome if we want the advance to be durable and sustainable.
I believe that the current recovery we are seeing in markets is a bear market rally (BMR). I do believe this BMR has further to run if the November FOMC reiterates the Fed Funds Target rate at 4.5%-5%.
With that said, let’s discuss our November Strategy on the U.S. and China.