October 10th Daily Market Note: Markets left a vicious bear trap last week. Does this rally have legs?
10/10 Premium Strategy Note
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Yesterday in our Daily Note, I mentioned several names that I believed had the potential for modest upside in the context of today’s market environment based on sector-specific considerations.
I chose companies that had a statistical likelihood of heading higher based on their current setup, regardless of general market direction (although a strong market does indeed help). So far, so good – traders can lift stops to entries – providing what is essentially a risk-free transaction. If you haven’t yet followed me on Twitter or Instagram, please do so as I sometimes do provide ideas freely to the public – like this one here on Costco and Walmart. Costco is up a stunning $20 per share from 545 to 565 since the Tweet.
As for today’s market context, there appears to be a few catalysts driving investor sentiment.
On the Dow Jones, many of the names inside this price-weighted index (high-priced stocks influence the index rather than market-cap weight) are categorized within Food & Beverage. In the pre-market, Pepsico’s strong earnings outcome reduced fears that popular drug Ozempic is going to greatly damage 2024-2026 forward looking profits within the sectorFood & Beverage. For this reason, names such as Coca-Cola and McDonalds are coming off deeply oversold levels while simultaneously lifting adjacent themes such as Proctor & Gamble.
MCD (and HD) at yesterday’s shared level had the case for at least a technical bounce, which is what we are observing today. Levels provided serve different purposes – some have a technical premise, others have a fundamental premise. I can’t say that McDonalds (or Home Depot) is undervalued from a fundamental standpoint (it’s not), but I did have the view that the stock was in a region where a bounce may occur. During technical bounces, they are viewed as relief rallies rather than the beginning of a new uptrend. Technical Bounces tend to be short-lived, but they serve their purpose well (and provide easy wins) if one is consistently finding such ideas on a repeated basis over and over again. These consistent sector rotation ideas attribute at least 2-3% annual alpha for me personally. My style can be characterized as pursuing small wins in volume. They add up over time to meaningful piles of profits and end up smoothing out the equity curve of a portfolio. Never underestimate the value of small wins – especially if there is a repeatable process behind finding them (which I believe I have found and actively share with you here). What I see on social media in terms of influencers taking large concentrated, all or nothing positions, in the prospect of big returns is exactly the opposite of what most people should do.
Within the Nasdaq, the Semiconductors are healing today as the prospects for a calming in middle east tensions. Semiconductors are very “supply-chain” oriented meaning that locational disruption due to conflict can slow down the production process and therefore prevent any backlogs of enterprise orders from being completed on time. Should the middle east tensions cool off, I think Semis are the next sector to advance meaningfully. The best way to participate in Semiconductors is the SOXX ETF, rather than go for specific name choosing. The recent rally from 465 to 487 has reduced its risk/reward ratio, but I think SOXX sees/touches/visits 495-500 before year end. Whether it stays there, I’m not sure. I can only comment on whether it touches that region because I am a limit order trader so whether it stays there or not isn’t my business. In other words, a decent probability 2-4% upside potential from here.
Last week has proven to be a ginormous bear trap for retail investors. I am also nearly certain that last week’s events caused a sizable portion of retail investors to slash significant equity exposure as the S&P 500 teetered on the verge of its 200-Day Moving Average.
We took the opposite side of that fearful thinking, added into positioning, and we are now being sincerely rewarded for it.
From here, for any further advance to be healthy, we need to see consolidation or even modest retracements. A straight surge higher is Not what bulls want to see.
It’s now too late to be adding new positions. Risk/reward has greatly moved away from new entry considerations at the broad market level.
For Traders, the optimal move is that we are closer to risk-reduction than adding positioning. Careful here.
Investors need not change a thing.
Make sure to be on my list here below and share with other investors/traders looking to navigate this market.
Forward-looking Conclusions of this note:
Macro: As previously mentioned, stronger seasonality is beginning to take hold in the context of existing macro worries.
Stock-Specific: Names discussed yesterday are all working in our favor. Lift stops to entry or slightly above, and let it turn into a risk-free trade.
Bonds: No near-term view on TLT after it’s largest 1-day surge in 3 months. Balancing & recharging may be required for next steps.
China: Discussed Hang Seng being bid up after National Day holiday before it happened. Now it’s here.
Rest of World: A relaxation in Middle East tensions will add fuel to the rally in European sensitive names.
Disclaimer: My investment community is not investment, financial, or trading advice, but for educational informational purposes only. I am happy to share my personal opinions which I provide as my personal journal. Trading of any kind of securities involves a lot of risk. No guarantee of any profit whatsoever is made. Investors may lose everything they have. Practice extreme caution. No profit is guaranteed whatsoever, You assume the entire cost and risk of any trading or investing activities you choose to undertake. You are solely responsible for making your own investment decisions. Owners/authors of this publication are NOT registered as securities broker-dealers or investment advisors either with the U.S. SEC, CFTC or with any other securities/regulatory authority. Make sure to consult with a registered investment advisor, broker-dealer, and/or financial advisor.