October 2nd Daily Market Note: The Markets May Make a Brief Tactical Recovery Higher IF the rise in Treasury Yields can be contained
Welcome to Q4 - Good Luck to All.
Intellectually Nourishing Quote: Three things cannot be long hidden: the sun, the moon, and the truth - Buddha
Bottom Line: The Markets May Make a Tactical Recovery Higher IF the rise in Treasury Yields can be contained
Forward-looking Conclusions of this note:
Macro: Stress is building in the U.S. Consumer Landscape, Real Estate Sector, and global FX Market as the Dollar’s strength and elevated Treasury Yields take its toll on emerging markets. However, a tactical bounce (reprieve) for the U.S. is possible if conditions loosen up. Will watch this closely.
Stock-Specific: There are a few companies that I’m watching closely now as I think certain names represent leading indicators. Discussed below.
Bonds: I will discuss TLT ETF below and long-term treasuries as this selloff renews my interest for a potential sector rotation idea again.
China: On the ground observations discussed below. Plus, I have updates on how folks from cities in Tier 1 and Tier 3 view Tesla and other brands based on in-person conversations and visible consumption.
Daily Market Note & Context
After a brutal September, many Investors have shifted towards a defensive posture as conveyed by the AAII Investors Sentiment Poll, which now reads fearful, and my own Community polling survey data. My Community demographic tilts more on the affluent side among global consumers and is typically more sheltered from economic malaise, so a shift towards market-neutral is a telling sign of how quickly price action can influence opinion on even well-heeled investors.
Based on today’s inter-market action, Big Players are attempting to hide out their positioning in FAAMG/Big Tech (Magnificent 7) with the continuous rise in the 10Y Yield. The fundamental reason for doing this is that nearly every FAAMG company has significant cash on their balance sheets, healthy free cash flow outlooks, and also disciplined cost management structure in place to protect EBITDA margins. It is unlikely that a rise in the 10Y Yield (the discount rate) in Wall Street DCF Models is enough to significantly lower their equity valuations ahead of the upcoming earnings season if EBITDA growth remains solid.
The same cannot be said for the other components of the S&P 500 as can be seen with the equal-weight RSP ETF now retesting an important level at 140. The equal-weighted S&P 500 has dramatically reversed its fortunes from the summer rally up to 155 and is now down for the year as of this post. I expect RSP ETF to keep underperforming QQQ and SPY.
One of the best signals to watch the affluent consumer market and spending patterns is the equity price and fundamental business performance of American Express (AXP), in my view. AXP is a strong proxy for high-income consumer consumption as well as corporate T&E (Travel and Entertainment). Credit card delinquencies, on average, rose slightly to 2.74% in August but remain below pre-pandemic levels. My view is that if AXP can stay above 146.5, then the Street may be thinking that the consumer slowdown is short-lived, and any broad market weakness may eventually recover.
If AXP sees the 135-138 level, I will be highly interested in this name, and will be creating a mid-size direct shares position for the company in my retirement account.
At today’s level of 149, AXP is in a consolidation phase, and I see selling puts at 130 Strike for January 2024 to be a decent allocation.
My price target for AXP is 160-165 within 12 months, regardless of any weakness it sees in the meantime. This is a good name to accumulate on weakness. During economic recoveries, the affluent folks bounce back the fastest; the poorest folks the slowest. AXP represents affluent consumer spending.
On new commentary surrounding China, which I will drip in more observations over time, I want to highlight that I see significant long-term potential in Li Auto, XPeng, and BYD. I'm putting these names in my watchlist and will craft levels for them once I see them in attractive territory. China’s Tier 1 cities are filled with BYD cars, and also an increasing number of cars from Li and Xpeng. Much of China’s Taxi fleets use BYD or Geely. I don’t see as many cars for Nio on the streets in Shanghai, Guangzhou, and Shenzhen (and I was on the road a lot). Tesla has an impressive visibly observed market share in China, but their dominance tends to be at the Tier 1 city level. In regions where citizens are more nationalistic (which is significant in China), I believe it may be much harder for Tesla to penetrate those markets as the political winds are currently very skeptical on U.S. tech companies. Elon Musk does have a good relationship with China’s policy makers, but the inherent nature of EV cars that can track location and collect data make Tesla’s cars a very sensitive topic among government officials.
Longer-term, my observation is that the priority to emphasize national security on both sides (U.S. and China) will make it quite hard for technology companies from foreign jurisdictions to have the enormous growth rates seen from the past in each respective country.
Guidance / What I’m looking at right now
General Index:
I am selling puts on SPY 360 Strike Puts expiration Jan 2024. I rate the probability of seeing 3600 on the S&P by year-end to be around 10-15% (rather low). Option now goes for 2.3.
I am also selling puts on SPY 392 Strike Puts expiration November 2023 (11/17 expiry). Option goes for 1.81.
Because I think the market has limited upside (but not dramatic downside), I’m currently selling puts on SPY rather than owning direct shares. However, upon lower levels, I may go direct shares. Just not at 425 SPY. I would need to see a 395-400 SPY to go Direct.
U.S. Tech:
As long as there’s no outright collapse in QQQ, I see FAAMG Stocks tactically attractive here for a short window, especially MSFT to see 323-325, NFLX to see 386-387, and AMZN to see 131-133. NFLX is a trade. MSFT/AMZN are ideas that can either be trades or an intermediate-term position, depending on one’s goals. Market conditions are still fragile, but I like MSFT/NFLX/AMZN at these levels that we’re at right now as of this post. I’m in this lightly (key: lightly).
If TLT can stabilize at 87, FAAMG is a high-probability 3-5% return opportunity from today’s levels within 60 days.
Avoiding all non-profitable tech with levered balance sheets. Only FAAMG is investible/tradable here.
Health Care
I’m watching JNJ again. But no action yet. I’m waiting to see if we get a 150-153 handle on this to retarget 158-160. Once I do, I’m interested in going direct shares – lightly.
TLT ETF
I do not know where the exact bottom is on TLT due to fearful investor positioning, but I believe TLT sees/touches/visits 90 again by year-end. It could go to 86, or 85 before then, but we will see 90 again before 2023 is over. 90 is a high-probability limit order profit sell target, in my view. The only challenging part now is getting the best entry to get a higher ROI. I’m entering TLT at 86.9 lightly.
European Luxury
LVMH (Louis Vuitton - LVMHF) will soon be an accumulation candidate. One of the best ways to play Chinese affluence spending rebound is not necessarily through Alibaba. Rich Gen Z in China don’t spend the same amount of consumer dollars on Taobao (Alibaba). They go for Hermes, Prada, and ultra high end brands from Europe.
If I see low 700s (ideally high 600s) on LVMHF I’m going to go for a mid-sized position. If it consolidates around 735-750 (where it is now), I’ll may go Direct lightly. Now 745 or so. No rush to enter – this is a high beta name.
LVMH derives their revenue approximately 1/3 U.S., 1/3 Europe, and 1/3 China. So the best entry will be when SPY ETF, Europe’s Stoxx 50, and Hang Seng all stabilize.
Update on Options Bootcamp: