Strategy: Imminent Inter-market Data, Charts, and Observations heading into Feb FOMC

For the real economy, the Worst is Yet to Come. Time will tell if the market can fully diverge from the economy.

Note to Readers: FOMC day is tomorrow. Last week, I sent out a Part 1 of February Strategy. I will send out a post FOMC Part 2 note about 24-36 hours after the event. I will do so as soon as I am able to.

In between my Part 1 note and today, I wanted to provide another informative update on inter-market data, charts, and observations ahead of FOMC. I know members will appreciate this update, and am happy to see so many folks navigating this market with my research.

Headline wise, I’m seeing a number of folks get laid off in the real economy, and as a result I want to do a bit more for our Community and provide more coverage/research during this period of challenges for the good people.

Reminder: my Investment Strategy is intermediate-term in nature and has been very successful with this timeline. The biggest benefits goes to folks who understand my multi-week/multi-month timeframe where my opinions have been most successful. Traders looking for extremely short-term timeframes/transactions may not find my research as applicable.

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Members,

This is a late evening note on Eastern Standard Time, but I think many of us may appreciate an extra update ahead of FOMC.

Many investors are scratching their heads over the stock market’s incredible resilience in the light of what I observe to be an increasingly difficult labor market, especially for white-collar employees.

The S&P 500 continues to stay supported on dips, and the market’s biggest bears are not being rewarded for their views (even though they are right conceptually on macro).

While this market may indeed run up higher (as discussed in Part 1 of my note), I believe that the market’s risk/reward at this juncture is poor on the long side. Even in the case of a Fed pause, the market’s upside is limited to 200-300 points in my view, for reasons explained in Part 1 of my Feb research.

Making conclusions ahead of FOMC is of course pre-mature, but based on the inter-market data that I’m looking at, I believe any whiff of hawkishness will reset the tone.

The January Effect has been tremendous for me personally and also for investors who were positioned in alignment with my views from my January Strategy.

My goal is to help you KEEP these gains. And avoid (or at least mitigate) the big loss that could come with economic upheaval.

January Investment Strategy: Looking for a reasonably stable start to the Month, followed by looming danger

I believe the worst is yet to come when it comes to the economy.

And the Stock Market, eventually, will reflect this.

How soon though? Very difficult to say. But with the inter-market data I’m about to show you, I hope to give you further contextual clues as to why this market looks to have perhaps 200 points of upside (in the best case scenario), but up to 500 points of downside.

Would I add aggressively here on the long side with 200 points of upside and 500 points of downside on the SPX? I don’t think so.

Let’s look at some data points that informs my opinion.

In addition to sharing macro observations, I’ll be using a bit of technical and brief fundamental commentary analysis from China’s largest travel agency, the U.S.’ White Collar Credit Card provider, and a Global Shipping Company to assess how market participants are thinking about where markets are headed next.

For people who know what they’re doing, they’ll soon realize I actually offer a 50-75/month research service in terms of value priced deliberately at 20/month to help retail investors. This is so that folks can be in my Community long-term and find ideas to protect portfolio wealth and find alpha without worrying about the cost of long-term membership.

There are many financial advisors/investment professionals inside my Community.

For now, I don’t charge separate rates for financial advisors/investment professionals. They are leveraging my research for their clients. Shouldn’t you?

Seriously, I would take advantage of what I have to offer to navigate this bear market.

The “January Effect” is over tomorrow. Tomorrow, is February.

What I will do now is share with you some charts that I’ve been monitoring up until this point, and will continue to monitor during and after FOMC.

After all the observations I share below, I will share my opinion on what all this means.

I will share Macro Observations and Company-Specific observations.

Macro Observations

Observation 1: On the Weekly Timeframes, the Dollar’s bearish structure is starting to slow down.

Implication: Unless the DXY breaks under 101.5 to a new local low (now 102), it is possible that the Dollar may see a tactical (near-term) recovery. A recovery in the Dollar will significantly dampen the SPX’s positive momentum.

The next steps for the DXY begins as soon as tomorrow’s FOMC event. I will be watching this critically important macro indicator.

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Observation 2: Gold, which is a proxy to understand Fed dovishness/hawkishness, is now seeing its positive momentum slow down in the last week of January on the Daily Chart.

On the Weekly Chart, Gold is objectively at overbought levels. Weekly RSI at 70 is a very clear objective level to monitor for overbought readings.

Implication: Traders/Investors alike are heavily betting that the Fed has no resolve to raise (or keep) rates higher for longer.

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Observation 3: The Euro (EURUSD) has rebounded significantly against the Dollar despite the large degree of uncertainty in the Eurozone

Implication: The EURUSD’s rally has coincided with a risk-on rally in SPY, QQQ, and IWM (Small Caps)

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Observation 4: The VIX is underneath 20 at a time when the unemployment rate is masking the true level of discontent in the real economy.

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Company Specific Observations that convey market sentiment clues

Observation 1: China’s leading travel agency Trip.com (TCOM)’s momentum is fading on the Weekly Chart (and I’ve started a very small short position on TCOM to hedge my China book - see Feb Bi-Weekly Dashboard).

Implication: In my experience, I view TCOM as one of the best indicators of travel, leisure, and hotel accommodations consumption in China.

Members who have been with me for a long time know that I guided upon TCOM at 23/share in Fall of 2022.

(Remember, if you are new, you need to understand my strategy is multi-month in nature. If you are here and want outcomes in short-timeframes, it’s not that I don’t want to do that for you, it’s that my strategy in this current Investment Community format isn’t designed for this. My strategy is designed to find alpha opportunities from a multi-week/month basis).

My call in TCOM was one of our best ideas that played out beautifully even before 20th Party Congress happened. TCOM rallied from 23 to all the way to 40, but now has been rejected by the Weekly RSI reading of 70 as well as a large Weekly Supply Zone.

A weak/falling TCOM is an early indicator that the China rally may run out of steam and is due for a retracement, which I believe is fair in light of the incredible strength we’ve seen in the last 3 months.

In my methodology to understand China’s internet sector: if TCOM is strong but BABA is weak, I still rate China to be Bullish. In other words, any BABA selloff is temporary.

However, if TCOM is weak and BABA is strong, I do think it’s only a matter of time until BABA follows TCOM’s lead lower.

Now you may wonder why I do this.

This is because TCOM is a representation of consumer discretionary strength, while BABA is a representation of BOTH discretionary and staples spending. In other words, the Buyside will trade their views on discretionary stocks BEFORE consumer staples because discretionary stocks are more sensitive to real-time economic data.

For this reason, in the same way that I view SOXX to lead QQQ, I view TCOM to lead BABA.

This is an observation that of course changes with market dynamics and context, but over the past 9 months, has been a helpful indicator for me personally.

Now, this pattern will indeed change as the landscape evolves. But for the time being, I view that if TCOM breaches/approaches 35, BABA will soon (although timing is imprecise) follow its way to be under 100.

Observation 2: China’s top consumption proxy Alibaba just formed a local double top on Weekly Timeframes

Implication: I understand that everyone in my Community loves BABA’s stock, and wants the company to skyrocket higher. Look, I do too. I want everyone here to make money in BABA.

But as a Strategist, I am looking out to help you protect your capital (and gains), and my last note on China to be cautious is now materializing.

Ultimately, for long-term investors, this double topping pattern has no bearing on BABA’s multi-year recovery. I’m still bullish on yearly timeframes.

In the near-term: while BABA could revisit my 130 target, I think China’s upside strongly depends on better-than-expected figures and stability in U.S. macro. And I would put a personal probability of BABA testing 100 or below based on fading momentum to be over 60%. If we rise to 113-115 and then get rejected off 115 (or cannot close above 115), the probability of revisiting 100/share increases as lower lows in shorter-time frames begin to develop.

If we get to levels where I believe the name is attractive again, I will let you know.

Observation 3: American Express, a signal for white-collar consumption, is now overbought in the context of white-collar layoffs

Implication: The jobs (blue collar) that are being created every month are not the type of jobs that American Express card users are typically working in.

In fact, among the American Express consumer base (which are primarily white collar), there is a significant white-collar labor market recession.

The Street has pushed AXP’s Daily momentum to overbought levels on the concept that a soft landing will materialize.

I don’t agree with this view, and although it may take months to correct, I believe any further upside in AXP is prone to profit-taking.

Observation 4: ZIM Shipping, which is a proxy for global shipping freight rates, appears to be searching for/finding a bottom.

Implication: With freight rates finding a bottom using ZIM as a proxy, this means that global transportation costs may tick higher over the next 12 months. This implies that the Transportation line item in CPI may have upside pressure in mid/late 2023-early/mid 2024, which blunts the falling CPI deceleration the Buyside needs to see in order to support current equity valuations.

Observation 5: CF Industries, which is a market leader for fertilizer production, appears to be consolidating and forming an intermediate term base.

Implication: CF Industries (Ticker CF) is a strong proxy for the outlook for fertilizer prices, which also happens to be a major input to food prices globally. Continued conflict in Russia-Ukraine will keep fertilizer prices supported longer-term, so I view CF as having geopolitical support given the current war.

A rising CF stock implies that fertilizer prices are set to rise in the future again, and that would undermine (weaken) the deceleration that may be happening in food prices. When fertilizer prices rise, food prices for all foods associated with fertilizers will drift higher at supermarkets and grocery stores.

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Conclusions from my observations.

Everything that I’m sharing here is PRE-Fomc data and information. This means these thoughts are provided before a binary event.

From here though, I am starting to formulate a view on the following opinions on how I’m continuously calibrating my exposure according to market dynamics:

These ideas are in conjunction with views shared from previous reports.

• Being long UUP (the bullish Dollar ETF which directly tracks DXY Dollar Index) appears to be attractive at this juncture. I like it at today’s share price at 27.5, and would be willing to add more at 26 if necessary. I see a target of 29 or better within a 6-month period. 

• Re-inflation theme CF may be another 6-month idea that has a reasonable chance at success. Today’s level of 84 is relatively attractive as well as a second entry at 79 if necessary. CF is considered a value name at this level, and value names take time to play out. 

• Other ideas I think can work in this environment are small additions to defensives PG & JNJ to balance out the beta of a normal growth/tech portfolio in the case of the next market rotation.

• Further target reducing (or even exploring a hedge/short) on any exposure to names that will face consequences if the Soft Landing narrative is wrong (like AXP). 

  • In my methodology, I ONLY take shorts on names that are against macro support AND have RSIs on the Weekly/Daily (ideally both, but at least one timeframe) near/over 70. Any shorts are sized significantly smaller than longs and are designed to nicely offset existing long positioning and not designed to profit significantly from market chaos/turmoil. That would entail being net short, which I personally do not do.

  • For near-term hedge/short ideas to protect other long positions, I think NVDA, MU, DIS, SHOP, and META trade at overbought levels and could retrace 5-7% from today’s levels given a 1-3 month horizon (meaning you may see the shares go up first but within this timeframe I do see the names being eventually priced lower than today). Just bear in mind that shorting individual companies should only be done by folks who have at least 5 years of experience in markets. For beginners, please stay with long only ideas. The best thing to do if you are a beginner and are bearish is to stay in cash. This is because managing drawdowns in shorts is psychologically more challenging than drawdowns in longs (the opportunity cost is larger).

• I’m a Hold on China at the moment, based on what I discussed above.

That’s it for now. 

I’ll be back with more strategy post FOMC after I’ve had a chance to digest the conference while also assessing other market participants’ views.

If you enjoy this, tell friends & fam.

Be safe. All my new entries are sized very conservatively as I expect volatility to chop back and forth in the coming weeks ahead. Do not hesitate to take profits once you see them. 

-Larry

P.S. As always, these are my personal thoughts and I’m happy to share them with you. I take action on my own views shared here, but please do your own due diligence and understand that my research is intended for educational purposes.