Discover more from Letters from Larry: U.S & China Investment Strategy
SVB Contagion & Opportunity Sets: Shopping List of Stocks/Themes I'm watching as we enter epic CPI Week.
Objective Technical Analysis & Key Levels Strategy on U.S. & China (Thoughtful Preview Provided)
Note: This Strategy note will serve to be the series of updates I plan to send out to capture my research thinking for March’s mid-month note.
If you missed my previous note on investor psychology, feel free read it now. No amount of research & strategy will offset improper emotional decision making.
I hope everyone is having an amazing Sunday.
This coming week, we will deal with the ongoing crisis with SVB and February’s inflation report.
Members will have noticed that I haven’t commented much on SVB.
The reasoning behind this is very simple:
My methodology is intermediate-term investing (multi-week/multi-month), and I like to take positions that match my views during consolidating periods, which we saw in the past couple weeks.
We made a proactive opinion to target downside since the mid-February timeframe when SPX was still 4150, and I believe that retail folks who are reacting to SVB at 3850 are severely late to the game in being bearish.
As I said extensively in previous notes, the moments to plan were during moments of consolidation.
Unfortunately, most retail investors found the consolidating periods as “boring markets” and didn’t do their homework on next steps.
How can you possibly plan during these chaotic trading sessions we witnessed on Thursday and Friday?
Seems like procrastination, at least to me.
If you want to achieve alpha, you MUST put in the work for even a chance to stay alive in severely falling markets.
While the longer-term direction is going to be challenged due to existing macro conditions, every powerful leg down will be followed by sharp/violent counter-trend rallies.
I believe upon further weakness in markets, we could be setting up for a tactical counter-trend bounce.
In this note, I will be sharing the key levels that I’m looking at for the names I’m personally interested in within the Financials sector, along with other key names I follow. Given time constraints to get this note out before market opens this week and my weekend obligations, this note will be written with extreme brevity/conciseness in mind.
This Strategy report will be primarily chart-based and key levels content, with drawn technical work that I’ve done for my personal planning.
The opportunity in risk/reward is slowly starting to come back to tactical Bulls in the upcoming weeks upon any further cratering.
Are you ready? Most won’t be - but I know you will be! Let’s discuss the opportunities and plans now for both U.S. and China names that are on my focus list.
The Big Picture in today’s battleground:
What we first need to do is assess the macro direction of markets at the indices level.
My fundamental and macro views on markets likely facing significant resistance in that 4100-4200 region have been well documented, so I’m not going to repeat them here in this note.
Given the high-correlation between stocks and the index, our questions to answer should be:
Priority Question 1: Where do we believe SPY/QQQ are going?
Secondary Question 2: What stocks do we believe will benefit from that direction?
SPY ETF: New Battle Ground Charted
My personal plans: Based on my assessment of the environment, I believe a 2-4% tactical counter-trend brief bounce could soon emerge (ideally once we enter the 376-383 Zone) back to 390+ before further weakness. Now 386 or so.
I would personally be surprised if we knifed underneath 376 and markets remained under this level (with no auction/trading above it) for the rest of the year.
In other words, I think we see a bounce upon any visit to 376 before going lower (if markets intend to go lower).
That said, to me, this is very much a tactical bounce until market conditions shift my thinking that this is a long-term position holding.
I think long-term levels on SPY may come later this year, and not yet today.
QQQ ETF: New Battle Ground Charted
My personal plans: Semiconductors failed to reclaim 433 on the SOXX as previously mentioned as an important level and QQQ has borne the brunt of market selling. That said Semiconductors have still held up well (relatively speaking), and SOXX is still above 400. If SOXX stays supported above 400 and QQQ falls into the 275-280 region, that level is interesting to me for a tactical brief near-term bounce on the Qs.
For long-term positions, I would need to see action near 260 QQQ before re-committing on longer term positions.
This environment (for now) continues to favor nimble traders who specialize in short and intermediate timeframes, and not long timeframes (unfortunate to long-term investors at present).
Individual Names I’m watching this Week (Charts on a few names in detail to demonstrate line of thinking, followed by a longer list with brief details)
U.S Names (Event-Driven for Financials, among other names)
American Express: I view a Gap Fill back to 158 as an area where a brief tactical bounce may potentially emerge. Now 165. Within financials, I’m not concerned about AXP’s positioning in the marketplace.
For long-term positions, I’m strongly interested in AXP if the name revisits 137-142 (green zone below) upon fears of financial contagion. At those levels, a reasonably painful recession may be priced in. Those levels also happen to be 2020 pre-pandemic levels.
Goldman Sachs: GS is slightly higher risk than AXP, but I ultimately do not think SVB will be a systemic event for Goldman. I think a 300 print on GS is a region where I may attempt to participate in a tactical bounce. At 280, I’ll give GS a 2nd Tranche bounce attempt. Anything materially below 280, and my thesis on GS will be voided/proven incorrect. The ideal path for GS in my view is a retracement down to 280-300, followed by a recovery to 340-360 over 6-9 months. GS is ruthless on cutting costs. Might not be good for their staff, but that management style is constructive for shareholders.
Charles Schwab: SCHB has been impacted severely by the SVB event, but I do not think SCHB will be at risk of entering the same fate as SVB. The business models are quite different, and while SCHB faces headwinds that are currently present in the financials industry, I think the name approaches an interesting level for me personally.
The name trades at Weekly 30 RSI, which is one of my favorite technical signals. I started a small position on Friday. I’ll try a second tranche long entry at 49 if necessary. If we severely violate 49, there may be bigger problems that I may not have accounted for as contagion events are very hard to fully map out in terms of complete scenarios.
On other regional banks: I’m not comfortable looking at the other regionals because I don’t understand their business models as well as I do with say GS, SCHB, and AXP. The other National Banks JPM, BAC, MS, C, and WFC will also be okay, in my view.
Dollar Tree: I view DLTR to be attractive today based on the current environment’s macro setup. Any revisit to 135 support levels are additional regions where I may be interested in further tactical purchases.
For long-term positions: If for some reason DLTR revisits 125 (Blue Support Line), I may take a relatively aggressive position on the name.
ETSY: Etsy has cash tied up at SVB. However, I do think depositors at SVB will be made whole (it’s in the best interest of the U.S. Gov & Fed to ensure depositors are safe). Today’s level is somewhat of a high-risk entry and binary to market conditions. ETSY could bounce hard if SVB is resolved.
For long-term positions: Within the High-Growth theme, I am being very selective in which companies I think can survive the recession. ETSY is one of those names as more and more freelancers will go onboard the platform to start businesses if the unemployment rate skyrockets higher. At the 79-88 level, I am interested in this name. This is a wide range I know, but that’s because ETSY moves like a SHOP/ROKU/ARKK type of price action.
Other U.S. names/themes I’m watching:
CF: If inflation comes in hotter than expected, CF may get supported for a retest of 85 in the coming weeks. If inflation is cooler than expected, CF may test the 72-75 region before a bounce. I still view CF at 90 as being possible later in 2023, despite the recent drawdown.
MOS (a similar company to CF): I’ll be watching how shares react to 46 and 42, respectively. Largely speaking, I see MOS and CF being supported if inflation comes in higher than expected. You’ll see MOS/CF get sold if macro data suggests weakening inflation pressures. In other words MOS/CF are “inflation hedging stocks”.
FIVE: I’ll be watching for any dips into 185 for a potential bounce in its longer-term uptrend. A severe violation of 185 will cancel the bull case.
GOOG: I continue to believe GOOG has more long-term (looking out 18 months) upside than downside as macro issues have been priced into shares. I’m interested in adding more GOOG if we visit 83-88.
MU: A return to 50/shr for MU will be attractive to me on the long side. If it forms a triple bottom at 48-50/share, it may mark the beginning of the end of the memory chips downturn outlook based on investor positioning.
NFLX: Previously a name I personally targeted downside at 360 and covered at 320 (per previously shared plans). Now 290. I see NFLX primed for a technical bounce at 250 on the long side (if it gets there). I’m not yet sure if NFLX is a LT Investment at that level, but at the very least, I don’t think new bears will be paid well should they enter at 250.
VNQ: I shared my strong dislike for this real estate ETF multiple times in previous newsletters (I think real estate is a turd market until mortgage rates come down). It has reached my 80 target. It may see a short-term bounce, but I would stay away from this ETF on the long-side.
TLT: The rush into treasuries due to the SVB situation is a difficult situation to read. For now, I view TLT as a hold and any revisit to 98-100 is a Buy again. Anything between 90 and 98 are Strong Buys. Any large rally to 110+ is where I’d start monitoring cautiously on TLT.
FXY (Japanese Yen): The Yen ETF may be supported due to the risk-off environment that we are in. I’m watching this ETF on my watchlist.
Note: My fundamental and macro views on China are in previous newsletters. This section is purely technical analysis.
BABA: I view any flirting with 75-80 as we near the bottoming channel as a long-term opportunity for my own personal accumulation rather than reasons to be fearful. Folks are back to being fearful on China.
Baidu: BIDU has the AI-thematic narrative behind it, and its relative strength within KWEB has been stronger than ECOM names BABA/JD. I do believe BIDU may find support at 125. At today’s levels, a bounce can potentially work if HK-listed markets are stable.
I do personally believe BIDU will reclaim 140 within 6-months (even if there are short-term wobbles down to 125 or < 125). At 125, I’m interested in adding to BIDU.
JD: JD is one of the market’s most hated stocks at the moment.
Upon any revisit to 28-32 (in Green Zone below) or any level near 30 RSI on the Weekly Chart (now currently 37), I may take aggressive action on the long side in my 401K as that represents 10-11X Forward P/E on the name. 401Ks have ultra long time horizons, and I believe my methodology will reward me in the long-run on JD at those levels.
TCOM: I believe TCOM is one of the bellwethers of the Chinese reopening trade and one of the least politically scrutinized names in China. I like TCOM at ~34-35, and if we can stay above these levels, I believe ECOM names JD/BABA will eventually recover.
Long-term members remember my opinion on TCOM at 22-23/share in Fall 2022 on the anticipated China reopening and became cautious near 40. TCOM has been range bound between 35 and 40 since the start of 2023. I do believe that if the next large directional move for TCOM will be higher once geopolitics start to dissipate and investors refocus on the fundamentals of the Chinese consumer (a demographic that has a personal savings rate of 40%). Dips back into 34-35 may be support for moves back to 38-40.
FXI: For China investors looking for relatively less volatile exposure to the country, FXI large cap ETF is a viable alternative to KWEB.
I’m interested in FXI in the 25-26 region (if it gets there). I think today’s level can work with an ultra-long timeframe. But risk-averse investors interested in China may want to wait.
EDU: New Oriental is undergoing a pivotal period of time in their business transformation. Being an investor in EDU is synonymous with being a supporter of Yu Minhong. I personally think Yu Minhong is a fantastic leader, and within the Ed-Tech space (left for dead after Summer 2021 regulations), EDU is most likely the strongest name remaining within this industry. I trust EDU more than TAL. Any dips into 37 may get supported on EDU. Any serious violation of 37 means that we must wait for further opportunities later and I’ll revisit then.
Okay folks that’s it for now.
As more opportunities come up, I’ll be back with more.
Though the commentary here is brief, it takes me quite a long time to come up with thoughtful research/technical analysis in these fast-moving volatile environments.
So if you appreciate this, feel free to let family and friends know about my work to help us grow our network. Appreciate your help as always.
Thanks so much. Will have more Strategy for you this week.
Please make sure to read my previous letters to understand my fundamental/macro views. This note was primarily technical analysis.