The Great Battle Continues: Trust the Market, or Trust The Fed. Or, Trust your Edge.
With yet another powerful counter-trend rally front running potentially lower inflation, will the market win its fight with the Fed? Like this email to stay on the right side of the trade.
Note: This email is intended for both my public and private communities. My next Bi-Weekly research update inside our Community will be released on September 16th. Over the past several months, we have guided well and we have every intention of helping our friends inside stay on top of this erratic environment.
As we approach a critical juncture in markets, I want this message here to be sent across all my entire Communities.
This specific email is formatted more in-line like my personal journal of markets. The tone will be informal and will be a reflection of my thought process, with elements of investor education that I’d like to share with you. Share my email here with friends and family who care about this subject. I wish to help more folks become stronger Analysts & Investors!
Dear Public AND Private Investment Community,
It is important to recognize that the market has become a giant battlefield among Big Money investors who are wagering large sums of capital, betting on the Federal Reserve’s next move to tighten or loosen their current stance in monetary policy.
For most retail investors, this environment may not be entirely suitable for long-term investing because the sentiment is changing rapidly nearly every week.
We have entered a trader’s market, and there are implications behind this type of market environment. The market is essentially trying to outmaneuver the Fed - whether this will work remains to be seen.
Given the environment we are in, I wish to share some very important reminders.
You MUST understand what your timeframe is when you make decisions in this environment. Ideas & Strategies that can work in the long-term may not work out in the near-term in this environment.
Do you care about where the market is next week, next month, 6 months from now, or in 12 months? Every decision that you make needs to account for timeframe.
You MUST understand where your edge comes from in this market (based on your skillset). I’ll discuss this more in a moment down below.
You MUST be open to multiple scenarios, and understand that this market will severely punish our natural tendency to feel FOMO or Fear.
When in doubt, transact LESS. And simply let volatility battle itself out while you wait for more convincing setups.
Now for me personally, I want to share with you how I’ve been thinking (and guiding) about this market leading up to this note.
A brief glimpse into my thought process
Prior to Jackson Hole, when the S&P 500 was trading at 18X Forward in the 4300 region, I felt empowered to share my bearish opinion in that I was confident that a big retracement would come. This is because the combination of the fundamental, macro, and technical setup all had convincing signals that the market rally was unsustainable.
Shortly after, we experienced a gigantic 400 point plunge in the S&P 500.
As we neared 3900 on the S&P 500, I told our members internally that a “chop in price action” and “whiplash” was far more likely of the path going forward rather than another substantial drop from there (at least for now).
Essentially, this conveyed that it didn’t make sense to be excessively bearish (and especially bearishly positioned) after such a large retracement.
Excerpt from September Investment Strategy (Published Sept 1st)
Now, here’s where your “edge” becomes important. While a large portion of my strategy is macro-based (which is reflected in the S&P 500), I also heavily focus on equity research and stock-selection as core skillsets.
So when the S&P 500 was at 3900, I felt more confident to guide on stock-selection opportunities RATHER than the index level based on the macro environment that we are in.
I had removed my bearish opinion at the index level (see below), and ultimately felt more confident in guiding on companies that could work in this environment.
My guidance on themes for September 2022 (published on Sept 1st) conveyed that at the macro level, risk/reward for Bulls had a slight edge compared to Bears, although the exact level and timing will always be an imprecise science.
My mission is to help our friends stay on the right side of markets directionally as much as possible.
Based on my understanding of the environment, here are my opinions (not an exhaustive list):
I believe the Consumer is weak, and do not buy into the narrative that Consumer is strong because spending is strong. Consumption is strong because it’s on credit, and that’s all there is to it. If credit were to dry up, consumption would be greatly endangered.
I believe the unemployment rate will rise past 4% within a matter of months because many companies are not in the position to keep a large headcount with end demand weakening
I believe that the shift in spending will be going towards necessities, staples, and cost-efficient items.
It is with this understanding, that I made several recommendations inside our Community in my September 1st report for stock-selection, all while the S&P 500 was in great turmoil.
Dollar Tree
Dollar General
Kroger
Johnson & Johnson
The exact fundamental reasoning, valuation setup, and technical setup should be familiar with members inside my Community who have read my September strategy report. I also discussed several cyclical ideas that performed well, but my conservatism resulted in my limit orders not getting filled.
While the SPX was at 3900, I wasn’t confident yet in sharing with our Members to add to SPX, but I was rather confident in these names listed above because of the macro and fundamental setup that we have.
This is the “edge” reference I mentioned above. As an individual investor, I didn’t believe that I had any “edge” with the SPX at that juncture. That level was definitely played by Institutional players.
But based on my research efforts, I did believe that my company list above would have an edge over a longer-term period of time, especially in this environment
This past week, all these names have at least matched SPX index performance, with some of them exceeding even the Nasdaq’s (QQQ) performance.
And here’s the best part: these are ALL defensive names which would usually would lose LESS when markets fall/soften up. So even if the market continued falling, my guidance to members would result in smaller losses than at the index level.
This is the type of conservative guidance I must issue in this market.
I operate with the mindset that a good defensive is a strong offense.
On Kroger
On Dollar Tree
On QQQ
Which leads me to my point here: I think many inexperienced investors will look at the landscape and try to pick up names that may have larger return profiles in trying to capture more capital gains.
Let’s say Dollar Tree (DLTR) and QQQ both returned exactly 6% this past week (as a purely hypothetical example).
Would you rather earn that 6% from DLTR or from QQQ, in this environment?
My opinion is that the “certainty” of appreciation from DLTR is far higher than that of QQQ. The macro environment supports DLTR, whereas QQQ depends almost completely on risk-sentiment returning. DLTR doesn’t depend on risk-sentiment returning.
Look, I have no idea at what precise moment risk-sentiment is returning. I don’t have a crystal ball. It could come and go.
But you know what I am confident in? The macro/fundamental environment that I’ve already done my homework on, and the companies that are likely to work.
DLTR and KR have already appreciated meaningfully since September 1st. And our members inside were the first to see this research. Join us and become a stronger analyst, which will help you find stronger opportunities.
Our friends inside don’t just get my researched opinion on S&P 500, QQQ, or the KWEB ETF.
They get my nuanced understanding on what pockets of the market are likely to work better based on the environment we are in.
This is the value of learning strong fundamental and macro analysis skills.
So that when you are unsure of where the index (driven by macro) may be going, you still can assess what types of companies can be winners in this environment.
Excerpt of September Investment Strategy inside Community (Read full report inside)
The Bottom Line: Take every moment to improve your Analyst skills (which we help with)
I know a lot of folks are constantly thinking of questions like these here:
What is the CPI print going to be this month?
What is the Fed going to say in their next FOMC meeting?
Will we have a 50 or 75 basis point hike in the next Fed meeting?
In my opinion, these are all very important questions to ask. But none of these questions actually make investors stronger analysts.
This is because these questions attempt to hypothesize about things with which we have little control.
The better questions to ask include:
Regardless of what CPI is going to be, what sectors are likely to benefit from this environment if the consumer remains weak
Regardless of what the Fed does in their next meeting, which companies are likely to still remain strong based on their current balance sheet profiles and market positioning
What is the company and industry growth profile going to look like after a scenario analysis of economic outcomes?
These were the questions I attempted to answer in my September report even though I was uncertain about the SPX and the indices themselves.
And it led me to recommending strong defensive names that actually Outperformed the indices themselves.
I felt comfortable in this recommendation because I believed that even if the markets fell further, these companies had macro on their side.
I wasn’t able add to SPX this past week, so I missed out on the S&P 500’s 4% bounce. But we caught Dollar Tree and Kroger’s 5-6% bounce.
And along the way, took far less risk. With greater peace of mind because of this type of positioning.
Like I said in my previous email, I’m proactive.
Not reactive.
I want to teach you this skill.
This is a skill that will not only help you survive this bear market, but it will also help you thrive when the landscape improves.
Let me show you another way to insightfully think about investment strategy.
Let me show you a way to become the Analyst (and Investor) that you’ve always wanted to be so that you can win even during periods of great Uncertainty.
Be a part of my Global Network of patient, long-term, thoughtful investors to navigate the U.S. and China macro landscape and the scarce opportunities within them.
That will do for this update. Add me on Instagram and Twitter below. On Youtube, I only get to post once per week. But I am able to be a bit more active on Twitter and Instagram.
Add me! 😊
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Your Investment Strategist,
Larry
Important note: My public letters are not financial advice. You must do your own research. They are designed for educational purposes only.