The next steps in the current counter-trend rally
Although I'm unsure we've escaped the claws of the Bear, I am rooting for Bulls. Hit the like button if you are bullishly positioned.
Note: I hope everyone is having a great Memorial Day long weekend (if you’re from the U.S.). I will provide a high-level summary of my thinking about markets, with the expanded detailed form provided inside our community.
Dear YT Friends & Public Investment Community,
One week is all it takes to change sentiment.
And that is what we saw this week when the SPX saw a local bottom at 3880 and now is trading north of 4150+ on the back of better than expected earnings, China’s Zero Covid policies curbing, and speculation that the Fed will back off its hawkish stance.
Allow me to recap the strategy provided inside our community so that you understand my perspective. Action speak louder than words, and the strategy I’ve shared is the strategy I’ve executed, for the better or for the worse.
First, I pounded the table that Snapchat was not going to be a major issue for tech past several trading days. (See image below on 5/23)
As a Strategist who covers U.S. & China Tech/Consumers for our community, I understand what drives Facebook and Google. And let me tell you, it’s not Snapchat.
There is a difference between what Snapchat/Twitter offers to advertisers and what Facebook/Google offers. The difference is large, but it’s not immediately obvious to investors who haven’t done their homework.
I personally saw an opportunity to buy FB after-hours at 180/share on the premise that the use-case for advertisers between SNAP/TWTR and FB/GOOG is fundamentally different. At 180/share, I also don’t believe that FB is richly valued even in a high-inflation environment/rising rate environment. Of course at 200+ per share, the risk/reward will change according to the context of the market and I will share my opinion on this inside our community.
We discussed with conviction that the Snapchat led selloff would lead to opportunities, which I provided guidance upon as the SPX retested the 3880 level. Since that level, fears have greatly abated, and suddenly, investors believe that risk has completely disappeared.
As a result of the past week’s market action, I can say with certainty that investors were far too negative as the SPX reached the 3900 level but sentiment has perhaps shifted (a bit too fast?) as the index is now above 4150.
What this implies is that very few people bought below 3900 and that many people are buying above 4100. The mini melt-up from 3900 to 4100 seems to be short covering and not organic buying demand IMO.
I suspect the organic buying orders (and not short-covering) has come at SPX ~4100. This means that new entries at SPX 4100 have a trading profit margin of roughly 1.5% from today’s levels (now 4150). If the SPX rises to 4300, any entries from 4100 will see that trading profit margin rise to 4.8%.
Of course, I want the market to keep going up so that you all make more money. However, in my humble opinion, I believe anyone who entered north of SPX 4100 has too thin of profit margins if the SPX were to reverse on adverse developments and need to be proactive about risk management.
In other words, I believe anyone who bought/added at 3880-3920 like myself and our community members most likely have “stronger hands” while market participants who bought at 4100+ almost need the market to keep going higher to ensure a profitable position.
My opinion: Chasing bear market rallies higher creates a bigger percentage of weak hands (high cost basis) in the market if the market were to do a violent reversal. It makes subsequent sell-offs more violent.
Members inside my community know that while I’m always rooting for bulls, I am also always trying to proactively assess risks.
We discuss strategy on a daily level on Discord, on a Bi-Weekly level with long-form research notes, and on a Monthly level with updated economic data, investor positioning data, and equity research updates.
I live and breathe public markets. This is my cup of tea.
One more thing
While the masses were shooting down retail after Target and Walmart earnings with contagion spreading to Costco and Dollar Tree, I had quite a different opinion.
I believed that Costco and Dollar Tree have fundamentally different customer bases and different value propositions.
So in defense of Dollar Tree (DLTR) being a macro hedge against recessions, I once again advocated for at least a hold/weak buy on DLTR after the Target/WMT sell-off.
My process is a combination of….
Bottom-up fundamental analysis on companies and their outlooks
Macro overlay strategy and the impact on industry analysis
Technical analysis for entries and exits
And sentiment analysis by virtue of being a Creator on Youtube where I can launch polls, assess comments, and understand more data points than a typical retail investors.
That said, my research and conclusions that I provide for my community is eventually my own opinions. And we all know that opinions can be proven right or wrong.
My value proposition isn’t solely based on whether I’m right or wrong. I provide a research process that many can learn from, and will undoubtedly at least provide a fresh and objective perspective.
Just like any investor, I’ve been wrong many times in the past, and I’m sure I’ll be wrong many times in the future. However, I have a solid research process that allows me to survive in any market environment and demonstrate the type of composure that you see in my email letters and on my Youtube Channel at a time when others are unable to remain objective.
For this reason, my community’s trust in my work continues to get stronger with every single trading day. And I have every intention of building the best-in-class investment community at the best possible price point, ever.
I discussed a counter-trend rally to my public audience here a few weeks back. And indeed here we are.
See below.
Now after a nice 7% bounce in the SPX, I’m proactively helping our community understand next steps.
This is NOT the time to be passively hoping that the market recovers to all-time-highs. This is the time to start planning your next move and strategize on whether to start recalibrating your asset allocation to one where you can take advantage of the next leg higher or lower.
We called the local bottom early this week, and I do believe this counter-trend rally will continue for a bit longer.
How you take advantage of it from here is up to you.
Most people find out about my work through word of mouth. If you are a fan, share my newsletter and social media with friends and family.
I appreciate every single one of you.
That’ll do for this update.
If you’re looking to truly understand the investing environment we’re in, and want to support my research/work, let me help you inside my community where I provide macro and equity research as well as career strategy advice. I’m on a mission to help people as many people as I can - hardworking, highly intellectual people like yourselves.
❤️ this email if you enjoyed the read. And see you in my next Youtube Video.
Also, if you haven’t yet opened up a free account with Webull, they’re offering up to 6 Free Stocks - Check it out!
Your Investment Strategist,
Larry
Hope you had a great weekend - I had a productive one! Getting our community ready for the week ahead. ✌️