Before we get into today’s topic, let me address last week’s premise.
Last week, I was cautious about a “Double Whammy” coming for the prior Wednesday. This was regarding having the CPI and the FOMC meeting on the same day. I was cautious about the market going into 2 macroeconomic data points in one day. I prescribed several actions to hedge on Monday and Tuesday, closing out the hedge before the market closed on Tuesday. Hedging should be looked at as setting up an insurance policy so that if there were a sell-off, the hedges would move in the opposite direction and balance any losses. My losses going into the close of Tuesday were minimal, partly because I was careful not to overdo the hedge. I also picked up some long trades as well. Insurance is something you gladly pay to mitigate the risk of larger losses. Wednesday worked out fantastic for the Bulls and my long positions. Also, I did stress that no one should be selling their investments and that I was still quite bullish. I have closed out all hedges except for some Call Options on the VIX, which I will address later.
Being bullish doesn’t mean you are on a team that requires your loyalty.
I am bullish because the facts support a bullish stance, and barring any unexpected changes I think the market will have an upward bias. If stocks do fall, I will consider it a buying opportunity and look to pick the best stocks to trade and invest in. If I see facts that support a more negative view, it might make me want to hedge, or perhaps look for specific stocks that might fall of their own accord. Or look for a sector to short that is most vulnerable to whatever looming macroeconomic condition I can see coming over the next hill. I want to be alert at all times to what could upset, or delight market participants and act accordingly
There is an inherent difference between investing and trading
If you are trading, and you see that a stock is falling or will fall, this is an opportunity to either sell that stock to take profits if you are long, or to short that stock if you think the stock has further to fall. If a stock is falling, you might consider it an opportunity to buy. You study the business model of the stock, assess the management and if they check out, you would start to buy a small amount of shares even if it might fall further still. Stocks that are very out of favor attract value investors. Investors who don’t mind staying in a stock that is not currently doing well, with the thought that eventually others will see the value that they see. Investing is governed by a completely different timescale than trading. The trouble starts when someone takes a position in an equity for a trade and turns it into an investment. I mitigate this issue by having a trading account and keeping it separate from my investing account, if you are new to trading, consider doing this too. Ok, now for the knot that I am trying to unravel tonight.
I worry that the stock market has an extremely narrow set of stocks holding up the indexes.
Ever since the current bull market started in late 2022, the S&P 500 and certainly the Nasdaq was carried higher by the mega-cap tech stocks. We have had moments of the rally getting wider, especially earlier this year. Industrials were strong, consumer discretionary was strong, and the like. Now we are back to the “Super Six” Apple (AAPL), Alphabet (GOOGL), Amazon (AMZN), Meta Platforms (META), Microsoft (MSFT), and NVIDIA (NVDA). AAPL was the real performer last week, breaking above its past all-time high of 199, reaching 220, and closing this Friday at 212. These are all fantastic stocks, and likely to be strong businesses for years. It wasn’t all that long ago that AAPL was trading nearly 50 points lower. Look it up, on April 19, AAPL closed at 165, this was after it reached the previous high. Even great stocks can fall hard and stay low for a long time. Each one of these names had their rough times, and not that long ago. The second name that comes to mind is META. It wasn’t that long ago that META founder Mark Zuckerberg was spending billions on the “Metaverse,” market participants were not at all happy with the project and voted with their feet. The stock went from about 400 to the low 90s, and that was less than 2 years ago. Among the “Super Six,” the real titan is NVDA, it too had times of weakness, this Friday it closed at yet another all-time high of 132. It began the year at 49, there is no arguing that NVDA is not a great stock and will likely reach higher highs. However, it has gone up so much in so little time, that any tiny thing could make the stock drop 10%, 15% maybe 20%. On May 17, a month ago, NVDA closed at 92.48. It has gained 30% in 30 days. I am not saying NVDA at 132 is overpriced, but stocks don’t go up in a straight line.
There is plenty to be bullish about
The CPI, this past Wednesday, came in softer than expected. This kicked off a strong rally in bonds, one of the biggest of the year. Lower rates are very supportive of tech stocks in general, so that certainly buoyed the “Super Six” stocks. Even the hawkish Fed, projecting just one cut this year couldn’t put a dent in the rally. This was especially true on Thursday, with the PPI coming in softer, and the weekly jobless rate rising. The softer inflation removed more than 20 basis points from the 10-year bond to 4.21 the sharpest fall since December. It wasn’t that long ago that some hawks were whispering rate hikes, instead of cuts, but at this point that notion is firmly off the table. No one will deny that if the economy keeps softening, the Fed could enact multiple this year.
When everything seems just right that is when I get cautious.
None other than Warren Buffett said, “Be fearful when others are greedy, and be greedy when others are fearful.” I am in no way saying we are about to hit a great financial crisis. I am just saying that everyone is piled into these stocks, even if you aren’t, if you own any ETF based on either the S&P500 or the Nasdaq then a big percentage of those ETFs are the “Super Six” stocks. The VIX commonly known as “Fear gauge” broke below 12 this week before closing at 12.66 on Friday. The lower the VIX means the less fear in the market. The VIX measures how much hedging to the downside there is. The 52-week low for VIX is 11.52, so even at 12.66, there is much complacency in the market, with participants relying purely on these 6 stocks. Everyone knows that NVDA is a hot stock, or that any of the “Super Six” will just keep going up. There will come a time when we run out of buyers of these stocks. I hope that the rest of the 494 stocks of the S&P 500 take up the slack at that point.
I do see a positive development
Adobe (ADBE) blew away its earnings report this week and raised guidance. This stock was getting sold every day on the notion that generative AI was going to make ADBE products obsolete. The newer creative products that are cheaper will take market share from ADBE. Critics discounted the fact that ADBE has done a very good job of integrating generative AI into its Creative Cloud. We all know that the proof of the pudding is in the eating, and now the ADBE bears are nowhere to be found. Broadcom (AVGO) to a lesser extent credited their integration of VMWare into their fantastic earnings report, besides the very strong AI chips performance. AVGO jumped 11% on Thursday and another 3% on Friday, and ADBE closed out Friday up 14.5%. What I am getting is that we need to see this market broadening out. This notion that AI is going to kill all enterprise software is just fatuous. So the question is, can the example of ADBE inspire buying in other enterprise software stocks? I think, yes, I would look at cybersecurity stocks. CrowdStrike (CRWD) is already at its 52wh, but Zscaler (ZS) had a blowout quarter, and they’re well below their 52wh. Other areas in tech would be a name like Datadog (DDOG) perhaps, and how about GitLab (GTLB) which works with generative AI to automate coding. I also noticed that ServiceNow (NOW) and Intuit (INTU) caught a bid this week. I am not recommending these stocks, what I am saying is that we need to see this rally widen, I think that it starts in the enterprise software area, and perhaps widens to other sectors like the industrial or consumer discretionary names. Then I will feel more comfortable about this rally. Until then, my head is on a swivel, and I will likely look for stocks that I can short using put options.
My trades
As far as trades are concerned, I picked two adjacent AI stocks that are kind of working, one is Vertiv (VRT). They provide infrastructure – specialized cooling and power conditioning, for Data Centers that house all those AI servers. The other is Pure Storage (PSTG), AI requires a lot of storage and memory. By coincidence, PSTG is having their investor day this week, so that should help. I am looking at ZS for a trade if it drifts back to 180 but keep it to yourselves! I held on to Call options on the VIX futures from my hedging exercise last week. The VIX is just too low, if it drops back to 12 flat or under, I will add to my 12.5 strike Calls.
Ok, I hope you have a great week, Happy Father’s Day to all the dads out there. Also, Wednesday is Juneteenth, Happy Juneteenth, everyone!
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