BROS - I Foresaw Last Week's Selloff. Not The Ferocity Now I'm More Bullish

2024-01-08 00:23:12 ET

Summary

• I expect new highs in the stock market in 2024, but not until the latter half of the year.
• I anticipate some further selling in Q1, but at a lower magnitude than previously expected.
• I believe that the tech, financials, and biotech sectors will perform well, while Apple and Tesla may face challenges.

As I said in my article last Sunday , I expected more selling this past week. As I explained, Friday's selling foretold further selling, because of tax-motivated profit-taking. So we were prepared for the selling, but not the vehemence of the sell-off, and that changed my outlook for this quarter.

Let me say right here that I am more bullish this week than I have been in several weeks. For one we did not break out to an all-time high, the market reached for but did not break above the high of 2021. That now creates a bearish formation in the chart that will be tough to break quickly. I fully expect we will reach new highs in 2024 but most likely in the latter half of the year. We started the first week of the year with a sell-off, which our community recognized and took advantage of. What I did not anticipate was the ferocity of the selling and the turn in investor sentiment. Here lies the hidden benefit for trading going forward, I suspect that buyers have been severely chastened by last week's seeming onslaught. The euphoric buying we have witnessed has broken down. I still think we will have some further selling later in Q1 but instead of 10% or more of retreat, we could have something a bit less. Check out this 3-year of the S&P 500 chart ETF ( SPY ) which will stand in for the SPX.

I expect that we trade sideways at the current level, earnings will be good for Q4 but many CFOs will strike a cautious note, and take down projections for Q1. How many times can the market fall for this is unknowable, but this time they could have some cover. Economic growth is likely to plateau at about 2% GDP this year, but the question will be, can the consumer keep consuming? Despite the strong employment number in December, the Bureau of Labor adjusted the prior 2 quarters downward, so the consumer could be doubted at first blush. I do expect this recent quarter to be adjusted downward by the BLS again as well. All in all, though, the positive earnings will reanimate a bit more froth going forward. I do believe that the consumer hangs in there and even if Powell is stinting with the rate cuts the economy will do fine. That means stocks should hang in there, but have a bit of a rough patch later this quarter.

We still have cause for optimism

We do have a lot to be happy about, the Fed is no longer raising rates, and now the discussion is, when with the Fed start cutting and by how much? I am in the higher for longer camp and in fact, this is what I think gave the market the strong impetus to sell. I think market participants woke up to the notion that the Fed is likely not going to cut rates in March. The economy is motoring along and inflation growth is falling. Once participants accept that they have to wait for their "dessert" until later in the year, we will regain altitude. We already have earnings season starting on Friday, as a bunch of the big banks are reporting. I think they do well, and that will stanch the selling for now. Except let's zoom in on the S&P 500 via the ETF ( SPY ) and this time let's look at the one month…

I don't want to be a downer but that 455 (4550 on the actual SPX) is looking like where we are heading at least to create some sort of base. That would take us down 5%-ish from the high of 2023. I think we chop around at the current level and perhaps the broader market keeps the indexes aloft. We do have a catalyst for tech this week and that is CES. There will be plenty of focus on AI, along with the chips and software to run them. I do see Advanced Micro Devices ( AMD ), Intel ( INTC ), and Micron ( MU ) benefit from the AI-PC excitement. I also see Nvidia ( NVDA ) getting a lot of attention at CES just for all the electronics that will lay claim to AI. I will have a kind word about that in my trades and investment section at the end. I want to stress that this is not a zero-sum game, tech can win but so can financials, and biotech. For me, small-cap biotech, medtech, and financials whether it's fintech or regional banks should do well while some Magnificent 7 stocks will not be so magnificent. I refer to Apple ( AAPL ) and Tesla ( TSLA ). I have been excoriated in the past for having the temerity to state that I am not an investor in AAPL. I pointed to the lack of revenue growth and innovation. I think AAPL is going lower as the $3500 Vision Pro draws yawns, their iWatch is in contention with Masimo in a patent dispute on their blood oxygen detector. AAPL is 7% of the weight of the S&P 500 so we will need a "rise of the rest" in the index to counteract the lag in its stock. TSLA has a smaller market cap weight but it does engender a lot of enthusiasm for stocks. Then again I expect NVDA to pick up the slack.

Let's take a quick look at the AAPL chart...

I don't often see an inverse cup-and-handle, this feels like the first time I've charted it. Just like a cup-and-handle is a very bullish chart formation this inverted one is a bad formation. You can call it a bullish to bearish transition if you like. The circle to the left is where I see this stock going. Let's check out TSLA

They are oh-so-similar to each other, aren't they? TSLA is headed lower as well. The good news is Meta Platforms ( META ), Microsoft ( MSFT ), Amazon ( AMZN ), and Alphabet ( GOOGL ), along with NVDA should all do fine this week, especially with CES as I said,

Let's summarize since I am trying to impart a complicated message tonight

We foresaw, even before the Friday sell-off that there could be some selling in Q1. Once we saw selling on Friday there wasn't a lot more to do since we already had 30% to 40% cash on hand, and several downside trades in place, plus being long the VIX using Calls. I advocated putting on some hedges as well at that point. What I didn't anticipate was the gusher of selling. I thought the selling would already be petering out Wednesday morning. So as usual, I acted too soon, quickly closing my short side trades and getting long. That old Mike Tyson saying about everyone has a strategy until you are punched in the mouth. I will learn from this experience and be a better observer of where the market is going and not just where I think it is going. Still, I am glad, that we were prepared and weren't sitting ducks. If I were grading myself, I would give myself a B+ for anticipating the sell-off and a C for actually trading the sell-off.

I see last week's sell-off as a comparatively good thing. It prevented a true manic "everyone in the pool" buying panic. That doesn't mean we are going to skate by without falling further but I suspect that dip buyers will come back into the market to support the megacap tech names taking us back close to the "double top" level but fail before getting close to 4800 again. Why the sell-off has good news in it, is that I believe that the vigor of the selling signals that market participants are backing off of the notion that Powell will be cutting in March. That said, there are plenty of things that an investor and trader should be happy about. First interest rates are already lower. We were at an 8% mortgage not very long ago and now we are at +6%. US automakers project more car sales for 2024 at over 16M in the US, The Association of American Railroads reported on Wednesday that for the week ending December 30, 2023, U.S. rail traffic was 370,800 carloads and intermodal units, up 3.4% year-over-year. You aren't having a recession with railcar traffic going up. The UN Food and Agriculture Organization stated that global food prices fell 13.4% except for sugar and rice. Everywhere you look there's good news. Oil and Natural Gas have lower prices, the US is now the largest exporter of natural gas in the world. I'm half joking but there is good reason for the market to be near all-time highs. Here's an important one, for months now the producer price index - PPI has been growing slower than the Consumer Price Index -CPI. This means that overall I think we should see good earnings as enterprises take in the producer price and charge the consumer price. Let's face it, we are trading at 19 times earnings on average, we need earnings to elevate our stocks.

Therefore, I am moderating my downside projection from 10-15% to about 7%. Why do I think the market has further to fall? The charts point to some more basing at lower levels later this quarter after earnings are done. February should be the time when the Fed officially puts the kibosh on a cut in March. If we somehow immediately power through that three-year double-top before February I will have to reassess. Right now, stocks should elevate for the next few weeks then we'll see what February brings.

My Investments

I want to talk about investments first this time, I think I emphasize trading because people want trading ideas. I value long-term investing just as much and some interesting stuff is happening.

I want to surface Tradeweb ( TW ) a stock that I always thought was an interesting concept but my lack of understanding about the bond market didn't light my fire to act on it. Now that the bond market has become such a huge fixture I think this is a name to invest in. Trading volume skyrocketing helps too. Trading volume up 43.3% Y/o/Y. If TW was trading BTC everyone would be all over it, but they facilitate trading with institutions and have digitized trading in bonds, which they used to have to trade by phone over the counter so to speak. I started the position this week. I also bought Moelis ( MC ) another financial, they are a boutique merger and acquisition advisor. You can choose to invest in Goldman Sachs ( GS ), and I might do so, however, I think these small investment banks also like Evercore ( EVR ) will attract clients, I haven't bought EVR yet either. I am starting with MC, and looking to start a small collection. I am pretty certain that M&A will be very big this year, we are already seeing it in biotech, and oil, and I suspect enterprise software will be on the menu.

My Trades

My trades this week might surprise you, these are all call options and now I take expiration out to April, most of my trades are generally in the money. I am long Affirm ( AFRM ) I think it was punished to the extreme so I am holding several contracts at the 42.50 strike, AMD at the 235 strike, Dutch Bros ( BROS ) at 32.50 Strike, Celsius ( CELH ) at 58.33 Strike, DraftKings ( DKNG ) 35, May Exp, and Monster ( MNST ) at 60 with a June Exp. Why all these consumer names? I also have Uber Technologies ( UBER ) too. I think that these are growth stocks that will continue to enjoy the patronage of the consumer and that this coming week should have some buyers coming back into the market who may want to diversify their portfolio. I will gladly sell my positions to them.

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