NVDA - Last Week's Sell-Off Was Expected Did We Buy Too Soon No Here's Why

2023-09-24 21:28:16 ET

Summary

• Last week's sell-off was expected and investors were advised to hedge and prepare for a buying opportunity.
• Timing the bottom of a stock is difficult, but longer-term investing allows for the rest of the world to catch up to your thesis.
• Short-term trading success is challenging, and it's important to understand the business and price action before making trades.

Last Week’s Sell-Off Was Expected, Did We Buy Too Soon, No, and Here’s Why

In my last missive, the title was “Get Your Shopping List Ready, But Remain Hedged” (click this link if you need a refresher). I urged you all to hedge and get ready for a big enough sell-off to go shopping. No one can see ahead with perfect vision, but last week was pretty dead on. The question now is, did we strike too soon, the answer is technically yes, but there needs to be more detail. Here is an important point; no one bottom ticks the perfect low point in a stock when they buy it, it almost never happens. I have said many times in the past that investing in stocks and trading depends on time scales. It is much easier to identify a quality stock and just hold onto it and let it grow. Well sometimes it is a harrowing experience but let’s stay on track for a moment. What long-term investment is doing is really giving enough time for the rest of the world to catch up to your brilliant choice. If that stock does not provide a dividend, then at some point to get the value you must sell said equity. Now, instead of waiting years, you believe that a great stock is about to rise rapidly, whether it is recovering from a sector selloff, or misunderstood news (in your opinion) and you decide that it should reach a peak in value in 2 months. Lo and behold, you were correct, and you sold. Was that a trade or an investment? Anyone would say that a buy and a sell within days is a trade. It is all about the time scales, the shorter the time frame the more difficult it is to create a return. For most individuals buying and holding for a longer term; 3 months to 18 months is likely to be more successful. There are times, when if you are very practiced that you can create returns in that shorter period 1 week, 2 to 3 weeks, or even a few days. If you approach stocks from the outset to trade within a few days unless you are really focused, have the latest data, understand technicals, and read a chart then maybe you will come out ahead. Chances are you have a full-time job, or just aren’t as dialed in as you should be, and you will lose. Trading is like baseball if you bat 300 you are ok, if you bat 600 you are a god. Three hundred is only 30%, right, so how does a trader make any money? The key is knowing when you are a loser and cutting losses quickly, then letting the winners run, and finally knowing when to cash them out. No matter how you slice it, it is still hard to do. Move your time scale out, and build a position over time, understand the business the stock is in. I don't follow retail, but some of you out there love to shop and you can make gazillions trading and investing in the retail sector. knowing the business is one important part.

Consistent short-term trading success is as hard as being qualified to be in the NBA

That sounds impossible, just like batting .300 in the MLB. So if you are a regular Joe – ok in the batting cage, or can golf within 100 yards of par, back off the quick trades and push out your time scale. Here’s the punch line: That doesn’t just mean holding a month after you’ve gone long on your trade. I mean stalk your target, watch the price action, and understand where the support is. Know the industry, and subsector, and be able to explain in 3 sentences why Intel ( INTC ) is starting to become a stock to own again. I’m not recommending INTC, I just am getting impressed with Gelsinger’s moves recently. If you are just going on “tips” or on yesterday’s news you should just put your money into ETFs. We often have neophytes joining our Group Mind Investors community and get intimidated by the amount of content I share in the chat room, on the other hand, we have plenty of members who contribute their knowledge. The ones that stick it out begin to realize that it takes work to be an active investor even if your time scale goes out 3, 6 months, or a year. These newcomers, if they stick around, will bring their own perspective and everyone gains from each other's knowledge. If you can’t monitor the market 3 or 4 times a day for 5 to 10 minutes at a time, you could get frustrated. I used to have a private email stock newsletter that I sent to friends and acquaintances, that’s how this all started. The feedback I would get is, just give me the stocks, why do I have to read all this? If you are that kind of market participant, you will be successful only when the market is a secular bull. We haven’t really had one of those in a very long time. I am not saying that you can never make a short-term trade successfully, but usually, it takes weeks to lead up to the quick money trade. Don’t take tips from anyone, the likelihood is that you are buying in at the top and may end up watching it lose 20% of its value in a blink.

So after all that, did we buy too soon, and more importantly will this result in bug losses this week?

I really don’t think so, I can’t say with metaphysical surety, but we really picked out spots. I will reveal what I bought and at what price later, but these prices were chosen well ahead of time, using charts and focusing on the one sector both most negatively affected by the rapid rise in interest rates short term but in the longer run as the economy slows they will be re-rated back to their highs going forward. If you haven’t guessed already, and haven’t read my previous writings, that would be the mega-cap tech names. For the longest time, I didn’t add to, or begin any positions in the Magnificent 6+. I felt that if I bide my time the tech titans would have their bearish case regain supremacy and depress their prices to a level that made sense to re-enter them. As to this coming week, we will start how we ended…

Friday's trading was messy

I won't dress it up for you, looking back on Friday's closing action was a disappointment. I would rather it didn't spike but just rose above the lows than fall at the last minute. The likelihood of additional downside on Monday morning is more than 65%. I believe the selling will peter out, and we could have strong buying in the first few days. The key economic data and Powell’s favorite; the PCE is on Thursday, and Friday is the last day before the government funding runs out. They will play chicken and at the last minute, provide a short delay by continuing resolution will be agreed upon. At some point this will be resolved, it will be continually the “can that's kicked down the road” until then. I am counting on market participants acting jaded so yes, I think we did the right thing by closing out all our hedges and getting long the various tech titans – more on that at the end. Besides the market being oversold, let’s count our blessings, and realize stock should be higher.

There is reason for optimism

Let's take a step back, and look at this clearly. The Fed was expected to be hawkish. The reasoning is that Powell is very likely done raising. Even if he raises in November, the likelihood that he raises again any time soon is practically nil. Next year is an election year, and the Fed does not like to interfere with elections unless inflation really shoots up. What you should have a thought for is why it was considered hawkish -- because they removed the dot plots that had the Fed cutting any time soon. No one should have taken the dot plots seriously in the first place. Dot plots are nearly always wrong. We at Group Mind Investors never modeled the Fed cutting rates even in 2024. Most reasonable individual traders will agree that there’ll be no cuts in the first half of ‘24 unless there’s a nasty recession. I am holding off opining on second-half cuts because I don't believe that there will be a serious recession next year. If I am wrong we have plenty of time to deal with that. So the economy is doing very well, inflation is coming down in the core. Yes WTI is at 90, and food is elevated, but did you know that the price of wheat and corn per bushel is lower in 2023 than in 2022? In September, US wheat futures fell to the lowest in nearly three years. I have been chronicling the price of Lumber falling as well, reflecting lower costs for home building and home improvement. Corn and wheat are used to fatten up cattle and feed chickens, so protein costs should be lower. Yes, the price of diesel is up, but I believe that the longer oil stays above 90, the more DUCs -- Drilled but UnCompleted wells will start producing more US oil. Areas that have been abandoned because of low prices will start producing again and Oil prices will stabilize.

Let's tie off the "Hawkish Pause" notion

At the danger of being called Captain Obvious, the Fed is not going to announce "Mission Accomplished" because Powell doesn't want to ignite a speculative frenzy in the market. Also, there is a non-zero chance that inflation isn't vanquished. However, in the long run, inflation is coming down, and job openings are being filled. The US Government just gave a half-million Venezuelans job permits. Also as I have been saying for more than a month now, there are millions of illegal immigrants, or in more PC parlance, Undocumented Workers that somehow have attained social security numbers and have joined the workforce. Call me a cynic if you will but this has been going on ever since I was alive so let's be grownups about this. You won't hear anyone in the media, or any economist saying this, but there are clearly more workers in the economy than the BLS is counting. We had 200K jobless claims last week, that is a super-hot number unless there are more workers than we account for. Okay? Let's count on service inflation becoming a non-issue. Also, another tell-tale sign is the super-hot GDP number. Do you know the easiest way to boost GDP? That’s right, MORE PEOPLE . More people working and more people consuming, is giving us more economic growth. So while the Fed is worried that the higher GDP is something to fear, they should welcome it because it is the result of lowering inflation. Combine that with generative AI writing corporate software applications and you have a boom in productivity coming.

So what did I buy?

Well first I closed off my downside trade on Arm Holdings (ARM), I never get long a PE-backed relisting. Add to that the price was ridiculously over the top. Anyway, I closed just above the IPO price in case the IPO book-runners want to defend that price. I will gladly long Puts against it, if I am right and we do have some bulls coming into the market. I also closed out WeWork ( WE ) for the 2nd time, and Faraday Future ( FFIE ) for the 2nd time. Then I covered my SQQQ, and SPXS calls, too early but they did their job. Finally, on Thursday I closed out my VIX options on the futures. Then I got long Boeing ( BA ) at 200, not a big cap tech name but it has very long-standing support in the upper 190s it’s at 197, and I will likely pick up more shares closer to 195 if it gets there. Why BA? They have a 4000 plane backlog, and they have a duopoly. The stock sold off for very temporary reasons, and it was just at 240. I have picked up this name at 200 more times than I can count. Perhaps if there really are recession fears as I referred to in a previous article about the “Recessionistas” (click the link to refresh your memory) BA would be justified at this level or lower, but I don’t see that happening yet. I got into Alphabet ( GOOGL ) at 130, Amazon ( AMZN ) at 130, Netflix ( NFLX ) at 386, Oracle ( ORCL ) at 110, and my big loser NVIDIA ( NVDA ) at 430. It bounced on Friday to close at 416, and I think that if we do rally tomorrow I should be okay. My price for Meta Platforms ( META ) didn’t get hit so I let it pass for now. Let me finish with this thought, I didn’t pull these prices from thin air, I have been watching these names all year, also I understand that in the long run whether the economy slows down, or inflation backs off without it, interest rates will stabilize and so will the dollar. Guess what? That is perfect for these names. One other thing regarding my trades, I favored NFLX because there has been chatter about the Writers Guild agreeing to terms with the studious. Once that happens, I think NFLX stock will enjoy having more bulls in its camp. Otherwise, I might have gotten into META instead. NFLX has some statements from the CFO about their ad tier not contributing to revenue as yet. Is there any doubt that advertisers want to get in front of NFLX viewers? I think NFLX will do just fine as a stock and a business.

Have a great week and drink plenty of water today…

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