WISH - Rally - It's Time To Start Thinking About Selling

2023-04-23 23:28:47 ET

Summary

• I am not at all retreating from the possibility of the S&P 500 breaking above 4200 and going on to 4300.
• We are headed deeper into earnings season in week 2. We will continue to produce reports that are better than feared and supporting the rally.
• Just like everything in life, all good things must come to an end; and so do bear market rallies. But what could set off a rapid retreat come?
• As you may have noticed, I tend to be about 3 weeks to 4 weeks early in my forecasts, so I am baking that into my projection now. I still project to have the highest trajectory of the rally to come.

There are plenty of positives that will support the rally currently

It’s likely that we have seen the peak for the 2-Year bond for the next several months at least. The 10-Year should also stay around 3.5% or perhaps lower. Also, the dollar index - DXY has been falling and (I believe) will continue to fall until it goes back under a buck in value. This is a great setup for growth stocks and global ones as well. It’s also great for commodities since they are priced in the dollar. That means that as the dollar comes down, the value of West Texas Intermediate Oil, Copper, Gold, Silver, and all-natural resources priced in the USD should benefit.

The punchline here is that the biggest S&P 500 sector by market value is the Mega-Cap Tech stocks. They are much more buoyant when interest rates inch lower and the value of the dollar goes up. Why is this important for the overall market of stocks? The S&P 500 the best indicator for market value is “cap-weighted” meaning the largest stocks by capitalization have the biggest portion of the index so the index is very top-heavy with the likes of Apple ( AAPL ), Microsoft ( MSFT ), Alphabet ( GOOGL ), Meta Platform ( META ), Tesla ( TSLA ) sways the index mightily. This is great news when growth names are doing well because it pulls the rest of the S&P 500 with it. It is a pain when these companies underperform, and nothing when the index goes nowhere. In the many years before our last market rally ended with the pandemic you could just invest in the indexes and beat most stock-specific investing styles. Now that has not been so easy, stock picking has been the way lately. I digress… Let me summarize, with the tech titans going up, all stocks in the S&P 500 go up too. Hence the rally will be sustained, and we will see proof of that since some of the biggest names are reporting this week.

I am also pretty confident that this next phase of the rally will be much wider than just big tech

We have been seeing very good price action in the health sector overall. Some of it is due to further consolidation in the biotech pharma space. There will be plenty of tailwinds for a number of sectors, a recovery in financials for select regionals, insurance, and even investment banks might clean up on advising on all those revived biotech-pharma deals. Other areas like aerospace and defense are growing by leaps and bounds. I mentioned the price of Oil which has retreated very recently, I believe even if it stays in the high $70s, many parts of the hydrocarbon economy should also do well. Even moribund Natural Gas is starting to perk up a bit as the Freeport LNG export facility seems to be reaching full export capacity. In sum, there are many different supports to move this rally higher. So where am I going with this title – Rally; It’s Time to Start Thinking About, Thinking About Selling. Well hopefully you will recognize the association with Powell’s pronouncement; We aren’t thinking about, thinking about raising interest rates. As the fates changed destiny to the most rigorous rate-rising regime in Federal Reserve history. Here I am acknowledging that our destiny at some point (perhaps late May or June) we could have a very sharp retreat. If you can recall in your mind's eye, the S&P 500 has been moving from the lower left to the upper right. Of course, if you’ve been a market participant since Mid ‘22 the index has been meandering so much, no one could be blamed for thinking that we haven’t gotten anywhere. In fact, if you zoom out it’s clear that we haven’t gone anywhere in quite a long while.

This wonderful gush of enrichment unfortunately contains the seeds of retreat

With all this sideways motion I once again quote the great chartist Louise Yamada who said, “The longer the base the higher in space”. Her aphorism very conveniently concurs with my base case, which is that the next phase will be panic buying that will take us past 4200 and perhaps on to 4300. The rise can be so sharp that it will be unsustainable. If you’ve been around the stock market long enough you’ll learn that stocks tend to swing too far in either direction. Why does this rally have to be called a “bear market rally”? We have a lot of ground to cover before we can call this a sustainable rally going forward. For one S&P 500, earnings have to be a lot higher to justify the index to reach the old highs, let alone make new ones. In fact, S&P 500 earnings have to be plenty high to justify 4300. We have learned the lesson that expanding P/E without higher profits or any profits is ultimately unsustainable. I have been projecting that the current earnings season will produce results that are better than feared. To summarize stocks have a lot of reasons to rally. Since most market participants are still quite negative, they are positioned for a sell-off too soon. As the index rises ever sharper, the pros are positioned wrong. At some point, the repositioning, and the retail investors will pile into stocks pushing the index higher. Maybe we don’t have a buying panic pushing the S&P 500 up to 4300 or past it. Even at 4250, we are high enough that if some new negative news, a known unknown as I sometimes say.

What is the “known unknown” that will be the catalyst to cause a sell-off

This is not any big secret, it’s been in the news but so far the stock market is completely ignoring it right now. I am talking about the Debt Limit and when the Federal government will stop being able to pay its bills because it runs out of money. The starter pistol will be fired when the date of running out of cash will be announced. When is that? Well, the amount of money that the USA can use to pay bills without getting deeper in debt is determined by how much tax revenue that was collected on September 18th. Thanks to USAFACTS.org the date will be May 15, some are projecting June 15 or thereabouts. The thought is the tax receipts will underwhelm expectations, and sharply curtail the runway for running out of money. Another oft-repeated saying that you should commit to memory is that “the stock market abhors a lack of visibility”. Stocks will be at the mercy of the Kabuki Dance known as the debt limit budget cut dance. This happens with regularity. When a president has both houses of Congress sharing his party the debt limit is not a problem. When the Republicans can have their voices heard the negotiation for lower budget spending becomes a ritualized act. The President and the Republicans will play chicken all the way to the last minute. Each party will appeal to the electorate saying the other is irresponsible, hoping to wound the other. As we approach 2024 these kerfuffles gain even more urgency. So we will have a date certain when the US runs out of money. We have both political parties slinging insults at each other, all the way to the last minute. All the while the media will hype the terrible downside of what will happen to the US if the debt is not paid. The stock market will hate the lack of visibility into the possibility of financial calamity. Will we see a break under 3800 down to 3600? Perhaps. So what to do?

First: Don’t panic. We are nowhere near the retreat as I see it. We have months!

Two: This is about planning and developing a strategy. If this sounds like a lot of work, you wouldn’t have read this far. If you want to win in this market you need to develop an approach and develop it gradually.

Three: CMD - Cash Management Discipline will play a part as it always does for the DMR community. CMD is a great tool for volatile markets. In this case we need to gradually set aside cash so that as we approach that fateful day, we can put it to use.

Four: It doesn’t make sense to start a program of hedging the indexes this early. It would make sense to do so as we get closer to the date that will be revealed on May 15.

Five: What if the market panics once the date is revealed on the 15th? We have several weeks to modify the plan, especially if the media hypes May 15th, which it is ignoring right now. If it does look like stocks could sell off, depending on how close DDAY ends up being we can always jump on SPXS, SQQQ, et al.

Six: What can we do right now? What I am advocating with the DMR Community is to select a number of vulnerable stocks to short. So that leads us to:

My trades:

I short using Puts. I have Puts on [[SQM]] recently dealing with the Chilean government wanting to nationalize the lithium mining industry. The stock immediately fell 21% but closed at -18%, I was lucky to get puts when SQM was at 66. I think it is headed lower. I also got Puts on WISH which had announced a $50M stock buyback. I think that a buyback is not enough to keep this stock rising. It has a lot of competition in online product sales. There is TEMU that is super successful right now. I am developing a list that I will share with the members of the Dual Mind Research Community. Why do I think this is the right way to prepare for DDAY? I will use my stock-picking skills to locate stocks that are vulnerable to the downside, whether it's a questionable business model, poot execution, lagging the competition, or macroeconomic forces at work against a name. Stocks that are lagging fundamentally will underperform the overall market. Once the downturn comes they will underperform even more than the better stocks.

For further details see: