Weekly Update: My View on the Market
Good evening, and welcome to this week’s edition of Stealth Trades!
As I write this on Friday morning, I am listening to Federal Reserve Chairman Jerome Powell speak at the annual symposium in Jackson Hole, Wyoming.
As usual, he has nothing useful to say. And investors do not like what is coming out of his mouth.
By now you know my opinion on this clown. Not only has he been wrong about everything since the pandemic began, but he also both caused record inflation with excessive money printing and then overcorrected to fix his mistake by raising interest rates at the fastest pace in history.
How this man still has a job I will never understand. But this is the hand the American economy was dealt.
To summarize his recent comments, Powell has taken an aggressive stance going forward. Most investors thought the Fed would begin lowering rates as early as next month. But if Powell is to be taken at his word, that is unlikely to occur.
The Federal Reserve plans to keep rates high for longer than initially expected to be sure inflationary pressures have been quelled.
So, for the time being at least… rates aren’t coming down.
As someone about to build a house, this is less than ideal. But that is their goal. They want to slow demand for goods and services in order to bring prices down – or at least stop them from going up more.
Macroeconomic issues aside, what matters is the stock market. How are stock prices reacting and where do we go from here?
For the last couple weeks, I have been advising readers to take caution. Not only has the market been pulling back, but many of the leading names that were driving this stock market rally have rolled over and lost momentum.
Yesterday, I sent a memo to the staff here at Traders Agency outlining my views. I would like to share that with you as well…
My View on the Market
2023 has been an incredibly strong year for stocks. The Nasdaq rallied 38% in the first six months for one of the best starts to a year in history.
This rally has been primarily led by an AI/tech theme that has been responsible for the bulk of these gains. That part of the rally is likely over, however… at least for now.
Every bull market has a “theme” with leading stocks that set the pace. In the late 90s that was the dot-com bubble. In the 2009-2020 bull market that was big tech like Facebook, Amazon, Netflix, Apple and Google (hence the FAANG stocks moniker). The 2020-2021 bull market was led by “work-from-home” stocks like Zoom, Teladoc and Peloton.
The 2023 bull market has been led by artificial intelligence. The leading stocks have been Meta, Microsoft, Dynatrace, MongoDB, Palantir, AMD, and the biggest leader of them all, Nvidia.
Over the last 4-6 weeks we have witnessed many of these leading names roll over and retrace beneath their 50-day moving average – a key level that generally supports top stocks through the move higher.
Despite the recent pullback in the market, Nvidia has held at its highs.
Wednesday after the close, Nvidia reported earnings. And the results were better than anyone could have expected.
Earnings of $2.70 per share versus estimates of $2.08. Sales were $13.5 billion – 20% above expectations. And the company raised forward guidance (how much they expect to bring in next quarter) from $12 billion to $16 billion.
They also announced a $25 billion share buyback which should act to propel the stock price even further. Investors got everything they wanted and then some. NVDA stock shot up 10% after hours. The news was so good, the entire Nasdaq index shot up 1% on the news.
But Thursday, in the first few hours of trading, all of those gains were gone. The Nasdaq opened higher, and immediately began selling off. It fell 3% during the session. And NVDA was back where it closed the day before.
This, to me, is a clear signal that the 2023 rally in tech stocks is over. The high was likely made on July 19th, and I doubt we will see that level again this year.
In a bear market, like we had in 2022, what you want to see is the market going UP on BAD news. This is the sign that the low is in, and buyers are coming back in.
We saw this on October 13, 2022. After a government inflation report revealed the worst numbers yet – far worse than expectations – the market gapped down and opened a full 3% lower than it was the day before. However, stocks immediately began to rally, and the index surged 5% that day. This was the signal that the low was in.
On the other hand, in a bull market, we want to watch for times when the market goes DOWN on GOOD news. This often signals a top. And I believe we saw that on Thursday.
Nvidia was the only stock that could have reversed this pullback. The earnings report was better than even the most optimistic investor had hoped. This should have absolutely put an end to the pullback and caused the market to rally higher. Instead, we saw the opposite.
So, what does this mean?
First of all, and let me be clear on this, I am NOT saying the market is about to crash. I simply believe the “easy money” stage is over.
I expect to see fairly choppy conditions for the next few weeks or months, and investors can no longer rely on the bull market to push everything higher.
I believe tech stocks have seen their highs for 2023. Those with large open gains in stocks like Meta, Amazon, Apple, Google, Nvidia and the like may consider selling to lock in those gains here.
There will still be stocks that go up, some of them by substantial amounts. I issued a new buy recommendation on Precigen (PGEN) to my Insider Effect members this morning and the stock is up 12% already. But I believe this is now a more selective stock picker’s market.
I sold the index funds in my long-term account and moved to cash. As of yesterday, those funds were up 37% year-to-date. That is a phenomenal year, and I do not want to risk giving those gains back.
To me, this is a low-risk decision. The worst-case scenario is that I am wrong or something material changes that propels stocks higher.
If this happens, and the Nasdaq makes new highs this year, I will simply buy those funds back. All I will have missed is a 6% move.
My goal with this weekly update is not to instill fear. In fact, just the opposite. I want to do everything in my power to help you grow and protect your wealth. And I would be doing you a disservice not to share this information with you.
I am not a financial advisor. I was for many years, but I let those licenses expire to do this… to help everyday people become more profitable and knowledgeable investors. This is not official financial advice. I am simply telling you what I see and the actions I am taking to protect my money.
Here are a few trade ideas I am watching for the coming week. It won’t surprise you they are all short trades in the tech sector.
Apple (AAPL)
Apple has been a top performer all year. The uptrend has been a thing of beauty – steadily marching higher since January.
But that ride is over. The stock fell 10% in a week and still failed to attract buyers. It finally broke down last week before reversing higher.
But that rally failed. And AAPL is again breaking through short-term support.
Traders may consider selling short AAPL stock here in a bet that it will go lower still. This is a very low-risk trade since you could place a buy stop at $182 and risk less than 3% on the trade.
Given the high price of the stock, it may be easier to simply buy a put option, like the AAPL $175 put that expires on October 20.
Upstart (UPST)
Talk about a fall from grace…
After rallying 460% from May to August, the high-tech automotive finance company fell 57% in a week!
The stock was murdered.
Yet, even at half off, investors are not enticed to buy. UPST cannot rally – a clear sign that institutions have no interest in the stock.
This is Stage 3 action, and I would be shocked if the stock did not continue lower in a prolonged Stage 4 decline.
Nvidia (NVDA)
A few weeks ago, I could not have imagined shorting NVDA. It has been the #1 stock in the market all year.
But, for the reasons I outlined above, I think the party is over. If this stock cannot go up following one of the best mega-cap earnings reports I have ever seen, I don’t know what would do it.
As the saying goes, “When the whore house gets raided, even the piano player goes to jail.”
NVDA will be the last to roll over. But I expect to see it break down over the coming weeks. Traders may consider shorting the stock or buying a put option to profit from this move.
If NVDA defies the odds and gets above $500, abandon the trade.
Best wishes for your trading,
