This week has many potential negative market drivers, let’s mark the trades
This is likely to be the most critical week for an emerging market recovery
We have some of the largest companies in America by market capitalization reporting this week. With a number of “tech titans” among them. Because of the sheer size of Their market capitalization, they have a huge influence when it comes to the most important indices – the Nasdaq 100 and the S&P 500. The Dow Jones Industrial Average, or colloquially known as “the Dow”, is actually less important, and it’s a price-weighted average. Although the financial media still gives it a prestige, it is generally ignored by market participants. Perhaps it is because of the large number that the index has; It’s currently just under 32,000 and the high was close to 37,000, so it’s more eye-catching. Or that it has always been this way, it is continuous. It is no coincidence that it is run by the eponymous Dow Jones and Company which also publishes the Wall Street Journal, which in turn follows the DJIA, and has it in mind. Back to my point, Apple (AAPL) is the largest company by market capitalization, then Microsoft (MSFT), the alphabet (The Google) and amazon )AMZN) All reports this week.
The first shoe that was dropped is GOOGL
I have blogged about what is likely to happen with GOOGL and how I can trade it. The faster version is that I’m expecting GOOGL to sell as the announcement kicks in because it’s been weak for the past week after the split, and if there’s the slightest discrepancy on the revenue and earnings downside side, it could break through support because it’s already only 3 or 4 pips above it now. If you want more details, click on the link at the beginning of this paragraph. I’ve been trimming deals for the past week using a cash management system to get a tiny bit of cash ready to snap up a great inventory at bargain prices. We may have seen the cheapest GOOGL of the next decade by the time the fall is over. The same goes for many tech stocks that are now dumped like yesterday’s dinner scraps. They will be appreciated again soon, as growth slows and secular farmers return to the top.
The most important is AAPL
If the AAPL is somewhat disappointing, it has ways to back off. It’s the most titan of the giants and since the major indices are market capitalization weighted, it could crash the entire market, especially with what might be the biggest factor being FOMC (more on that point below), I’m going to chart AAPL and all these other names to understand where we stand related to levels of support. Right now I’m focusing on AAPL for a reason, it’s actually the most redeemed of all of them. It probably means that the larger, more animated AAPL is better equipped to chart this shallow sea of impasse that we are about to enter. I’m not an AAPL expert, because I don’t favor any tech company that has hardware as their main source of revenue. I know some basics, 19% of AAPL’s revenue comes from China and of course China makes almost 100% of the iPhone, and the iPhone has a lot of chips too. Unless you’re living under a rock, chips are in short supply and those earmarked for AAPL are much more expensive than when the latest iPhone was designed. There is also a recurring theme that I will use to condemn other “tech giants” and that is the scammed US dollar. The strong dollar is still rising until last week, and may have affected its lower and upper lines just as MSFT did. If you remember recently, MSFT had to adjust its next quarter earnings estimates, just a few weeks after it was first released. Even AAPL’s massive revenue outside of lockdowns in China, war-torn Eastern Europe and already stagnant Western Europe will offset the currency’s impact on earnings. It might be possible, as I said I’m no expert on AAPL, but in my view, there’s a better chance than you’ll miss out on profits or revenue. Let me add this little nugget, AAPL has announced layoffs, not of engineers but sales staff in the store. That’s probably because sales haven’t been this hot lately. Does this mean that Tim Cook isn’t expecting a big Christmas season? It’s too soon to tell if that’s what’s going on but it’s not too early to rattle the tongues of that conclusion. AAPL went from 131-132 to 156+ just this week. Before I show you the chart below, keep in mind that there is a possibility that all of these earnings will have good news or “better than fear”. We just need to keep the Netflix (NFLX) example, for that to make sense.
This graph is one month long, and from this point of view, there is nothing wrong. Even if it flips, it has several points to find support from the trend line. It’s hard to have the nerve to call the AAPL’s downfall, evidently by many measures it’s the best stock in the world. However, let’s pull off to our sixth month chart.
Can I say with complete confidence that AAPL sells? No, of course not. What if there was additional motivation to drive the downside? This is another piece of this puzzle.
From July 26 to 27, the Federal Reserve announces interest rate hike
Everyone is expecting a 0.75% rate hike to be announced in the FOMC announcement, so what could be bearish about that? It’s not an advertisement, it’s the colorful comments of Federal Reserve Chairman Jay Powell. If he ignores all the progress in reducing inflation, such as commodities, including the price of oil. Also, there is evidence of a slowing economy, and several major companies announcing a hiring freeze. Shall we not only ignore this progress, but double down on militancy? What would your reaction be, if GOOGL and AMZN lose profits or revenue, AAPL is in trouble too, and Powell remains hawkish? I can hear you saying, “Come on, David, it’s not like you to be so pessimistic,” what are the chances? My answer is, yes, it’s not my usual positive view but after years of unexpected events, a giant pandemic, closures and deserted city streets all over the world, high inflation, and a massive land war in Europe that could turn into World War II don’t tell me that This cannot happen. It doesn’t have to happen at all however, the market can sell out in fear of this happening.
I haven’t heard of others noticing this but this week’s sale is in line with the pattern
I noticed that the overall market would go up 4% to 6% in one week, and then sell off shortly thereafter. It’s an anti-VIX trend. Check out this chart:
Orange is the SPY ETF that tracks the S&P 500 index, VIX is the black line overlay. At the moment, the spy was at its peak before Friday’s heavy selling. A member of our DMR community explained it a little better.
The projection is that perhaps by the 27th day VIX appears when the spy falls. Again, maybe everything will work out, I admit that this is one alternative. So what is my plan? Well, I have my shopping list and it’s the same as it was weeks ago. I’m buying the largest stock of the most capitalized and most popular cloud software, if AMZN drops to nearly 100 or less, I’m a buyer, same for GOOGL, although I don’t expect that, I would be happy to get more shares in MSFT Less of 250. So let’s talk about my trades.
So as I already mentioned, I chose AMZN under 109, and similarly, GOOGL at 108 and below, as with MSFT at 251 and below. I actually cut the ServiceNow (now) at 460 and then bought it back at 444. I traded around that position, by selling at a high price and buying it back at a lower price. I lower the break-even point and raise the profitability of this position. I have also trimmed the higher priced stocks in AMZN as it crossed 120, and hopefully AMZN will fall back to 107 and lower. I cut Intuit (INTU) and Adobe (ADBE).
I also decided that I could now add some of the lesser known names with a higher risk; Bill.com (BILL), Workday (WDAY), Datadog (DDOG), and Taiwan Semi (TSM). I think these are all new situations. All of these are very small positions. My top priority is still AMZN, GOOGL and MSFT.
In summarizing, There are many ways this market can sell, whether it’s a hawkish statement from Jay Powell or AAPL and any of the other non-profit making giants that could lead to market pressure on stock prices. There is also a recurring pattern that may reassert itself again this week. I’m not intimidating, in fact, if the stocks on my shopping list drop to the low prices I’m looking for, I’ll be happy. Even while Powell may maintain a hawkish stance, the rate hike regime will stop in September. Inflation data will continue to move in a beneficial direction. Of course, the economy could calm down a lot and cause another sell-off, but that’s a concern at the end of September, possibly early October. In the meantime, enjoy the discounted shares.