Drew Angerer
This is likely to be the most critical week for our nascent market recovery
We have some of America’s largest companies by market cap reporting this week. With a number of “Tech Titans” among them. Due to the sheer volume of their market cap, they have a huge sway when it comes to the most important indexes – the Nasdaq 100 and the S&P 500. The DJIA or known colloquially as the “Dow”, is actually less important, and is a price-weighted average. Although the financial media still gives it pride of place, it is generally ignored by market participants. Perhaps this is due to the large number that the index has; it’s currently just under 32,000 and the high is almost 37,000, so it’s getting more attention. Or it always goes on like this. It is probably 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 keeps it in mind. Back to my point, Apple (AAPL) is the largest company by market cap, followed by Microsoft (MSFT), Alphabet (GOOGLE) and Amazon (AMZN) all reporting this week.
The first shoe to drop was GOOGL
I blogged about what is likely to happen to GOOGL and how I would trade it. The fastest version is that I expect GOOGL to sell off when the announcement comes because it was weak all last week after the split, and if there is a slight difference in the downside of earnings and profits, it could break through support because it already has 3 or 4 points just above it now. If you want more details, click the link at the beginning of this paragraph. I trimmed positions last week using Cash Management Discipline to have a slug of cash ready to pick up good stocks at cheap prices. We may have seen the cheapest GOOGL for the next decade by the time the fall is over. The same goes for many of the tech stocks that are now being thrown away like yesterday’s dinner scraps. They are about to be loved again, as growth slows and secular growers are on top.
The most important is AAPL
If AAPL somehow fails, it has ways to drop. This is the most titanic of titans and since the major indexes are market cap weighted, it can bring down the entire market, especially what could be the biggest factor and that is the FOMC (more on this point below), I will chart AAPL and all these other names to understand where we stand regarding support levels. Right now, I’m focusing on AAPL for one reason, it’s actually the most recovered of all these names. Perhaps this means that AAPL as the biggest and moving top is best equipped to chart this clogged sea we’re about to enter. I’m not an AAPL expert, as I don’t favor any tech company that has hardware as its primary source of revenue. I know some basics, 19% of AAPL’s revenue comes from China and of course, China builds almost 100% of the iPhone, and the iPhone has a lot of chips too. Unless you’ve been living under a rock, the chips are in short supply and the AAPL ones are more expensive than when this latest iPhone was designed. There is also a recurring theme that I will use to indict the other “Tech Titans”, and that is the super-dee-duper US Dollar. The strong dollar was still up as of last week, likely affecting its bottom and top lines as it did MSFT. If you’ll recall recently, MSFT had to readjust its earnings estimates for the next quarter, just a few weeks since they were first released. Even AAPL’s massive earnings outside of China’s lockdowns and war-ravaged Eastern Europe and already recession-ravaged Western Europe will defy the currency’s impact on earnings. It might be possible, like I said I’m not an AAPL expert, but from my perspective, there’s a better than even chance of missing out on either profits or gains. Let me add this little nugget, AAPL announced layoffs, not of their engineers but of the in-store sales staff. This is likely because sales haven’t been that hot lately. Does that mean Tim Cook isn’t expecting a big Christmas season? It’s too early to tell if that will be the case but it’s not too early for tongues wagging to make that deduction. AAPL went 156+ from 131-132 this week alone. Before I show you the chart below note that there is a possibility that all these profits have good news or “better than feared”. We just need to keep the example of Netflix (NFLX), for it to make sense.
TradingView
This is the one-month chart, and really from this point, there is nothing wrong. Even if it rolls, it has several points to find support from the trend line. It’s hard to muster up the courage to call for AAPL to crash, clearly by many measures the best stock in the world. That said, let’s pull out the sixth-month chart.
TradingView
Can I say with complete confidence that AAPL is selling? No, of course not. What if there is additional impetus to push the bearish view? That is another piece of this puzzle.
July 26 to 27 The FOMC Fed announced a rate hike
Everyone is expecting a .75% rate hike to be announced at the Federal Open Market Committee announcement, so what could be so weak about that? It’s not the announcement, it’s Fed Chief Jay Powell’s off-color comments. If he ignores all progress in reducing inflation, such as commodities, including oil prices. Also, evidence of an economic slowdown, and various large corporations announcing hiring freezes. Not just ignoring that progress but doubling down on being hawkish? How would you react, GOOGL, and AMZN are losing revenue or profits, AAPL is also having trouble, and Powell remains hawkish? I can hear you saying, “come on David it’s not like you to be so bearish”, what are the chances? My answer is, yes, this is not my usual positive outlook but after years of unexpected events, a giant pandemic, lock-downs and deserted city streets around the world, high inflation, and a major land war in Europe that could change. in WWIII don’t tell me it can’t happen. This doesn’t have to happen and yet, the market may sell off for fear that it might.
I haven’t heard anyone else notice this but a sell-off this week follows a pattern
I have observed that the general market will run 4% to 6% a week, and then sell off immediately after that. This is a counter-trend to the VIX. Check out this chart:
TradingView
Orange is the SPY ETF tracking the S&P 500, VIX is the black line overlay. Right now, the spy is at its peak ahead of Friday’s sale. One of our DMR community members described it better.
TradingView
The projection is that perhaps on the 27th the VIX pops up while the SPY falls. Again, maybe everything works, I admit this is an alternative. So what is my plan? Well, I have a grocery list and it’s been the same for weeks. I buy the largest capitalized and best known cloud software stocks, if AMZN drops close to or below 100 I’m a buyer, same for GOOGL, and even if I don’t expect it, I’ll be happy to pick more shares in MSFT under 250. So let’s talk about my trades.
My Trades
So as I said, I took AMZN below 109, also, GOOGL at 108 and below, as well as MSFT at 251 and below. I actually shorted ServiceNow (NOW) at 460 and then bought it back at 444. I traded that position, by selling high and buying it back low. I lower the break-even and raise the profitability of that position. I also short AMZN shares higher as it has reached above 120, and I expect AMZN to drop to 107 and below. I cut Intuit (INTU), and Adobe (ADBE).
I also decided that I might as well add some higher risk lesser known names; Bill.com (BILL), Workday (WDAY), Datadog (DDOG), and Taiwan Semi (TSM). I believe these are all new positions. All these are very small positions. My top priority is still AMZN, GOOGL, and MSFT.
In summary, There are many ways this market could sell off, whether it’s a hawkish statement from Jay Powell or AAPL and any of the other titanic market cap stocks that have underperformed earnings that could put the market under pressure of stock prices. There is also a recurring pattern that may reassert itself this week. I don’t trade out of fear, in fact, if the stocks on my shopping list fall to the lower prices I’m looking for, I’ll be happy. Although 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 cool down too much and cause another sell-off, but that’s a concern for the end of September, maybe early October. In the meantime, enjoy discounted stocks.