Despite Friday's Swoon, We're At A Bottom; Buy These Beaten Down Big Cap Tech Stocks

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We published a mid-week article with the notion that we are bottoming here. The long process of discounting the rising interest rate issue is likely fully discounted. Despite all contradictory pronouncements such as: Powell isn’t raising interest rates enough and not fast enough, then Powell is going to go too far and will push us into a recession. Another contradictory set: the economy is already slowing down, and Powell needs to raise mortgage rates because housing prices are still soaring. No matter what the news, it has been slotted into two sides of the same coin “Heads the economy loses because it’s slowing down, tails the economy loses because it’s overheating”.

Then the chief bugaboo that encompasses both sides – Stagflation. Mortgage rates are now 5.6%, just last year the rate had a 3 handle on it. Yet, new home sales are just as hot as ever. Perhaps, just let’s for one second imagine that the economy can handle higher rates. What happens to the financial media then? Furthermore, Powell manages to avoid recession but slows the economy markedly. Still, gasoline is priced high, as will a shortage of washing machines, cars, and baby formula… What? Did you know that China produces 44% of baby formula contributing to shortages across the country? That’s because that country is on a self-destructive Covid shutdown turning dozens of cities into ghost towns. No amount of interest raises will lower the price of baby formula, new cars, and washing machines because of component shortages. Interest rates will never lower the price of gasoline either, and better energy policies that were practically making producing crude oil criminal. ESG advocates are still pressuring banks not to provide capital to exploration and production companies.

To Interest rate hawks “everything’s a nail”

There are so many areas of high prices that have nothing to do with inflation on a monetary basis, no matter how high-interest rates go, it won’t push food prices down because of Putin’s War. The old saying “a man with a hammer sees everything as a nail”, raising interest rates is a very imprecise tool to say the least. The aim is to retard spending and lower demand by raising rates which will slow business and raise unemployment. This way cutting demand will equalize with supply and hold down prices. Yet, the consumer has never been more flush. Also, small businesses have never had so much access to credit. I say this with my experience as a very small service business. I was offered loans from my commercial bank, a loan from Bill.com, and a loan from the SBA. I also know that PayPal (PYPL) is going into the lending business through what they call “Loanbuilder”, Block (SQ) has been doing that with tiny retailers for years. Intuit, through its Quickbooks product, is also lending to small businesses. Never has there been more money sloshing around the system that is unreachable by the Fed. These are the “Shadow Banking” companies that, besides catering to the big fish, have found a way to cater to the little fish. A lot of these huge companies are using their idle cash to make the loans, and getting a much higher return than the 3-month to 2-year T-bills.

I am also seeing a lot of credit card mailers again, so the consumer is being pushed credit as well. What I am saying is that small, even tiny businesses have never had this much choice in getting credit. Many of these companies, they are lending from internal cash flow and then bundling these loans out at a decent profit. Remember that these kinds of loans are a lot lower rate than credit card charges. This lets them charge a comparatively stiff rate, and still be competitive with what these little companies usually get. Therefore, raising interest rates will have less of an effect on “Main Street” than feared.

What if Powell is just aiming for normalizing rates to match economic growth, and reversing from Quantitative Easing to normalization, not Quantitative Tightening to tighten us into recession. On both counts, just moving in the direction of normalization. If the average micro business on “Main Street” has access to plenty of cash, the individual consumer also has plenty of savings and access to credit as well. It follows that the economy can handle higher rates. The rates just need to be raised gradually. That is why I was heartened when Powell said that at this time a .75% interest rate rise was not necessary.

Perhaps I am meandering to my most important point – we have a bottom here that should be exploited.

Even if I am wrong by 100 points to the final bottom, the upside is much larger, I think we are going to reach 4800 to 5100. Mostly to reinflating the P/E Ratio, because Technology will regain primacy, and since they are the largest fraction of the S&P 500, both it and the Nasdaq will rise again. It’s likely that Powell will have some success in slowing the economy albeit a bit above the long-term growth rate of the USA at 2%. In this world, technology stocks and their growth will once again be valued at a higher level.

Look at this 5-Day S&P Chart

Everyone is talking about the huge reversal on Thursday. Look, I am as disappointed as anybody about this bearish reversal. I think it happened because the rally went ridiculously too high on Wednesday. There must have been a ton of short covering, so boost stocks like that. Why were there so many shorts? Because everyone was expecting Powell to be a super hawk during the conference Q&A, and he was just moderately hawkish. So why did the market nosedive on Thursday? That one is easy, it was the 10-year rate, it reached 3.142% the highest level since 2018. The market was hardly finished discounting 3%. Though I believe it will get used to 3.0% and even 3.1% this week. Okay let’s look at this SPY chart as a stand-in for the SPX index, I want to show you something.

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The huge spike on Wednesday fell nearly to a mirror image of the beginning of the week. It ended practically where it started. In fact, Thursday’s low was higher than Monday’s low. All I am trying to say here is that if we were to eliminate the peak, this week would have been seen to end where it started. If there was this reversal and it broke significantly under the previous level, I would be more humbler than I am now. Even though I proclaimed that Wednesday’s spike showed that we were bottoming at that point.

Let’s zoom out to the 1 month chart…

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This is a one-month chart and I think it’s telling us something. The circle at the top was probably around when Bullard first proposed a possible 0.75% raise, and a number of other Fed presidents then piled on with comments. The obvious slide from that peak was the market in the process of discounting that possibility, and also the unknown of whether it will be a .50% or .75%. Rule number 1 is the market hates any kind of unknown. Monday and Tuesday were choppy but positive. Wednesday continued the positivity. That told me that the market was ready to handle the .75% at that point. I think this is significant, I believe that the market has made the determination that these interest rates will not harm the economy. It also means that the stock market very unlike the media and their ivory tower academics and economics collaborators, still has faith in Powell. Then Powell gives the happy news about walking away from the .75% hike. This kicked off what appeared to be a monster relief rally, but I believe differently. To my thinking, this was a short-covering rally. Why do I say that? Look at the long green line, the rally stopped right at where the two prior interim peaks petered out. This defines a huge overhead resistance and that is why we had this sharp reversal, short selling ended Wednesday at the close and the lucky day traders that bought at the bottom then sold on Thursday to collect sweet profits. Take a glance at the first chart, I said that if you eliminate the peak of the week, the market pretty much didn’t go anywhere. Even with the continued selling on Friday, we didn’t break lower than what we had early in the week. So I don’t find the sell-off quite as baffling to me as those looking for what the market is “saying”. We held the line, and to me, THIS is what the message of the market is.

Tuesday is now the most important day of the week

I expect Monday to be a choppy inside trading day. Meaning trading doesn’t break last week’s lows but not trading higher than Friday’s high. I surmise that most of you already are aware that the next day is the CPI, the Consumer Price Index. I believe that a number of products and services have improved vs. inflation. So I believe that the market markedly improves next week. Why do I say that? Auto manufacturers are saying that chips are trickling in a bit faster, this is evidenced by the fact that used car prices have dropped sharply. A significant portion of used car buyers are those who normally buy new cars. The moment new models come, available used car prices drop hard because those normally habitual new car buyers are willing to pay higher prices to get the used car that they want. Once they begin to leave it leaves much more price-conscious buyers. Also earlier in April gasoline prices fell a bit, and WTI shot up last week, so it may not seem to have been very long. It was long enough to have a bit of improvement for the Consumer. I am not looking for a precipitous drop, just a small deceleration.

Also much has been made of the strong employment numbers, but did you notice that 55K manufacturing jobs were filled? I understand that 70% of the manufacturing plants are now back up and running. With the supply of goods returning, prices are likely to stop going up in whatever items are being bought in the US. Even Powell noted during his Q&A on Wednesday that core CPI has moderated already. Also, let’s not forget that the dollar index is now at a 20-year high? That means all those imports that US consumers love are cheaper to buy now. So is this enough to throw us back into disinflation? No, but it might be enough to start breathing a sigh of relief. Perhaps the 10-year takes a breather too.

What if I am wrong and inflation is still accelerating, it would be very interesting to see what happens. Maybe the market shrugs it off, Powell is raising .50% for June and the following FOMC meeting. Maybe the market, which was in the middle of discounting .50% raises, perhaps shrugs off the bad news. That is as long as inflation doesn’t keep accelerating.

To my thinking is the odds are we have bottomed

This is why I believe that chances are we are at or near the bottom provided there is some additional bad news. Frankly, I think we have had enough these last few years, don’t you?

So I am repeating my prescription for my trading in the coming days. I am going to be more aggressive and buy bigger if not full lots. I think technology stocks, especially big-cap tech stocks…

My Trades

In regard to big-cap tech stocks, I continued buying Amazon (AMZN). I added shares to Intuit (INTU), and Advanced Micro Devices (AMD). I opened new positions in Expedia (EXPE), Airbnb (ABNB), and Live Nation (LYV). These are tech adjacent reopening stocks. All 3 have gotten stupendously punished, and by all indications, the summer travel and entertainment season will be a blockbuster and I see no reason why it doesn’t continue into the fall. I observed that the VIX shot up this week to 35, this has been an unsustainable level for a long time. I put on a trade to bet that the VIX falls using a leveraged ETF in a unique way that my partner at Dual Minds Research introduced me to. I feel like this is his method and I don’t feel right revealing it here. I still have a Put Spread on DWAC the Trump SPAC, but I think I should just short it and wait, that way I don’t have to worry about premium decay.

I also sold half of my Oil names, I held on to my refiners though. The reason I sold half is that WTI Oil hit 111, and I think that is just a bit too far right now. I would certainly buy them back if WTI comes back to 100 or less. Right now, I was motivated to have a slug of cash where I can buy more AMZN, get back into Meta (FB) and perhaps start positions in Alphabet (GOOGL) and Microsoft (MSFT) on further weakness. There are some other tech names that I am looking at in the chip area. I think Qualcomm (QCOM) is a sleeper, and I am looking at getting back into Micron (MU). Right now, as even the top Big-Cap technology names have been cut down to size, why go looking for the undiscovered? So if you like Apple (AAPL) go right ahead. I am even tempted to trade Tesla (TSLA) at 850, and I believe that much of the selling was on fears that Musk will continue to sell shares to close the deal. As it turns out he is making this a bit less of civic duty to more of a commercial one. There is chatter that Musk will cut the workforce, and otherwise restructure the company and business model, and publicly committed to taking Twitter back to public markets in 3 years. So I think TSLA will have a reason to run back to 4 digits. I am tempted to trade, but I still think that it is still a car company and hugely overpriced.