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Before we get anywhere, let me address the title, specifically the word “Sell”
First, it is impossible to convey everything that I want to in a title. My meaning when I say sell is only for those who are trading. I prefer that you keep trading separately from your long-term investing. So when I say sell I am referring to a risk reduction tactic we call “Cash Management Discipline”. So whenever I refer to selling please assume that that is what I mean. You should never sell an investment, especially because the market seems iffy short term. The only reason to sell a long-term investment is if there is an issue with the business model. A good long-term investment should have sustainable revenue growth, to support growing dividends.
Never sell an investment
Owning a stock for the long term should be seen as owning a piece of the company. Just like any business it should pay you as an owner, and as an owner you should spend at least some time studying that company. You need to make sure that it can keep growing, generating enough cash flow to develop and perfect its product and services, with enough to pay you that dividend. This is the long way of saying, that no one should interpret what I write in these articles as a blank “Sell or Buy” on either your investments or your trades. Now that we have this out of the way, I want to repeat something that I am sure I’ve said several times, the biggest amount of your savings should be in long-term investments, and separate from your trading funds. Once you set up a trading account you cannot put more money in. Trading is supposed to pay you, if you risk a significant portion in trading and you lose it, guess what? You aren’t good at trading, so just stop what you are doing. Spend time with your mistakes, and try to figure out what went wrong. Just watch the market, and paper trade. Most people keep throwing money at it and making the same mistakes.
Why do I concentrate on trading?
So if investing is all important, why do I write exclusively about trading? Well for one, I, and like a million other people are passionate about trading. If you excel at trading it’s like being a top-ranked golfer, chess master, or pilot. Perhaps not in the particulars but in the ability to juggle many pieces of information, keep your head in the game, and not get overly emotional. So there’s the challenge, there’s managing the risk, there is also the reward. Successful trading is very rewarding, not just monetarily but intellectually. Separating the unimportant jetsam and flotsam from what is truly valuable at the moment. That is why I write about it, I share my experiences with you the reader, as I recollect what happened in the last week, which was historic, and what might happen this week and next. So let’s get on with it.
We finally closed at an all-time high after two years of trying
I had no doubts that eventually, we would exceed that level this year after we hit the top of the range in December. My thought and hope was that the “Double Top” which is a strong bearish signal would moderate the euphoric rally we saw at year-end. A hyperbolic rally ends in tears nearly all the time, as indiscriminate buying of a sector, like “internet” stocks of a quarter century ago, and before with Kodak, Polaroid, and Xerox of the “Nifty Fifty” of 60 years ago. There were a lot of tears in the wake of the dot.com implosion, including mine.
I am not calling ChatGPT, LLM AI, and all that a bubble, at least not yet. The only name that is soaring and looks “bubbly” is Nvidia (NVDA), and it isn’t a bubble at first blush. What I mean by that is the statement of Mark Zuckerberg late this week that announced he is buying up another 250K GPUs to power the Artificial General Intelligence cloud, now that, sounds bubbly. Artificial General Intelligence would replicate how humans think but an order of magnitude faster and with immediate access to all human knowledge. Let’s put aside how this is not at all yet feasible, the fact is, the appetite for NVDA chips has not yet been slaked. And while Advanced Micro Devices (AMD) GPU chips are just gaining a following with consumption much higher than projections, the gains in these stocks are not unjustified. How high can they go is another question, I am not asking at the moment, but I can’t help being cynical and doubting the sustainability of this seeming infatuation. Just like every other euphoric rise, there is a core truth to the madness. So everyone is buying up NVDA chips, and lately AMD chips, to what true end? This reminds me a bit of Global Crossing of 25 years ago, the long-haul data communications company that crisscrossed the planet and probably every continent (except Antarctica) with fiber optic cable, creating so much capacity it went bankrupt. There was so much capacity, there was no one to buy all that much of it and pay for the sunk costs. So much so that the fiber remained dark and unlit for years.
In last week’s article, I warned about layoffs at some of the largest and best companies
This Thursday none other than Google CEO Sundar Pichai said the layoffs are about “removing layers to simplify execution and drive velocity in some areas.” Flattening organizations is not only a cost savings but a corporate good. This trend would not be possible without a change in thinking due to the evidence, and the emergence of software, and communication tools to make it possible. Right now this is a trickle but as the adoption of all these productivity tools and techniques gains currency it could lead to some false signals about the economy and ultimately panic in the markets. This and several other threads of narrative are coming together to raise the hairs on the back of my neck, hence the “chicken” metaphor of the title. The first is this breakout after 2 years of sideways action. Is it real? The breakout was achieved on the last day of the week during options expiration. Could options expiration have juiced the rally that closed very near to the high of the day?
We are back to a narrow rally once again
Last year everyone was sure that the big-cap tech stocks were out of favor and it was the “rise of the rest” for 2023. How wrong they were, then in the waning days of 2023, their sincerest wishes were granted, the Magnificent 7, moved sideways and the Russell took leadership. Then this month the great “Switcheroo” Lucy pulls the football from Peanuts and once again Magnificent 7 and other several associated techs return to pride of place.
The result now is that Hedge funds hold the highest level of net-long Nasdaq 100 futures in nearly seven years, according to Societe Generale’s weighted analysis of data on the Nasdaq 100 Index futures and e-mini contracts provided by the Commodities Futures Trading Commission. Also, Bank of America’s recent fund manager’s survey has the most crowded trade being long the so-called Magnificent Seven stocks. It also follows that many other sectors are nowhere near their all-time highs right now. That means this rally is fragile and if it gets perpendicular as it did in December we can only expect more weeks like we had at the start of January.
What, me worry? – Alfred E. Neuman
“If we don’t maintain sufficiently tight financial conditions, there is a risk that inflation will pick back up and reverse the progress we’ve made,” Lorie K. Logan, Fed President, stated in a speech just this month. She also raised the possibility of a rate rise, of which I give zero possibility. I think she gave that alternative view merely to counteract the happy talk of rate cuts in March followed by an additional 5 to 6 cuts this year. That is just not happening. How about no cuts? Not super likely but, under the right conditions going forward, we might not get any cuts. Right now we don’t need them. Just last week we had a fantastically low unemployment number at 187K, the lowest in 16 months. Why would the Fed lower rates with a result like that?
So let’s review what is before us…
We have a narrow rally, with the Magnificent 7 standing like an Atlas holding up the entire market. Everyone is focused on NVDA as the representative of the new shiny object of AI. This is real, but can’t be the only thing driving the market, or it could but it makes this rally even more fragile. We just inched up above a huge sideways action 2 years in the making. Technically this is a breakout, but it could be a false breakout. It happened on the last day of the week during options expiration. And now we come to the punchline, this Friday is the Personal Consumer Expenditure data reveal. Just like the year before last, we trembled before each inflation-related number, I think this might just be the last time this number counts. For those who aren’t keeping track the Core PCE is Jay Powell’s favorite statistic and what is called the “Super-Core” is his even most favorite. He uses that to isolate housing-related costs. We have yet to see a favorable reduction in “Owners’ Equivalent Rent”. I know I am getting in the weeds but everyone is so sure we have inflation licked, that the market will not react well to a less-than-perfect PCE. Moreover, the following week we have the FOMC meeting with Powell having his announcement on January 31. We could easily give up all the gains of the last week going into month-end as Powell gives the news that a cut in March is unlikely. Perhaps he says cuts could happen later in the year, but that won’t be enough to keep Atlas from shrugging.
My Trades
I stayed with Boeing (BA) This past week. I stayed in Call options for it though I rolled down my options to the 205 and 210 strike while adding even more calls as the price action confirmed 200 as base support. I even added BA stock to my investment account. I think the upward momentum is becoming established as it closed above 215. I closed out my 205 calls at just 35% profit, to start building cash in case BA falls back under pressure next week. BA is now my biggest position in my trading account, Barring any doors or wings flying off I don’t see a problem with another quick 10% upside. That doesn’t mean it can’t test 200-203-205, so proceed with caution, as might happen next week. If it does retreat because of a general market sell-off I will consider this a buying opportunity. The catalysts that I see are, additional deals announced and airline CEOs making positive statements about the manufacturing changes to improve quality. The big one is David Calhoun resigning, even more, exciting would be an outsider with true engineering and aviation expertise. Another big catalyst is a strategic acquisition offer for $SPR, from the likes of $GE (purely a figment of my imagination). Or other players in the aviation sector like Honeywell (HON), could step in. I don’t see BA reacquiring SPR, since I think the FTC would object. The real trade I will be engaging in is adding to my Puts on the 3X leveraged Nasdaq-100 ETF (TQQQ), and making hard decisions about what other trading positions to liquidate to build at least 25% cash this week. Rarely does my fear come to pass but there are so many red lights flashing right now, that I have to pay attention.
Good luck, and be careful out there!
