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August performance
For those of you reading MktContext for the first time, our investment strategy is to be 100% in stocks (mainly S&P500 ETFs) and use market timing to avoid drawdowns. This allows us to capture all the upside and beat a buy-and-hold strategy by sidestepping drawdowns. This also eliminates the need for bonds, which are a drag. We explain our approach in detail here.
August is quickly coming to a close and we managed to avoid most of the -10% selloff, handily beating a buy-and-hold strategy. With some luck, our signals timed the July peak and August bottom. We also switched into QQQ on the ride up, which added alpha. Not too bad for one month of work.
Now that the market has rallied 10% from the bottom, forecasters and financial media are coming out of the woodwork to say “the growth scare is over” or “the fed put is alive”. They weren’t saying that when VIX hit 65 on a Monday morning! Narrative follows price – a common occurrence in finance media. When the market is doing well, people rationalize reasons why and extrapolate forward.
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Week in review: Rangebound
For the past week, stock prices have been rangebound. A dovish (bullish for stocks) Jackson Hole speech last Friday couldn’t push SPX out of this range. We warned on Sunday that SPX options were too richly priced (chart below). Similarly, our favorite Put/Call ratio was extended, meaning buyers are exhausted and wary of the rally.
Dips from here should be shallow and we’re bullish on stocks. Friday’s Fed speech shows they are concerned about joblessness and therefore will support the economy with rate cuts. Whether it’s 25bps or 50bps, stocks go higher.
Data on home sales increased 10% (!). Falling interest rates is already spurring demand in housing, where the consumer still has a lot of cash left. We expect other cyclical industries like cars and durable goods to recover in tandem. Speaking of durable goods, data also came in strong (chart below). Businesses are ramping up inventories again! Great for cyclical stocks.
The Texas manufacturing survey showed an improvement across manufacturing, restaurants, professional services, and more. It turns out last month’s bad numbers were a fluke — distorted by Hurricane Beryl — and not indicative of a recession. The Consumer Confidence Index also rose. Consumers’ assessment of current business and labor conditions have been sideways for two years and not deteriorating.
All these things come together to tell a story of a resilient economy, which should bolster company earnings and support stock prices. That’s the KEY to our bullish call.
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NVDA quarterly earnings
Investors are gearing up for the most important event this week: NVDA earnings. Typically, the stock drifts up in the days leading up to it, but instead it’s been choppy this week. Fundamentally, investors are concerned about the cloud providers reducing capex, as well as language models needing less computation. Our proprietary data confirms that hedge funds are positioned very bearishly in semiconductor stocks.
How to trade this? You’ll recall we recommended buying NVDA (and SOXX, the semiconductor ETF) in our Sunday Aug 4th premium letter. This happened to be the bottom of the stock; if you bought it on the Monday morning, you’d have a cost base of $92 and made +40% profit in less than a month.
If you indeed bought it then (we know for a fact some of you did!), take some profits before the close of today but you should feel comfortable holding it into this earnings release. Why? The fundamentals are still good, sentiment is bearish, and the technicals suggest a nice pop is coming if it breaks $130 resistance (chart below). Watch this price level if you trade afterhours. IF we break out, we should get a quick pop to $135 and beyond. Trade your own view.
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Key charts this week
Wayne Whaley, an excellent forecaster, shows this great chart below of stock market performance in the week leading up to Labor Day (filtered for bull markets only). SPX performance is usually positive, with a large proportion of +1% days.
Advancing/decline volume ratio is reaching highs! Shares are overwhelmingly bought, not sold. That’s a good sign of market breadth.
That’s it for today!
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Disclaimer: This publication is for educational purposes only. The authors are not investment advisors and nothing here is investment advice. Always do your own due diligence.
Great report! So much good information here.
Nice post. Lots of bullish data in here. The NVDA move lower today is a bit surprising given how good their earnings were once again, but I think there is still plenty of reason to suspect higher prices for stocks into the end of the year.