One day does not a trend make
Usually, it’s not a good idea to point to a single day and proclaim a new direction of the market. Before we get anywhere, let me disabuse you of assuming that I think stocks are headed for an immediate fall. We know that the first 2 weeks in July are the best of the year and have been for decades. I am not saying that this reversal is a harbinger of retracing the S&P 500 to a significant low. Admittedly, we are due for a 5% to 7% drop, since we haven’t had a real consolidation in the indexes in months. It is common for the market to have at least one 10% correction a year, and we are overdue. All that said, this is not what I read from Friday’s price action.
First, let’s celebrate the disinflationary PCE
This past Friday morning, the PCE Deflator was flat in May, as expected, and was up 2.6% on an annual basis, one-tenth less than the annual figure from the previous month (April). Disposable Income increased to .5 in May from .3 in April. You can visit BEA.gov for more details. The numbers are showing a gradual disinflation trend. Inflation reached 9% and was transitory, but confoundingly sticky, much to Chairman Powel’s chagrin. Let me acknowledge that real prices have not come down, and many of the basic items of life are now about 20% higher than they were before the pandemic. I think that is why inflation was so sticky, people’s incomes have not caught up with that rise, so demand for wages was rising. If you look at Friday’s PCE numbers, there’s hope that income and savings are catching up. When the PCE data was revealed the indexes shot up immediately, well past 5505 the previous high for the S&P 500 to 5523.64 and ended at 5460.48. Many analysts have 5500 as their target for the entire year, others are at 5600 and higher. The current forward PE ratio for the S&P 500 is about 23 times, historically that is quite high, but earnings are expected to rise into 2025, and as inflation is falling the PE ratio could come in a bit. Much of the power behind this PE is the Super Six stocks, which are highly profitable, have no debt, and are still growing fast. So even if we say the ultimate high for the year will be close to 6000. We are getting close to that level already. We hit a new high and then reversed and fell more than 63 points; we need to rest a bit.
Let’s look at the chart, I am going to use the S&P 500 ETF (SPY). Here is the 6-month chart.
The above ABCD pattern is in every book on charting, the next step is down (E), it doesn’t have to be as sharp as B to C, and it doesn’t mean we are headed lower permanently. This is just a natural stair-step pattern that is extremely common. Now I want to get a bit closer, let’s zoom in to the 3-month chart.
The end of the ABCD pattern is “E” (sharply down), but it doesn’t have to be. In this chart, we had that little rollover in May before we continued higher. Now we see a “Double Top” formation, which means we go lower. However, we could move sideways like we did in May. It wasn’t that fun either, but it wasn’t terrible. I have said this before, when I say I want to chart something in this article, it means I am charting it at that moment. My intellectual assumption was that the chart would show that we are entering a sideways consolidation, perhaps we have a good 2 weeks according to historical norms, but we could have a step lower before we continue higher. This wasn’t the message I wanted to impart to you.
Here is what I think the market is telling us
The PCE gave us everything we wanted, and the market hit new highs (5523.64) and then sharply fell (5460.48). To me, this means that the Federal Reserve no longer matters. It has been coming for a while, but I think this Friday’s market action was definitive. Now what will matter to market participants is the lowering inflation rate (to continue), lower interest rates (at some point), higher earnings, and other fundamentals. Price does matter, it always matters, and right now, prices represent the full value of the S&P 500. My punchline was going to be that the Super Six would take a rest, and other stocks would shoulder the burden of keeping the index at this high level. The chart points to a bit of a messy transition. I usually chart single stocks for my investment group, and I haven’t looked at an S&P 500 6-month chart in a while. So I am as surprised as you are.
The key driver of this market is NVIDIA (NVDA) let’s look at it too
Here is a chart I made at 10:30 am on Friday, as you can see, it was challenging strong overhead resistance.
I just drew this chart below, and we see that the resistance line at about 128 rejected the upward move. I think NVDA won’t see new highs for a while. Instead, I think it hangs in a range, looking for the strongest support. Right now, it is just below 120, but as you see below, I think it will test the next line of support, in the next week or two.
So this slow descent and search for support where it can consolidate its gains gave me the notion that given these first weeks of July, and all the positive macroeconomic numbers, market participants might lighten up on the Super Six and look at other sectors. We do see some green shoots with other tech stocks, like cybersecurity Zscaler (ZS), and CrowdStrike (CRWD) have been strong the last few weeks. We’ve seen the enterprise software sector moving up again too, for example; MongoDB (MDB), ServiceNow (NOW), and even Salesforce (CRM) coming back to life. I see other areas of green shoots, as I’ve highlighted before, consumer discretionary, July 4 week is supposed to break air traffic records. The summer driving season is finally picking up, with many millions on the road. I have mentioned Vegas before as well. Then we have the Summer Olympics in Paris! I bet a lot of international travel is going to happen. Yes, I think the consumer is still out there, perhaps not as widely deployed in every economic strata, but people still want experiences. I believe this is a sustainable trend. Perhaps when houses become more affordable somehow, people will start saving more and traveling less, but they won’t stop. Cars are getting more affordable, there are plenty of cars in the lots we are told, so long live the consumer! Everyone wants a bargain, so certain retailers are doing well while others are not. It is once again a stock pickers market. This brings me to…
My trades
Well, if you read my last article – This Week May Give Us A Nice Entry To Nvidia And Other Titans I did just that. NVDA fell below 120 to about 118, and I took the long call 120 strike August Expiration and got out just under 125. I shoot for 40% profit on an options trade. I took a bit less because I am a chicken. After NVDA reversed from 140, you have to be very nimble. I suspect that NVDA will test that 114 level and bounce to 126/128, and I might try to trade it again. I would wait to see if it holds a level under 120 before I make a move. I mentioned cars being cheaper, CDK a private equity-held software service company for car dealerships was hacked not once but twice. They said that they are shooting for the service to be back on by June 30. Meanwhile, the 1500 dealerships that use this service have to process car purchases by writing up deals with pen and ink. I am telling you this because I traded Zscaler (ZS) options again, once again I pulled the trigger at just under 40% profit because I am a chicken. I am also telling you this because I have Puts on AutoNation (AN) which is a fine establishment but has the misfortune of being a CDK user while CarMax (KMX) is not. With AN Calls, I am down 27%, but I am pretty convinced that they will not be up and running for the big July 4th sales week. They were hit twice; I think the chances are pretty good that two groups hit them at once. They already said they would pay, so maybe there was a pile-on. I am thinking of going long KMX and making it a “pairs trade” using options – long KMX, short AN. Also with the travel theme, I got Delta Air Lines (DAL) options. I bet DAL will do very well with international travel to Paris. I have DAL September in the money Calls. I also have the Cruise Lines both Carnival (CCL) and Norwegian Cruise Lines (NCLH). To continue the cybersecurity, I got long Rubrik (RBRK), they are an important capability to deflect ransomware, so it’s very timely. Ok, that ought to hold you all.
I don’t want you all to be discouraged by the SPY chart. I do think we will finish at new highs; we just have to go through a healthy retrace and consolidation. If everyone is already long, who is going to bid up stocks? There also has to be a rotation, that’s just how it works. The indexes come down and that attracts new investment money.
Have a great week, everyone!
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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