🗞 Bull Trap

WHILE YOU POUR THE JOE… ☕️
Please Bro Come On

Here’s the latest on the state of global power affairs:

• Trump said he had a productive call with Xi

• Xi says the call never happened

• Trump lashes at China

• China says Trump is confused

And that’s coming from the two most powerful countries in the world right now, a circus that has literally gotten the market to stop participating.

Until now.

Friday’s auction was an interesting one, and I want to show you a bit of what I expect moving forward.

Speaking of Friday’s auction, let’s get on with today’s email 📧…

DETECTIVE MODE
What Really Happened

For starters, the S&P 500 went higher on almost no volume. 📉 

I was on a call with one of my trading buds and we were watching the NASDAQ and S&P auction together, around 1:00pm we noticed that buyers started to become absent, and all real orders came in from the sell side.

First at $5540, then at $5550.

Until finally, at around 1:30pm, the big flush came in as Trump tweeted again. 💥 

We think that this is only the tip of the iceberg, a really bearish iceberg that the market is about to run into.

Here are some warning shots coming from the top dogs, let’s do NVIDIA first:

This has been the poster child of the bull run this year, but that ship might be about to run out of steam here.

Why?

• Forward P/Es are now at the lowest levels since COVID basically

• The stock has struggled to climb out of bear market territory

• EPS growth forecasts still don’t justify this low valuation

Here’s the thing, all others in the Mag 7 are going through the same thing right now. 🐻 

When the markets start discounting the top dogs in the index, that’s typically a bigger warning at play that something is about to break.

We see it in the yield curve as well, steepening past the 2022 recession fear levels after the longest inversion in history. 👀 

And don’t get me started with credit default swaps going on the rise as well…

But out of all those, here’s a better timing tool coming right out the heart of the beast:

The commitment of traders report, which measures the level of futures inventory held by both commercial players and institutional ones.

An important narrative to keep in mind here:

• When the S&P 500 hit the bear market level of $4900, you can see that institutions bought back in (green line)

That supported the index back into normality, for now, but then the selling continued ahead, as has been for the past two quarters. 📉 

If these are the ones dumping, then there’s probably something fishy going on in the background, seen by the higher highs with declining volume.

There’s no confidence in the market at the moment is what I mean.

That being said, I think we should head back to $4900 to reassess where capital wants to go and what it wants to do from there, dump it all or reinject some cash again. 🫰 

TRADE OF THE WEEK
Thank You for Flying

Last week, when Southwest Airlines reported its quarterly earnings results, the CEO said something very surprising..

“The industry is in recession”

Yet, the stock went higher the day after, and not by being dragged with the entire market, because it ended up outperforming peers like American Airlines and Delta Air Lines too.

You can see that the industry does show signs of recession right now, apart from the lower guidance and earnings given by all of the reported names so far, specifically:

• Discounted Forward P/E ratio

• Bear market territory as it’s at 70.5% of its 52-week high

• Lower than average EPS growth

Yet, there’s a big difference when it comes to Southwest Airlines.

Actually there’s two:

• Its routes are more regionally focused, thus less cyclical to consumer discretionary themes

• They have one of the best fuel cost hedging systems in the industry, keeping them safe for the WTI volatility that is to come soon

Which is why you can note the following trends:

Southwest Airlines is set up like no other in this space, specifically when it comes to future EPS growth. 📈 

Which is why it also trades at an attractive premium in terms of forward P/E ratios.

Look, at 73% of its 52-week high, and having the right fundamental makeup to weather the storm that is now the airline industry, I think this stock can be a winner in the coming quarters.

Looking for it to go $30.3 first, then we see what happens. That’s 15% return roughly, unless you do options 👀 

GO AND MAKE IT HAPPEN
It’s a Big Game

The stock market is just a legalized Ponzi scheme, nothing more. As new money comes in from retail and other sources, the old-timers and the “Capos” get their nut so nothing blows up.

We all pay tribute to someone; in other words, the game is rigged, as you saw from Friday’s auction.

Today’s book recommendation 📖 is an entertaining way to find out just how rigged the system really is.

To your success,

G. 🥃