🗞 Hello World

WHILE YOU POUR THE JOE… ☕️
Swinging Wild

This month's Nonfarm Payrolls report will rock the S&P 500 in about an hour and a half, so be careful not to trade too big at the open or around this report.

If you absolutely have to trade, like us, we recommend you head over to our Twitter account and write down the following levels from which to trade the $SPY ETF.

We’ve gotten some positive feedback lately as to the levels we put out for people to trade on, so might as well keep them as a reference for yourself:

I do have a short bias on the ETF, though, so after a potential morning run, I will go to those value areas and other trading levels. I recommend loading back up on short inventory. 📉 

Also, remember what the NFP expectation is. Any number that beats 148k means a stronger-than-expected economy, and that could be good for the S&P since now good news is actually good news.

However, a number below the NFP expectation would push the Fed to consider further aggressive interest rate cuts in the coming months. As long as that outweighs the fact that a poor NFP means bad news for the economy, we can expect to see the ETF hit those higher levels. 📈 

Speaking of strategy and expectations, let’s get on with today’s email 📧…

BREAKDOWN LIKE A PRO
Running Hot Again

After we broke down our views on the manufacturing PMI on Wednesday, it’s time to relay what we spotted in the services PMI for further strategy and review.

The index came in at 54.9 🔥. Remember that anything above 50 means expansion, while anything below means contraction. This month marks the third consecutive month of accelerating expansion for the services sector.

This could mean good news for its cousin in manufacturing since most of the US economy is now services, but don’t celebrate just yet.

Let’s first check out what the individual components in this PMI ended up looking like.

Business Activity

Expanding by 6.6% in the index, business activity was the leader in the PMI index this month, so now we have a bias to keep in mind when breaking down all of the industries within the sector.

This expansion could be due to the Federal Reserve’s interest rate cuts making their way through the economy, pushing some of the biggest industries into expansion. However, we can’t yet go about buying stocks and going long industries without knowing which ones are following the trend; that comes later ⏱️…

New Orders

Expanding by a factor of 6.4%, this reading represents the second-largest expanding segment of the PMI, which starts to build the bullish thesis for a potential long bias in the industries that follow the same trend in both business activity and new orders.

With business activity and new orders on the rise, you can probably guess that corporate earnings could rise for the next quarter, where the odds of being long improved for most services companies.

Okay let’s go on…

Prices

Here’s an issue, prices reached a 59.4 level on the index. In contrast, the manufacturing prices actually lowered to contraction at 48, so we can definitely assume that demand is on the rise for service businesses.

One thing we can also look into is inventory, as tightening inventory can cause further price hikes and bottlenecks; the opposite is true.

Inventories

Inventories also expanded aggressively, indicating the sector's need to lower prices in response to this growing demand 📈.

So, knowing that demand is happening all over the sector and inventory is probably tight right now (as seen in rising prices), then it would make sense to start looking into the industries that share the following:

• Rising Business Activity

• Rising New Orders

• Rising Inventories (expecting more demand)

As a bonus, slower deliveries show tight bottlenecks as a result of high demand and low supply. In case you forgot from economics class, this means businesses have potential pricing power above the group, leading to better margins and earnings.

Alright, so which industries fit this description?

Notice the trend in the Real Estate (renting and leasing) and Accommodation & Food Services industries? They all share the same characteristics that drove the overall PMI index.

You can probably guess where we’ll look for potential long ideas after the PMI, right?

But before we get onto stock selection, there’s a lot of homework to be done. It’s going to be a fun weekend at InvestiBrew. 🥳 

TRADE OF THE WEEK
Bullseye

As promised, we are giving you some of the best stocks we figured would make good long selections inside last week's manufacturing PMI.

Remember that we were going to be long the Computer & Electronics industry along with the Food & Beverage industry, so here it goes:

First step, we need to break down all computer industries and figure out which ones carry the most earnings growth potential and the most forward P/E premiums, as the market typically has a good reason to overpay for an industry.

Ignoring the exaggerations in the Peripheral Equipment industry, there are two that we chose to dig deeper into for log ideas.

• Computer Software industry, for 18% EPS growth and a 119x forward P/E

• Computer IT Services for 47% EPS growth and a 31.5x forward P/E

Now, we need to apply the same thinking to all the stocks inside the industry. For research's sake, we stuck to the IT Services industry, as Software had too many outliers.

Standing out from the pack, we have SentinelOne, Cyber Ark Software, and CoStar Group.

While we have yet to do the more profound homework on these stocks and the proper chart analysis for potential entries and exits, their EPS growth and forward P/Es make for excellent prospects for a long idea. 💡 

Besides, they’re tied to the cybersecurity bull trend the whole market seems to be getting behind and software logistics for the real estate industry (sound familiar from the services PMI?).

I’d suggest you follow our Twitter closely, as we will probably share what we find on each and any potential trade entry if we decide to buy them. 👀 

NOW GO AND MAKE IT HAPPEN
Refresher

Every once in a while, I find myself looking for new strategies or trends that the big traders are using so that I can compare my current methods to theirs and judge whether I need an upgrade.

Today’s book recommendation 📖 provides a few examples of big traders and investors and the strategies behind their success so that you may learn from them as well.

To your success,

G. 🥃