🗞 It's Time

WHILE YOU POUR THE JOE… ☕️
Hot Hand Fallacies

Can you believe there’s a 96.4% chance that the Fed will cut rates in a week? 📉 

Because that’s exactly what the market is betting on, but being the morally responsible mentors that we are, we think it is our duty to tell you why markets might be wrong this time.

Key word: MIGHT.

We’re not saying the Federal Reserve won’t cut, but what we’re saying is that the rest of the market price action is acting as if they won’t.

Speaking of price action, let’s get on with today’s email 📧…

CRYSTAL BALL TIME
Whales Lead the Way

Most people ignore the commitment of traders report, which next to the manufacturing and services PMI is one of our favorite tools to look at.

Why?

Because it tells you exactly what the big whales are doing, and also where the sheep are headed into.

Now, before we get into it, let us break down a couple of definitions here:

• Commercial Dealers: These are the whales, the prime brokers, and investment banks that hold and control most of the inventory. Think of them as the leading Toyota factory in Japan, controlling the flow.

• Institutions: Pension funds, individually wealthy investors, and hedge funds, amongst others. These are typically momentum chasers in the “local” market, so whatever is ho, they’ll buy, and whatever is cold they’ll sell. Think of them as your local dealership.

Alright, now let’s see what the locals and commercials are doing with each major market shall we? 👀 

S&P 500

It seems that the big daddy of all markets is losing steam. Notice what the commercials are doing right now, outlined in red below.

First, balances are net short, which tells you straight away that commercials (the factory) are bearish on the S&P 📉. Then, it is how heavily short they currently are.

They haven’t been this short since 2007, meaning they either expect the market to crash significantly, or they are completely on the wrong side of the trade and will be forced to cover, sending us into a massive bull run instead.

On the other hand, the institutions (in green) are nearly tapped out on the long side; poor bastards are always chasing momentum. This means that the S&P has potentially run out of buyers and breadth now.

But that’s only one side of it; let’s check the activity in other major markets here.

Ten-Year Bonds

Now, you see something interesting here for the ten-year bonds. Notice the commercials (again in red) are buying bonds right now after their previous decline.

Why do you think that is?

Well, we have the FOMC meeting here shortly, which is getting ready to “cut” rates, right? But then why would commercials be short the S&P if this was a typical bond rally sending rates lower (which is bullish for stocks)?

It’s because, in this case at least, the bond interest comes as a recession/stock crash response 💥. This means that rates will come down not because of economic reasons but as an aid to recession responses.

Let’s keep going..

Gold

Now, why would commercials be selling their gold positions all the way down into a net short? 👀 

It’s because gold only tends to rally in inflation or stagflation scenarios, neither of which are being reflected in the price action of any market right now/

So, the only sensible response to this is a recessionary theme, in which the commercials would have managed their inventory correctly when and if gold prices pull back significantly in a bearish market. 🐻 

Starts to make more sense doesn’t it? Yet nobody is paying attention.

But we are, and this is where we tie it all together:

Russell 2000 (Small Cap Stocks)

If there are any doubts, I think the commercial selling activity in small caps will clear them all.

If commercials are short the S&P (recessionary), then short gold (also recessionary), and buying up bonds while at it (for recessionary cuts in yields), then what do you think it means when they also go short small-cap stocks?

One thing: Recession.

And when push comes to shove, it is the small cap sector that will feel the most pain.

Why?

Small businesses can’t diversify away costs and cycles like the big internationals can, so that’s why we’ve been calling for a decline in our nightly market recaps, and so far, we’ve been right. 🫰 

TRADE OF THE WEEK
Hit the Spot

You know what sounds better than FOMC?

FMC stock.

We gave you a pitch on chemical stocks a couple of weeks back, where fertilizers and agriculturals took the cake, we also mentioned FMC and how it wasn’t time to buy yet.

Well, now it’s time.

See that chart up there? That’s the $54.5 cutoff level 🎯 we've been waiting for, where the stock will either bounce back up to $68 ish or crash down toward $50.

And based on all the evidence we got stacked up for it, we think it’s going higher, and our ideal exit is sitting right around $61.33 🤌.

This is the price of fertilizers, the input prices tracked in the PPI report. Notice how they’ve been coming down to near pre-COVID levels right?

Well, that’s a good thing for margins at FMC, especially now that the war premium between Russia and Ukraine is coming down thanks to daddy Trump. 📈 

Ending the war would mean a world where fertilizer and crop supply is back to normal levels, making input costs for FMC much lower to expand EPS.

Whether this is already reflected in projections or not, it doesn’t matter because today’s view compared to peers is already bullish for us:

Comparing FMC stock to other fertilizer and agriculture input stocks makes sense as to why it’s a buy today.

The market has been discounting it to 11.6x forward P/E ratio compared to the industry average of 13.5x, which would typically turn us off.

But

FMC has the leading EPS growth rate of 39.7% compared to only 16.4% on the industry median value, meaning analysts are seeing something down the road that could propel FMC into a major rally past its peers. 🔥 

Now you already know that it could be the PPI decline in input costs, which will only be accelerated by the war being solved in Ukraine, but that might not be reflected here yet.

Anyway, based on that, we have another good piece of data to bring you:

This guy definitely smashes.

Big Tony is now switching from Mattel and into FMC, in what management has called a strategic addition to help restructure logistics and costs moving into a new agricultural cycle.

Connect the dots, translate, and this means they are expecting to see above-average demand in the coming months, so they need someone to help them cope with it all.

That is why you see analysts aligning right into our price target of $61.33 here, even more, which we might as well consider a reality. 👀 

NOW GO AND MAKE IT HAPPEN
Learn From the Best

Stanley Druckenmiller has arguably a better track record than Warren Buffett himself. Today’s book recommendation 📖 taught us one simple lesson.

You have to be aware of all markets at all times and always have a catalyst and a narrative in mind so that you can profit from their shifts.

From the legend himself, and someone we keep learning from actively.

To your success,

G. 🥃