🗞 The Future is Not What it Was

WHILE YOU POUR THE JOE… ☕️
No But Really

You may have heard that the United States GDP growth was revised up to 3% for the quarter, but we just don’t buy that narrative.

A couple of weeks ago, the Bureau of Labor Statistics (BLS) revised the nonfarm payrolls (NFP) downward by as much as 818,000 jobs 📉, meaning the economy is not as strong as it seems.

For my non-econ audience, GDP (on a nominal basis) includes inflation as well, so the current revision might be a little tilted to the upside.

In real terms, adjusted for the crazy inflation in rentals, groceries, and insurance, GDP might have actually been negative.

We are confident that it is negative and has been for at least 18 months, but that’s another subject.

Speaking of events that disappointed markets, let’s get on with today’s email 📧…

NEW CYCLE (REJECTION)
Nvidia’s Abandonment Issues

Let me explain what all these dots and numbers above mean, but first, know that above is Nvidia’s stock price is quoted as 30-minute footprints.

That being said, Notice the activity from yesterday’s close (5-6-7 stamps) and how everything settled overnight around that range.

This typically means that a lot of inventory was short overnight, creating the potential for adjustment the following morning, which means buying the stock to close short positions.

Instead of getting these alerts three times a week, you can also follow our Twitter (X?) account to keep up with our live thoughts and strategies.

Anyway, now that inventory was adjusted yesterday and the stock closed near its lows along with the S&P 500, what comes next?

We think it’ll be a continuation selloff 📉. Of course, the company doesn’t create much fundamental ground for it to recover any time soon.

Nvidia’s CEO, Jensen Huang, admitted that there was a production flaw in the company’s following chips, which will bring over $36 billion in revenue for the fourth quarter this year.

However, markets didn’t buy the hype this time, as they woke up to the realization that the semiconductor industry is now coming off its sales cycle and coming into its development cycle.

Which is why:

If the CEO was as bullish as he says, why is he selling the stock at the most aggressive rate ever? It just doesn’t add up.

If the stock keeps selling off the way we think it will, then the S&P 500 will probably follow suit; the question is how far down?

We need to start with this image because it’s one of the main drivers, coupled with the yield curve (which is now steepening and signals a recession crash).

The purple line is the S&P 500, while the white bars are the spread between corporate yields and treasury yields.

Those in the know understand that securities with higher yields represent more risk, which is why we look at how yields are rising for corporates over treasuries.

This is English for stocks looking riskier in the face of the market, which doesn’t spell good news for the S&P 500 in the coming months.

Seeing the market make higher highs on the back of declining volume is another red flag, as it indicates that investors are not accepting or facilitating trade at these high prices.

So that brings me to the ultimate price target for the S&P 500 if we do go into a broader selloff from here:

The thick white line on the $SPY ETF at roughly $458 🎯 shows the 20% discount from all-time highs, sending the market into a bear market, as Wall Street defines it.

Of course that wouldn’t be far from reality, as we do see all the leading and current economic indicators slowing down in recession fashion.

Be careful out there. Stick with our hedges in bonds through $TLT and some oil stocks, and you should be fine.

TRADE OF THE WEEK(END)
Long Live Pets

After reporting earnings for the second quarter of 2024, shares of Chewy rose by just over 10% 🔥 . Since there was no price rejection, we assume the market accepts this new value perception for the company.

But here are some of the fundamentals we like about Chewy and why we consider it a potential buy at the right price:

• It is a strong staples business. Whether the economy is booming or busting, people will make room in their budgets to meet their pets' needs.

• The business has had 29% gross margins over the last 12 months, enabling management to retain more capital and compound operations.

• From the past 12 months' data, Chewy generates a 28% return on invested capital (ROIC), which sets the company up for potential compounding effects.

• Positive Free Cash Flow allows for potential share repurchase programs in the future.

Wall Street analysts expect to see up to 60.9% earnings per share growth 🔥 in the following 12 months, setting the company up for a potential undervaluation today compared to where it could be.

The chart does give me some hope that the stock is channeling nicely around the $20-28 level. Ideally, we can buy some time before it goes to the lower end of the channel, giving us room to run proper research and valuation for the stock.

The fact that there are so many wicks to the downside means there are only a few buyers right now, so we could front-run demand by getting an excellent location here. 💰️ 

NOW GO AND MAKE IT HAPPEN
Head in the Game

Right now, markets aren’t behaving the way they should, and stocks are as statistical as they are emotional, so you better understand both of these sides.

If you only trade and invest with your left brain, you will miss everything that happens. If you do only your right brain, you will probably die out of poor risk management.

Today’s book recommendation 📖 helps you understand both sides of the market and puts you on the winning side of history when it comes to forecasting and anticipating future moves.

To your success,

G. 🥃