🗞 The Shoe Dog's On Top

WHILE YOU POUR THE JOE… ☕️
And Atlas Shrugged

The S&P 500 index is now highly exposed to one stock: Nvidia. Everyone has been following this story for a while, but I think it's time to take it seriously.

Particularly what earnings tonight could mean for the entire market.

I'm not calling any shots here, but it doesn't look like Nvidia is set up for an earnings beat. They must beat by a massive amount to justify today's valuation and forecast an even more optimistic rest of 2024 to keep the party going.

I'd stay away from trading this one if I were you, but know that any miss on Nvidia's part could trigger a massive stock market selloff to follow 📉.

Speaking of events that could move the market, let's get on with today's email 📧…

CATALYST CHECKLIST
Shocks and Knee Jerks

We made a post not too long ago about the yield curve inversion and how it might trigger a boom in oil stocks, driven primarily by a likely rise in oil prices.

These shocks are starting to come in, and stocks like Helmerich & Payne and Chesapeake Energy have collectively taken off by over 10% 🔥.

By the way, we mentioned those in our last post, so you’re welcome, I guess.

Moving on from our previous victories, let’s talk about the next ones.

If oil manages to keep closing above the $75 level and into the $78 area, $90 or more oil could be underway soon. 🛢️ 

Considering that China, representing over 40% of global oil demand, is coming back online, surging demand might get us there.

More than that, the Saudis and their most recent balance sheet suggest they need to keep oil above $95 a barrel if they want to avoid going into a deficit and triggering debt accumulation.

Here’s a global event that could trigger a knee-jerk reaction in oil:

Yep, the fight ain’t over in Israel and some other nations in the Middle East, and that’s going to create a lot of positive tailwinds for stocks like Lockheed Martin (who are already up by over 10% on the quarter). ✈️ 

Okay so, if you are following our portfolio into Helmerich & Payne and Chesapeake Energy then you’re mostly covered.

I want you to pay attention to other market developments right now because they might be another trigger to a market selloff.

Massachusetts is the only one affected by this breakout so far, but they are already considering lockdowns and curfews. Here’s what caught my attention about the timing.

We’re about to be done with summer (sad), which means wind and temperature changes are southbound. So, if you release a mosquito breakout up north, it’ll easily spread in the coming months.

So, lockdowns? Maybe.

It would be convenient for remote elections like in 2020, allowing for easier manipulation, especially with such high stakes.

Look at Zoom shares. They’ve been popping lately for no apparent reason other than insiders catching onto what could be remote work 2.0. 🏘️ 

Sure earnings were the trigger for the rally, but the outlook is what kept the stock here, and that’s always a good indicator of the future.

As always, that could send us into the tail risks currently present in the S&P 500. My guess? Two scenarios:

1. Nvidia earnings beat tonight, and we see a new all-time high, potentially on no volume, and hold until the next set of economic data.

2. We sell off on Nvidia earnings, then bounce back on NFP and PMI data, only to have a disappointing FOMC and then selloff.

Remember, the Fed overpromised last week at Jackson Hole, and we now need oil to stay down if we want PPI data to be compressed. We also need a tame consumer to show CPI slowed again, and lastly, we would need NFP to show a cooling labor market.

If any of these show the Fed reason to wait before cutting, the promise for September 18 FOMC would fall right through the sewer, with $SPY right along with it. 📉 

TRADE OF THE WEEK
Office Yoga

I remember when Lululemon first became popular amongst women, and it’s too bad I was too young to start buying that stock. Today, though, I am glad I don’t suffer from FOMO.

It is a great company and still relevant to the white girl index (Target, Starbucks, Ulta) 👧. But, as the company is set to report earnings this week, I have a few issues.

Inflation-choked consumers probably laid off Lulu this quarter, especially with the job market as bad as it is today. With unemployment on the rise and rental inflation out of control, places like Lululemon suffer.

More than that, the company hasn’t yet reached international status, so any downturn in the US (or the dollar) will have 100% weight on this brand.

Other brands with international exposure, like Nike, don’t have this problem, so I would prefer it over Lululemon in the coming quarter.

This isn’t a one-way ticket, though; I’m talking about a long/short equity trade 🔃.

The above spread shows the price of Nike minus the price of Lululemon over the years, with the red lines representing the second standard deviation from the mean value.

A long/short strategy involves buying or selling highly correlated pairs like these when they deviate too much from the mean. In this case, we would look to buy this spread.

That means Buy Nike and Sell Lululemon.

Correlations have been high for these two stocks, save for COVID-19, so there is economic and statistical reasoning for considering this trade.

The risk for this one would be that if Lululemon beats earnings and rallies, your short will lose money, though, by extension and correlation, your Nike long should be in profit 💵.

To balance this position, use a hedge ratio as follows:

The highlighted “Delta Hedge” Is basically what you would hedge every 1 Nike share by, so if you were to buy 100 shares in Nike, you would short 20 shares in Lululemon to be perfectly hedged.

This way, it doesn’t matter where the market goes or whether Lululemon goes nuts; your hedge should cover you as long as the spread between these two goes back to the mean from its current deviation.

Happy trading. 🫰

NOW GO AND MAKE IT HAPPEN
Know Your Competition

Look, every time you place a trade, you compete against guys like me (and thousands of others) who look at the market 7 days a week for hours on end. Looking, sniffing, modeling, and studying.

You might want to get to know your competition a bit more, as well as their strategies and methods, which is where today’s book recommendation 📖comes into play.

To your success,

G. 🥃