🗞 Did the Tree Really Fall?

WHILE YOU POUR THE JOE… ☕️
D.O.G.E.

You know who still manages to make friends within a month of almost getting shot? Good old Donald Trump.

Most people would develop a healthy amount of trust issues after what happened to him. Still, he just turned that into a new friendship with the genius of our time, Elon Musk.

Openly stating that, if elected president, Trump would call on Elon Musk to serve with him, Elon responded by tweeting the image above.

Now, we all know about Dogecoin and Elon’s dark jokes about it, as it was never meant to be a serious currency. But this is just classic: He plans to be the head of the Department of Government Efficiency (DOGE).

Speaking of making jokes out of the government, let’s get on with today’s email 📧…

VOLATILITY EVENTS
Did the Tree Really Fall?

This image has been going around Twitter and the internet; it is a revision made by Goldman Sachs regarding how many jobs were actually created in the US economy over the past year.

That big red bar on the downside essentially means that the Bureau of Labor Statistics (BLS) overstated the number of jobs created 📉 in the economy by over one million.

That’s English for a dying economy, essentially, and it justifies a proper selloff, if not an outright crash, in the S&P 500 coming up, as the revision is said to be released this morning ⏰.

Look, we’ve been bearish on the market since July 2023 but also bought every dip as we understand markets can stay disconnected from the economy by lags of 12-18 months at a time.

This time, however, the lags have reached up to 21 months, and we’ve made a few posts now on how the market is making higher highs on essentially no volume, but that’s another subject.

The main question is: If everyone knows this is going to happen, will the market crash?

Or, as I heard one time in philosophy class, if nobody hears a tree fall, did it really fall? 🌳 

This chart tells me that the tree did fall, and while nobody heard it initially, a group of tourists is about to drive by it and let everyone know 👀.

What you see there is the spread between corporate bonds and treasury bonds, a cyclical instrument that tells me where markets are pricing in stock risk premiums.

The higher the spread (like recently), the lower the perceived risk for stocks. Got it?

Now, notice that this spread has been making lower lows and lower highs since the end of 2023, while the S&P 500 (purple) makes uninterrupted higher highs.

That disconnect needs to be corrected 🎯, but it could take a while, as it did during 2019 and the 2020 selloffs.

Whatever the cause, some in the market are starting to bet on the stock market's having a correction sooner than most would feel comfortable with.

LESSON OF THE WEEK
An Inside Look Into My Journal

Look, I know we’ve been right in making calls lately, and some of you have thanked us through email and other platforms for your gains 💰️.

But we’re not perfect.

It is also our job to let you know when and how we messed up so that you can avoid these mistakes yourself and become a better trader by learning where we went wrong.

Remember that CrowdStrike recovery trade I put on a few weeks ago? At one point, it was all over Twitter.

Anyway, the stock went a lot lower before it decided to come back up, and even when it did, it only retraced back to a breakeven point. Here’s the chart to show you what I mean:

That gray area is where I imitated coverage for a potentially long trade and took the position myself.

Almost a month later, and we’re only back to that entry-level, wasting time and energy on a trade that never paid off. You know where I went wrong?

• First of all, I got carried away by the potential gains that could be had in recovery after the company’s software incident, so I prematurely bought the dip.

• A few days of weak print were mistaken by markets accepting the bottom; I should’ve gotten out when I realized there was no responsive buying to these new lows.

• I completely fell into tunnel vision and forgot one of the most important tenets of trading: Where will the next domino fall?

Turns out that Domino flew right under my nose all along; it was:

Palo Alto Networks (NASDAQ: PANW)

I’ve seen this so many times before, a company crashes on some news event, and markets decide to bail out on every other one that could be related.

So, because CrowdStrike is in the cybersecurity space and crashed, it also brought down Palo Alto Networks 📉 with it, something I would have - and should have - caught if I wasn’t so emotionally invested in my CrowdStrike recovery play.

Turns out, the stock recovered and rallied past the selloff point in half the time it took CrowdStrike to reach breakeven from our long entry.

Lesson learned (again, you always make mistakes in this game).

Now, here’s the flipside, in my opinion.

Palo Alto Networks just announced its latest quarterly earnings results, and they look like they beat expectations in all the important ways. Plus, management laid out even better guidance for the rest of the year 📈.

My question is, did the market already price in this growth potential? I mean, the stock barely moved after the release, and no new analyst ratings suggest there’s any further upside right now.

So, having learned my lesson by getting slightly burned in CrowdStrike, I think the market is going to start pricing in the potential earnings beat 🔥 the company will deliver in its next quarterly results.

It’s a long shot, and I’m not going to trade it, but I hope this mind map helped you spot what I did wrong and how I should have gone about this trade.

NOW GO AND MAKE IT HAPPEN
Morning Inspiration

It’s almost the end of the month, and I like to make it a point to watch a certain video at least twice a quarter. It’s from my former mentor, Anton Kreil.

A real Goldman bro, now winning at life in one of my favorite destinations (Phuket, Thailand). Today’s recommendation 🎥 is a 2-hour talk filled with all of the subjects that matter during our 20s to ensure we win by our 30s.

To your success,

G. 🥃