🗞️ You'll Wish You Were Liquid in 2 Months

WHILE YOU POUR THE JOE… ☕️ 
It’s Crystal Ball Time

They say that trying to predict the market is a waste of time, and from my experience, it really is.

But that doesn’t mean that sometimes an obvious piece of evidence is staring you directly in the eye 👀.

And when that happens, then sure, take some action on it. Here’s how a lower employment number (NFP) may hit us in the face on today:

Retail traders, especially those trading FX (forex), try to trade around big economic reports like the NFP since it gives them tons of volatility. However, they’re just trading around what the institutions are dumping.

Way back in the day (when I worked at Goldman), we used data like the PMI and Jobless Claims to try to gauge where the NFP may be headed 🔎. Because both the manufacturing and services PMI showed contracting employment, we feel comfortable predicting a lower NFP about an hour and a half from now.

To find out what that means for stocks and how to make a kickass trade around it, let’s get on with today’s email 📧…

INSIDE THE MACHINE
Catch the Turnaround with Us

Don’t be surprised to see the stock market moving higher if the NFP comes in weaker than expected.

Typically, a weaker employment reading is bad for the economy and, therefore, bad for stocks, right? Yeah, but not today.

Today’s market doesn’t care about the economy; it only cares about being right. Their bet? The Federal Reserve (the Fed) will cut interest rates at least once this year.

What started as a projection for 4 rate cuts beginning in March 2024 now becomes a projection for 1 rate cut in September 2024.

Max, if you’re reading this, you’ll remember that meeting🥃 we had with a cigar about how cuts wouldn’t come until the end of the year.

Anyway, here’s how you can tune out all the media BS and get a glimpse into the market’s bets for yourself:

There is a 66.5% probability that the Fed will cut interest rates by 0.25% on September 18 and a 27.4% probability that it will not do anything.

This is measured by the number of contracts open in the market for a specific interest rate level, so it’s not made by economists or anything like that but by traders and other participants in the live market.

How Do We Know They’ll Cut?
The Fed worries about two things when choosing their interest rate path: Employment and inflation.

Today, as we know, employment is starting to weaken more and more. At the same time, inflation is still relatively high but is finally starting to come down a bit 📉.

So that gives the Fed some evidence to allow them to cut rates, and here’s one sector that could benefit from this move.

Timberrrrrrr

That’s right, the wood products industry 🪵. Cutting interest rates will begin the most significant market rotation since COVID-19. Still, only the industries suffering the most will bring you the most upside.

If you still don’t have this Excel sheet carrying over a year of data into the manufacturing PMI index, you can request it by sending an email to [email protected] with the subject line “I’m ready for my model”.

As you can see, the manufacturing PMI has been contracting for 20 consecutive months, with April being the almost insignificant exception.

Services PMI, on the other hand, looks like this:

It has barely broken a sweat lately, expanding for most of 2023 and 2024, with only the past month reading a serious contraction.

Because the Fed now faces contractions in two sectors that drive the economy the most, it could seriously consider cutting rates now.

But as you now know, the biggest turnaround can come from manufacturing, and here’s how wood products can lead that shift.

The price of lumber is now at a normal level, falling like Biden’s approval ratings since the start of 2024.

This is due in part to the low housing demand, which led to a 7% annual decline in building permits, except for Florida, Florida be buildin’ as you can see in our post a couple of weeks ago.

But Florida can’t carry the entire nation’s construction chain. With mortgage rates hovering around 7% and home prices staying 30% above pre-COVID levels, there just isn’t a need to build more homes.

No need to build = no lumber demand = lower prices. Got it?

So, it’s no surprise to see the wood products industry do this:

Three months of consecutive contraction, which means no wood stock is going to report an earnings beat this quarter.

But wait there’s more:

Wood inventories landed at the bottom of the pile, meaning lumber and plywood (main construction wood products) are running out of stock.

Of course, this could be a strategic move to raise lumber prices again and help stop the bleeding at wood companies.

Now that September is looking to bring interest rate cuts and make mortgages cheaper for would-be buyers, it would make sense to expect the industry to start preparing, right?

That they did:

Notice the quick turnaround in employment, going from a contraction into an expansion for June. Now, why would the industry start to employ workers?

Well, they’re probably expecting rate cuts for housing demand and cheaper rates from which builders can take on construction loans.

And that could translate into demand for wood products. Bingo!

Now, which stocks are worth taking a look at here?

Potlatch Deltic (NASDAQ: PCH)

With the highest expected earnings 📈 per share growth in the industry, this stock could become a prime choice among traders who see the same development you are now aware of.

There’s also a reason why markets are willing to pay a 45.2x forward P/E for this stock, a premium of 77% compared to the industry’s average 25.6x multiple.

Some other factors in favor of the stock:

• Trades at only 69% of its 52-week high, in other words it is cheap in price, but a premium in value.

• Bank of America analysts recently placed a $57 price target on the stock, or 152% upside 🔥from today.

• Short interest fell by 15% over the past month, signaling that bearish traders are abandoning their thesis on this stock, potentially realizing all the fundamentals at work here.

TRADE OF THE WEEK
Technical Analysis, the Right Way

Most think of technical analysis as drawing lines on a chart and recognizing some weird name patterns. I like to run a personal test on myself whenever I test a strategy.

The test is: If I were to pitch this to a Billionaire, would he actually take me seriously?

Guess what? They would laugh you out of the room if you pitched an investment based on lines and patterns. So, here’s how to make technical analysis work for you.

It starts with the fundamentals, and for Tesla (NASDAQ: TSLA) the fundamentals don’t look too good right now.

Deliveries for the first quarter of 2024 declined over the year, and that is likely to continue into the second quarter, especially considering how weak the economy is right now.

Looking at other drivers, like oil, the price per barrel isn’t high enough to make electric vehicle demand a thing. Notice how 2023 saw record Tesla deliveries?

Guess what? That year saw a record because oil prices stood above $90-$100 a barrel for most of the year, making the proposal of owning an EV more attractive.

Anyway, you know that low oil prices = low EV demand = lower Tesla deliveries. Add lower employment and high inflation to this equation, and you also have a weak consumer.

The fundamentals are bearish for this trade, so now let’s check the charts:

Tesla’s daily chart. I drew only excess zones in those gray areas, defined as a range where no volume was traded and where prices are likely to either reverse quickly or accelerate into a new perceived value.

Notice how recently Tesla shares jumped past both excesses. Well, that was only because Volkswagen announced an investment of $5 billion in Rivian Automotive (NASDAQ: RIVN).

That had nothing to do with Tesla, though; as we know, deliveries were announced to be lower during that period.

So, now that we have entered into another excess area let’s check what the market did during the past couple of days of market profile:

July first saw most of the volume below Tesla’s value area (red bar), as seen by the turquoise volume bars. That means buying pressure.

As we would have expected, that sent prices higher into July second, where volume also spent most of the time below the value area, signifying buy pressure.

That sent prices higher for July third as well. But that’s where the profile begins to change. As the price entered the excess of $246, here’s what happened on that day:

The yellow bar shows the price at which Tesla stock spent most of the day, which is where markets believe the fair price to be.

Later during the day (as seen in the 4,7,8,9 numbers), prices reached and went through $246 to $248, above the value area (red bar), on very low volume, as seen on the left turquoise bars.

That means volume dried as the price reached our excess zone, rejecting any price above $246 (red bar).

So, what could happen next is a couple of days spent between $246 and $240 while traders decide whether to stay or take profit after the run.

And, unless we see volume pick up in this excess, we will stick to the bearish fundamental view and short the stock down to the next excess of $225 to $230 📉and see what it does there.

Remember, Tesla earnings come out on July 23 📆, which could be our catalyst as short sellers position themselves for the potential earnings miss due to lower deliveries.

NOW GO AND MAKE IT HAPPEN
Quant Trading at Your Fingertips

Jim Simmons (RIP) is the man who beat Warren Buffett at his own game, using only computer algorithms and mathematics to trade and make insane amounts of money.

Today’s book recommendation 📖covers his story and also brings you some of the main concepts he used to develop his strategy so that you can also do your own digging into them.

To your success,

G. 🥃