🗞 Rate Cuts Aren't Bullish

WHILE YOU POUR THE JOE… ☕️
We Can Sleep Easy Now

For what it’s worth, we started recommending bonds as a hedge against what might happen in the next few weeks.

We chose the less volatile $TLT ETF for this opportunity 📈, and so far, it has treated us well. Now that other traders are also starting to pile up into bonds, the trend is clear that reducing S&P 500 risk exposure is the mandate today.

The trend in bond holdings has accelerated recently, too, as the Jackson Hole Symposium is set to reveal what the Fed Chairman is thinking about interest rates. Lately, the S&P 500’s price has rested on this one decision.

Speaking of interest rate decisions, let’s get on with today’s email 📧…

HISTORY LESSON
The Trade that Haunts Me Still

So, back in 2018, when I was just getting started in my journey to understand what drives the market and economy, I understood one thing very well.

Bond yields typically act as a precursor to where the Federal Reserve (the Fed) might move interest rates toward. The magnitude of bond yield swings is a good way to tell how much the interest rates will swing by, too.

The market was expecting a 0.50% (or 50 bps) cut from the Fed, and the S&P 500 started rallying higher and higher because of this belief.

One problem made it a bit fishy, though; there was a relatively low volume to that build-up 📉.

That red line I drew is basically the run-up to the September 18th FOMC meeting, at which Jerome Powell would decide whether to cut by 50bps or not.

Spoiler: He chose to go for 25bps instead of the decided 50bps, which, of course, threw the entire market into a tantrum 📉 that lasted for over a quarter.

Today’s market feels a bit similar. Cutting by 50bps seems a bit extreme for me. Even 25bps might be premature, but who am I to judge?

Anyway, here’s what the run-up to the September 18th, 2024 FOMC meeting looks like:

Very similar right? Both of these scenarios saw declining volume leading up to these meetings, and the Fed will likely choose to cut by 25bps rather than the expected 50bps.

I could never take that trade back in 2018 since I had very little capital.

But

The few thousand I had available (roughly $5,000) to put toward this trade would have turned into an insane $180,000 profit 🔥 since I was playing very low delta and out-of-the-money put options.

That’s English for betting on something nobody is expecting to happen so that if it happens, your payoff is huge 💰️.

I am still haunted by this missed profit, so today, you can probably guess who is almost in YOLO mode for $SPY puts.

All told, I think that securing your portfolio for the coming weeks is key to surviving whatever might come.

If we’re wrong, then no worries; we know you’ve been making money out of all our other pieces, with stocks flying by more than 20-30% 🔥 in a matter of weeks.

See you after Jackson Hole. 👋 

TRADE OF THE WEEK(END)
Ducks Lined Up

The guys who control the world's oil supply (at least most of it) just put their cards on the table.

The Saudis, in their balance sheet release, admitted that they need the oil price to stay above $95 a barrel at minimum 🛢️ to meet their breakeven fiscal demands.

Any price lower than this would send them into fiscal deficits, and this minimum represents an upside of over 30% from where oil is trading today.

One catalyst we have in mind for this run higher in oil is the fact that China's economy is starting to wake up again through consistently positive inflation and recovering import volumes.

Pre-COVID, China made up 40% of the world's oil demand 📈, and we expect this to be higher once it has fully recovered.

Now this is good for the classic oil stocks like Exxon and Chevron, or the main Buffett pick right now which is Occidental Petroleum.

But

Other stocks higher up in the value chain could see more upside, as they are always set up to get paid first, which is always good for traders to watch out for.

Naturally, I got looking into what the market expects out of the oil and gas sector, trying to find which industries are getting hot and justifying a premium valuation today.

It turns out that drilling is at the top of the food chain, with an average earnings per share growth of 183.1% 🔥 in the next 12 months.

It makes sense since more expensive oil will likely prompt producers to ramp up their equipment so they can have expensive oil in their inventory and sell it for a wider profit.

A 13.0x forward P/E ratio above the industry average is also justified here. Now, it’s time to figure out which stocks are driving this trend.

Chesapeake Energy and Stone Energy are the stocks looking to grow their EPS the most and commanding the highest premiums.

However, I also had a special guest who caught my attention outside of this table. That stock is Helmerich & Payne, also a drilling and production equipment name.

Here’s what the charts look like as far as a potential entry:

Chesapeake Energy (NASDAQ: CHK)

Okay, those gray areas are the most important, so I’ll start with those.

These are known as low-volume nodes 🎯, where the stock price tends to either quickly pivot off that area or either shoot through in a continued direction.

Right now, the lowest low-volume node shows that the market triggered buying activity, meaning traders found an excellent opportunity to start positions for a higher price ahead 📈.

The next low-volume node above it also saw rejection, and the stock is now right in the middle of that range. As long as it stays within this range and keeps showing us buying activity, it’s a buy-and-accumulate stock for us.

Here’s what Wall Street has to say about Chesapeake:

• Those at Stephens placed a price target of $118 a share for Chesapeake stock, calling for 64.8% upside 🔥.

• Institutional capital made its way into the stock this month, with those at Kimmeridge Energy Management boosting their stake by 28.8% to net their investment at $303.7 million today.

Helmerich & Payne (NYSE: HP)

Like its distant cousin Chesapeake, Helmerich & Payne stock trades at one of those low-volume nodes we have come to know and love.

Judging by recent volume around this area, traders don’t want to see the stock trade any lower and have started to create some support in this region.

As long as our oil bet (which is the same Saudi bet) is right, these two stocks should move to and past the other low-volume nodes above where they trade today.

But, as a routine check, here’s what analysts have to say about Helmerich & Payne:

• Bank of America has a price target of $50 a share for this stock, calling for a 54.3% upside 🔥from today’s stock price.

• Dimensional Fund Advisors (the largest shareholder) allocated more capital to this position, netting 5.6% ownership in the company.

While many other fundamental factors favor these two companies, we just don’t have the space to cover them all in this issue.

But stick with us, we may start giving deep dives into companies we like to put you on the winning side of history.

NOW GO AND MAKE IT HAPPEN
Morning Inspiration

Remember that statistic about China being 40% of global oil demand pre-COVID? Well, there are many other ways to understand the world today that can help you figure out where the next big investment trend may be.

Today’s book recommendation 📖 is one that led me to some of the most profitable investments since COVID, especially in energy and food. I hope it will do the same for you in the coming years.

To your success,

G. 🥃