🗞 Risky Business

WHILE YOU POUR THE JOE… ☕️
One-Trick Pony

Remember when they tried to tell you that a mysterious balloon from China suddenly showed up and was never shut down or interrupted? 👀 

China didn’t even bother to say anything back, all so that you would forget about Biden’s confidential documents, which he kept in his garage…

Look, I grew up in a country where they just made anything up and blamed the United States for all the issues, and I feel I have enough experience to tell you this isn’t China.

They’re trying to deter you from something else, and it’s your job to think independently.

Speaking of being an independent thinker, let’s get on with today’s email 📧…

THE RIGHT WAY
Close Cousins

We discussed this on Monday, but here’s another fresh look at the relationships and data, since we know this intermarket business is one of the topics our audience loves the most.

You can see that the $IWM ETF, which represents small-cap stocks through the Russell 2000 index, has now become positively correlated to the $TLT ETF, which tracks long-term treasury bonds. 📈 

We told you a few weeks ago that correlations would bottom and go up and that small-cap stocks would come down—bingo!

Now we’re telling you that bonds will rally from here, which is why we’ve been buying the $TLT around $90.50 a share. 💵 

Let’s break it down further for you:

In white, you see the $IWM and the $TLT in orange; after the small caps sold off to give us a new upper range on the correlations between them; now we’re looking for the next step.

That next step is a divergence between the two, and based on what we just covered in our previous post, it is more likely that bonds will make the rally from here to diverge away from small-cap stocks. 💥 

And of course this is recessionary, we see a bond rally as a potential flight to safety, especially as other asset classes like crude oil and gold struggle to reclaim a decent high.

And here’s a relationship that makes sense to believe this recessionary view when it comes to oil:

In white you have oil prices, and in orange a widely followed spread to measure market sentiment and views.

The $IVE / $IVW spread (value vs. growth stocks) is at a multi-decade low now, and it typically has a negative relationship to oil. As you can see in this chart, it is nearly the mirror image of oil prices over history.

The fact that this relationship has become positive means the same as it does for the bonds and small caps convergence. One of them needs to rally hard.

Now, this is tricky because if a recession theme takes on momentum, then value stocks might see some nice inflows. However, that might take a little while.

What is more likely to rally from here is oil, and the United States is already starting to tighten its supply as the manufacturing PMI index shows expanding business activity in the energy sector. 🛢️ 

One last indicator that you need to keep in mind for this cycle is the yield curve (ten-year bonds minus two-year bonds), which has just gone from negative to positive, and 100% of the time, this means recession.

This might be why equity risk premiums (the risk placed on owning stocks over bonds) are also on the rise.

We suggest you re-read our last post after this one; it’ll reinforce why all of these relationships mean a contraction in the overall market and economy coming up, no matter what the Fed decides to do today. ✅ 

TRADE OF THE WEEK
It’s a Cold World

After Luigi Mangione decided to shoot the United Healthcare CEO (well, former CEO) to death, the stock took an understandable dip.

The thing is, unless DOGE completely reverses our healthcare system, stocks like United Healthcare will always be a massive moat and a buy under the right circumstances. 💰️ 

We think one of those circumstances is here today, let us explain why:

After the dip, you can just see the massive amount of volume that took place right at the bottom of $485 ish. 🎯 

Now that’s on a two-dimensional basis, let’s consider the market profile to double-check this idea.

You can see that previous idea being shown in this graph, too; the thick red line means that most of the volume for the year took place around this price, and most importantly, it took place not too long ago on this recent dip.

If you’ve been with us for a while, then you understand that this is exactly the sort of setup we look for when hunting for a potential bottom and turnaround, so you better bet we’re willing to buy UnitedHealth right here. 📈 

When spreading the comaparables in the HMO space, it becomes clear that UnitedHealth Group is the leader and the obvious buy here.

Let us tell you why:

• Leading forward P/E ratio of 16.2x, a premium above the 9.9x average.

• Leading P/B multiple of 5.6x, a premium above the 2.1x average.

• Perfect technical setup.

Take advantage of our Twitter account since we will be updating you live when we decide to buy the stock based on favorable order flow because one day soon, those live updates will come at a cost. 🫰 

Reason? Simply because our followers are starting to notice the value of what we put out, especially in their suddenly heavier wallets. ☕️ 

NOW GO AND MAKE IT HAPPEN
Grounding Time

If we are right in this view of a recession and a pullback in the overall market, then having enough buying power will be essential for most investors.

However, having the right mindset is also essential, which is why today’s book recommendation 📖 is as important as ever, it’ll affect your mental state with the market and money that no other book can ever give you.

To your success,

G. 🥃