🗞️ Delusion

WHILE YOU POUR THE JOE… ☕️
First Day on The Job

Did you see what happened with shares of Starbucks? They went up over 20% 🔥 during the day on the mere announcement of a CEO change…

And out of all the candidates out there, they picked Chipotle’s CEO, Brian Niccol. Whether this was the work of a recent stake made by activist investor Elliott Management or not is up for debate, the reality is that markets are sort of delusional.

Look, we did like Starbucks way back, and you can’t deny it because we pitched it to you when it was below $75 a share in this post 🎯.

What matters is that this CEO change hasn’t even taken place yet; there is no new strategy or any material change, yet Niccol added up to $23 billion in market cap 💰️ to Starbucks on his first day as announced CEO.

That’s not normal, and that makes us think that markets are sort of out of sync with reality.

Speaking of delusional markets, let’s get on with today’s email 📧…

LOOKING FOR ANSWERS
It’s Not Over Yet

We’re not here to spread doom and gloom across our readers; that’s not at all what we’re about. In fact, I’ve personally been bearish on the market since July of 2023, yet I’ve been buying dips on every stock I like since then.

Why?

Because markets can stay disconnected from reality longer than we can imagine, there comes a point when enough is enough—and that time might soon be upon us.

Here’s how I can tell:

• Last week, the $SPY had the worst day of 2024, then came back like it was nothing. This isn’t good; it’s like saying a patient had flat-lined then suddenly returned, and now he’s good to go home.

• The “Carry Trade” between US dollars and Japanese Yen is not finished unwinding; it could have as much as $20 trillion more behind it, so hang on.

• Lastly, PPI data came out on Monday with only 0.1% growth, which is essentially admitting we’re in the middle of a recession 📉.

When markets ignore the warning signs, it must be due to a good reason, and the only one I can think of is the Fed cutting interest rates this year.

But

0.25% to 0.50% rate cuts aren’t enough to justify an S&P 500 near all-time highs, especially when the ENTIRE economy is falling apart underneath it.

You can say it all starts with 4.3% unemployment 🫢, which isn’t too high compared to historical recessions. Still, it is definitely not a sign of a strong market either.

On the other hand, the manufacturing PMI index has read a 21 consecutive month contraction. Markets tend to follow the PMI with a 12-18 lag, so this disconnect is overdue for a correction.

And I’ll tell you one thing, most of the market is still blind to all this; Monday morning was the confirmation for me.

When the PPI came out at only 0.1%, it should have caused a monster selloff in any other market, but not this one.

Lower PPI essentially means that America’s businesses have no customer demand and no pricing power, which is synonymous with recession 📉.

But

That also encourages the Fed to cut interest rates, so a recessionary piece of data is now good? That’s where we’re at today, and that’s the nonsense market that you have to sadly navigate

However, not all hope is lost. 🙏 

TRADE OF THE WEEK
It’s Shiny, But That’s About It

Before you get the wrong idea, I am not a bull on Cryptocurrency and Bitcoin, but I can’t deny the value it provides as a potential indicator and a sentiment gauge.

The only common thing Bitcoin has with gold is that they are both shiny and sit there looking pretty, but that’s about it.

Gold and Bitcoin are quoted in USD, so a decline in the Dollar could also signal a rally in gold and Bitcoin prices, which comes through a “risk-on” attitude from the market.

There is just over a 30% outperformance in the $SPY over the price of Bitcoin in the past year, which might indicate that something is going to come by and hit the market.

You know what is also a good indicator of where the market is right now? Gold prices.

In the purple line (Gold), you’ll see how there is now a big divergence between the metal and the $SPY, which could mean we’re about to see a move down.

The question is, how is the market looking right now, and where could we expect it to move next?

You already know my bias is short, so let’s start with where I am looking to take profit around with my short positions:

On the $SPY, I’m mainly watching yesterday’s levels, which are a high-volume node that gives me evidence of higher seller activity 📉.

This rally could continue unless the CPI number in about an hour and a half from this email gets us our desired move down.

On the upside, I’d want to see the $SPY reach $548-$552 before we stop and look for new auction, otherwise it’s a smooth sail from here until those levels.

I may very well switch my net shorts into net longs 📈 if we continue this move.

If not, then here’s my downplay:

We sell back down to the $533-$535 level, then consolidate before the auction decides if it’ll sell down further or rebound higher.

Should we break down from this, then my guess is $522.50 all day, at which point I can consider taking half my profits and waiting for a potential next leg down to $513-$515.

Mind you, the current levels seen in Gold and Bitcoin, with Oil now joining the party and breaking above $78 again, are all confirmations that our downside scenario could be the one to play out.

Here is some statistical data to back up our next expected move:

Called ATR (average true range), this is how we measure the volatility of any stock over a period of time. Over the past five days, we have seen the volatility in the $SPY collapsing from 2.4% to 1.0%, which is a five-year low.

This means the next big move could be just around the corner, but how much of a move can we expect next?

More math for you, according to five years of price data, most of the $SPY returns lie between a -0.5% day to a 1.5% day.

But

Remember that our next expected move will be a volatility expansion, so we could move to the following probability bracket: a -1.5% to a 2.5% move.

According to yesterday’s close of $542.04, we could expect this bigger move to be down to $533.90 as described above or even down to $528.50 for an even better trend confirmation 🎯.

All told, our hedge in $TLT is still in place, and our $SPY shorts will be closed if the CPI doesn’t trigger this volatility expansion in the $SPY.

NOW GO AND MAKE IT HAPPEN
Do the Math

If you’re in finance, you probably are looking to line up your career prospects as best as possible, so I couldn’t recommend the CFA program enough.

The type of math (and way way more) that you just encountered above will be among the first topics you’ll face in today’s book recommendation 📖.

To your success,

G. 🥃