🗞 The Market is Changing

WHILE YOU POUR THE JOE… ☕️
Please Bro Come On

Remember this section from our last newsletter post?

It was talking about how the Mag 7 stocks are all struggling to trade back above 80% of their 52-week highs. 📉 

But, more importantly

How their forward P/E ratios are all diverging from their prices on a very bearish note, and you can now see that belief at play through Amazon and Apple after last night’s earnings.

Can NVIDIA be next? We’ll see.

Speaking of bearish notes, let’s get on with today’s email 📧…

TRADING FLOOR TIME
How to Keep Your Job (as a trader)

This text was sent to our remote trading floor chat members in the early opening session of the market.

Something just seemed odd, not just in the S&P 500, but everywhere else.

Specifically:

• Bonds and stocks are now positively correlated

• Oil is kind of going off on its own

• Copper and EURUSD are not giving any signals right now

This is not the normal state of the market, as our biases on every meeting have been neutral rather than a very clear “Risk-on” or “Risk-off” 🤷‍♂️ 

Then came a 70 point selloff to end the day, confirming this outlook as Amazon and Apple Sunk.

By the way if you want to be part of the next meeting, make sure you join before all materials are sent out this morning:

Alright, back to shifting markets.

If you’ve been with us for a while then you know most of our daily biases are formed through price action in all of the macro picture, but we are also well aware that correlation regimes might change.

Well, they just did.

This means that every asset class is now kind of acting on its own, not giving any signals whatsoever to the equity markets and vice versa.

So that means we have to look for a plan B, and that means finding signals within the markets we want to trade. 👀 

So for equities we chose our favorite, the $IVE / $IVW spreads (value vs growth), and overlayed it with the price of WTI Crude Oil futures in order to spot any potential correlation changes.

You see, these two are typically the mirror image to each other, but not so much lately.

In a nutshell: ⬇️ 

• A rising spread means worsening outlooks for the market and the economy, as people look to value (safety) rather than growth (speculation)

• A falling spread has the opposite effect

That being said, I was watching the spread continually rise at the opening balance, and I decided to let that guide me as my bias for the day, looking for shorts.

Understandably, it ended up paying off.

And now you have a signal to keep track of for better timing and biases in your equity outlooks. When this changes back to a macro perspective, we’ll let you know to incorporate all the rest.

If you need a refresher on how macro biases work and what to watch, here’s a primer newsletter on the topic for you. 🫰 

TRADE OF THE WEEK
Big Brain Time

Look what the LATAM dragged in.

I was having a conversation with my trading partner Andres the other night, and the thought of what might happen (commercially) in a tariff-filled world came up.

The conclusion?

With Amazon and Temu / Shein struggling to import and export stuff to willing consumers due to import charges, a new backdoor market might pop up. 👀 

This is why we decided to look into Mercado Libre stock, which held its highs while Amazon took a trip to the toilet.

Now let’s look at the main internet commerce names in the market:

• Alibaba

• Amazon

• Mercado Libre

There are others, but I feel this is more apples to apples.

It becomes clear quite quickly that Mercado Libre is leading in market sentiment and future upside potential for a few reasons: ⬇️ 

• Momentum is definitely on its side

• More than double EPS forecasted growth

• Justified forward P/E premiums

• Discounted forward PEG ratios

But the most important one of all in this particular case:

• P/S premium

Why is the market willing to overpay SO MUCH for Mercado Libre’s sales? I think it might have to do with this backdoor dealing thesis.

These are the methods I learned from my former job at Goldman Sachs.

So when I see them boost this stock in the middle of all the tariff uncertainty, you bet they know something already. 🔥 

GO AND MAKE IT HAPPEN
Land On the Right Side

Trading and investing is a sort of coin toss, never forget that.

And sometimes, you (and I) may feel like a genius because the coin landed on a winning outcome for several times in a row.

But don’t be fooled, that’s just the game's random nature.

Which is why today’s book recommendation 📖 serves as a reminder of this very fact.

To your success,

G. 🥃