As a member of the Entrepreneurs Organization chapter of Chicago, a community of driven business owners, our monthly forum meetings offer a valuable opportunity for discussions, workshops, and other business-driven events. From personal experiences to professional challenges, we share insights, offer support, and create lasting connections. And, of course, we usually cap off each event with a delightful dinner at a local restaurant, providing us with a chance to unwind, indulge, and engage in meaningful conversations.
Recently, however, there was something distinctly different about our post-forum gathering. For as long as I can remember, we had always frequented the same steakhouse, enjoying its warm ambiance and delicious cuisine. But this time, when the bill arrived, it carried quite a surprise. The cost per person had skyrocketed to a staggering $350, a considerable jump from our customary price that rarely topped $200 per person for a similar experience. It was a moment I remembered throughout the week as we released inflation data.
This eye-popping increase in restaurant prices was not an isolated incident; it was symptomatic of a broader trend. In fact, it highlighted an issue that has been gradually creeping into the fabric of our daily lives and dominating financial headlines: inflation. As costs continue to soar across various sectors, the question arises—how accurately does the Consumer Price Index (CPI) reflect the realities experienced on Main Street?
The price increase struck me even more profoundly when considering the scene in the restaurant. Despite the exorbitant prices and the lingering concerns about crime in the bustling heart of downtown Chicago, the place was packed. The tables were filled with people savoring their meals and engaging in lively conversations - as if inflation was truly not a concern.
It was an intriguing juxtaposition: rising costs, a city haunted by safety worries, and yet, a thriving restaurant scene that showed no signs of abating. This observation led me to contemplate the reliability of the latest CPI data, released earlier this week, which indicated a slight cooling of inflation. If prices are indeed on the rise, shouldn't we be witnessing a significant impact on consumer behavior? When will the real impact of inflation be felt?
The interplay between the CPI and the lived experiences of individuals raises valid concerns about the accuracy and timeliness of economic data. As we delve into this topic, it becomes apparent that understanding the true economic landscape requires a more comprehensive assessment than what the figures alone can reveal.
In this article, we will examine the recent CPI and PPI data, the implications of rising inflation, and the disconnect between economic indicators and the behaviors we observe on the ground. By exploring these nuances, we hope to gain a deeper understanding of the current economic climate and how it affects businesses and individuals alike. And stick around through the very end where we reveal the Power Trading and Markets symbol we will be adding to our portfolio this week!
Join us on this exploration of the enigmatic world where rising costs, packed restaurants, and seemingly unaffected economies converge, as we seek to unravel the mysteries behind the accuracy of CPI data and the impending impact of inflation.
Recent Trade Review
In our ongoing pursuit of identifying profitable opportunities in the market, let's take a closer look at a recent trade that unfolded during our live trading room session. On Tuesday, we focused our attention on PayPal Holdings Inc. ($PYPL) and analyzed its potential for generating extra premium due to elevated implied volatility. For a detailed recording of the live trading room session, you can refer to this link.
Our proprietary Earnings Power Trader model flagged $PYPL as a prime candidate for selling out-of-the-money (OTM) premium, based on the prevailing market conditions. I quickly acted on this opportunity by executing the trade on Monday. The strategy involved selling OTM puts and collecting additional premium, capitalizing on the heightened implied volatility.
By employing this approach, we aimed to achieve a return of approximately 0.5-1% by holding the position overnight. This strategy is particularly effective when applied to liquid stocks with weekly options available. It's worth noting that around half of the options traded on $PYPL were weekly options or had zero days to expiration (DTE). Selling OTM puts and implementing call spreads are among the most popular strategies during bear markets, as they enable us to profit from collecting premium.
To provide further insights into the performance of our trading models, we present the results of our Stock Forecast Toolbox model. This model showcases the major differences between our paid and free services. One notable advantage of our paid service is the real-time SMS messages we send to our subscribers, alerting them to optimal entry and exit points, and ensuring timely and informed trading decisions.
For a comprehensive understanding of the trade and its implications, we encourage you to review the live trading room recording mentioned earlier. It offers valuable insights into the decision-making process and the practical application of our trading strategies.
At YellowTunnel, we remain dedicated to uncovering profitable opportunities and empowering our members with the tools and knowledge needed to navigate the markets successfully. Join us as we continue to explore and capitalize on potential trading prospects.
CURRENT TRADING LANDSCAPE
The stock market exhibited a mixed performance on Friday, with Wall Street recovering slightly from a mostly downward day. However, despite encouraging data indicating a further cooling of the U.S. economy, the week is poised to end on a negative note for the S&P and other major U.S. indices. As of Friday, the SPY is looking at closing in the red:
As I continue to closely observe the market, my attention is focused on the crucial levels of overhead resistance in the SPY. Currently, these levels are identified at $418, followed by $430. On the other hand, it is important to note the support levels for the SPY, which are situated at $410 and then $406. These levels will play a significant role in determining the market's direction in the near term. See $SPY Seasonal Chart:
One of Friday's significant economic reports was the U.S. consumer sentiment report, which revealed a worrisome trend. Consumer sentiment plummeted to its lowest point in approximately six months, reflecting heightened concerns about the economy amid the ongoing debt-ceiling standoff.
The consumer sentiment index for May delivered concerning results, as it recorded a notable decline to 57.7. This represents a significant 9% drop from the previous month and marks the lowest level since November when it stood at 56.7. Despite displaying resilience earlier this year, consumer sentiment took a pessimistic turn in May, primarily fueled by concerns surrounding a potential recession and the ongoing impasse over the debt-ceiling among politicians.
Although there was a slight decrease in expectations for inflation in the coming year, down to 4.5% from 4.6%, it is worth noting that long-term inflation expectations rose to 3.2% from 3%, reaching the highest level seen in over a decade. These figures reflect the growing unease among consumers and highlight the challenges faced in restoring confidence and stability in the economic landscape.
This sentiment result follows the release of two crucial inflation reports—the consumer price index (CPI) and the producer price index (PPI)—which indicated a moderation in price growth - more on that in a bit. However, both indices remained above the Federal Reserve's target of 2%, and the sentiment survey suggests that consumers lack confidence in the prospect of reaching that target.
Furthermore, import prices experienced a year-over-year decline of 4.8%, offering companies that import goods the advantage of lower costs. This reduces the incentive for them to raise prices, thereby benefiting their profit margins and contributing to a broader decline in inflation. Lower inflation levels also alleviate the need for the Federal Reserve to continue raising interest rates, which are typically employed to curb economic demand.
Going back to the start of the week, on Monday, the market experienced a mixed trading session, with looming concerns about the debt ceiling and anticipation surrounding the week's economic reports. Tuesday witnessed a decline in stocks as worries over debt ceiling negotiations and Wednesday's inflation report remained prevalent. President Joe Biden held discussions with House and Senate leaders from both parties to address the debt ceiling issue, but no resolution was reached. The unresolved dispute surrounding the debt ceiling continues to generate unease, as a potential U.S. default on its debt would pose funding risks for the government and increase the overall volatility of financial assets, including corporate bonds and stocks.
Continuing with market developments, Wednesday witnessed a predominantly positive trend in stocks as the latest inflation report revealed signs of easing inflation, with tech stocks leading the rally. The consumer price index (CPI) showed a year-over-year gain of 4.9% for April, which was lower than economists' expectations and a decline from March's figure. This development instilled confidence in the market that the Federal Reserve's interest rate hikes are effectively curbing inflation, potentially leading to a pause in rate hikes this June. As a result, the 10-year Treasury yield decreased to just under 3.44% from its previous level of over 3.5% before the release of the inflation data on Wednesday morning. Excluding food and energy, the CPI recorded a 5.5% increase over the previous 12 months, slightly down from the level observed in March.
Moving on to Thursday, the Producer Price Index (PPI) data for April indicated that wholesale inflation advanced at the slowest pace in over two years, rising by 0.2% on a monthly basis, which was slower than the anticipated 0.3%. On an annual basis, prices experienced a 2.3% increase. The PPI data suggests that the Federal Reserve is making progress in its battle to tame inflation. Furthermore, producer prices for April declined at a slower pace compared to March, aligning with a decreasing increase in consumer prices. Market participants hope to see the Federal Reserve pause interest rate increases, which are intended to reduce inflation by curbing economic demand.
In terms of earnings reports, Disney announced a top-line beat in its fiscal second quarter. However, the company also disclosed a 2% decline in memberships and projected another significant operating loss in its streaming business for the current quarter, resulting in a decline in its shares. Similarly, PacWest shares plunged by 22.7% after the regional lender reported a 9.5% decrease in deposit outflows the previous week.
Despite PayPal reporting strong first-quarter earnings, revenue, and total payment volume that exceeded expectations, the company's shares experienced a significant decline on Tuesday. The disappointment in the market arose from Wall Street's underwhelming response to PayPal's raised outlook for 2023. Although PayPal's earnings showed a notable 33% increase from the previous year, reaching $1.17 per share, and its revenue rose by 9% to $7.04 billion, surpassing estimates by approximately 1%, investors remained unconvinced.
Similarly, Airbnb faced a similar fate as its shares fell during extended trading on Tuesday following the release of its first-quarter earnings. Despite the company's earnings outperforming analyst estimates, the guidance provided for the current quarter fell slightly below expectations, leading to a cautious outlook among investors. Furthermore, after the market closed on Tuesday, Rivian and Electronic Arts unveiled their respective earnings reports, further shaping market dynamics by falling similarly in line with AirBnB.
Looking at the market as a whole, the current trading landscape remains characterized by sideways movement, and expectations point towards increased volatility throughout the first half of the year. As earnings season unfolds, a pullback has already begun, with small caps, regional banks, China-related stocks, and semiconductor companies breaking their April lows and initiating a downward trend. While the Consumer Price Index (CPI) and Producer Price Index (PPI) data showed slight improvements compared to expectations, they still remain at elevated levels.
Various indicators, such as the recent performance of Airbnb (ABNB), Rivian (RIVN), and oil prices, suggest a deceleration in the economy. Price competition in the electric vehicle market and weakening oil prices indicate that the reopening of China's economy may not be going as planned, raising the likelihood of a potential recession. Additionally, the takeover of First Republic Bank by JPMorgan and the growing concerns surrounding regional banks like PACW and ZION suggest that they could be the next vulnerable targets. The breakdown of the KRE index below major support further highlights the challenges faced by regional banks.
The performance of major technology stocks like AAPL, NVDA, and MSFT is crucial for the overall market. If these stocks start to experience a pullback, it could lead to broader market declines. Furthermore, with small caps announcing earnings this week and trading near their 52-week lows, it reinforces the idea that this is a stock picker's market, emphasizing the importance of risk management for investors.
While the current market conditions may raise concerns, there is hope in expert opinions, tools for risk management, and validated trade ideas supported by macro and micro conditions. Yellow Tunnel provides resources to support clients in making informed investment decisions and emphasizes the importance of staying with the platform during volatile times.
Regarding the future outlook, there is a belief in the possibility of a hard landing, not opposing the Federal Reserve's high-interest rate policy and the historically strong US Dollar. It is anticipated that the bullish sentiment may hold on to December lows in the coming weeks, but as earnings season approaches, there is a high probability of testing and potentially breaking the 52-week lows in the following months.
The expectation is that the SPY rally will likely be capped at the $418-424 levels, while short support is expected in the range of 375-350 for the next few months. With these factors in mind, a bearish outlook for the market going into the summer is advised, emphasizing the importance of managing risks effectively.
Overall, this week's market dynamics were influenced by key inflation reports and earnings releases. Investors closely monitored the actions of the Federal Reserve in managing inflation, and the market responded to the performance and outlook of various companies. As the market continues to navigate these factors, investors remain attentive to future developments that may impact investment strategies. With this in mind, I have identified the next symbol and strategy I am going to utilize within my portfolio in the coming trading session.
CPI and PPI Data Release…
Inflation Is Running Its Course…
…and I am anticipating tons of winning trades…
and will help you find them
CPI and PPI numbers are in: Inflation continues to run its course.
Recession can either be a soft or hard landing – or not at all.
Bank breakdowns, China reopening, Fed fudging, Debt Ceiling, and Crypto shenanigans...
Rumblings of increasing interest rates and then a quick reversal (aka Stagflation)
There are a lot of things happening right now that have thrown the market into fits of upward surges, downward volatility, and overall uncertainty.
And traders can't seem to decide if they are fearful or greedy.
That doesn't mean every single one of the thousands of stocks on Wall Street will go down.
I've built a tool that helps me find the winning trade… even in this inflation-crazed market, we're living in now.
Vlad Karpel, Founder &
Chief Investment Officer
(A portion of Yellow Tunnel sales will go to directly help the Ukrainian people)
In the current market environment characterized by inflation and volatility, one sector presents an intriguing investment opportunity. This sector encompasses a wide range of industries, including retail, entertainment, and leisure, which tend to benefit from increased consumer spending during periods of economic growth. Despite the challenges posed by rising prices and market fluctuations, this consumer sector can offer attractive prospects for investors. Additionally, within the broader market landscape, it aligns with one sector that often demonstrates resilience and is considered recession-proof.
The Consumer Discretionary Select Sector SPDR Fund (XLY) is an exchange-traded fund that focuses on the consumer discretionary sector of the stock market. The fund seeks to provide investment results that correspond to the performance of the Consumer Discretionary Select Sector Index.
XLY is designed to track the performance of companies that are primarily involved in the production and distribution of consumer goods and services. This includes sectors such as retail, media, leisure, automobiles, and other discretionary spending industries. The fund holds a diverse portfolio of stocks from various sub-industries within the consumer discretionary sector.
Investors in XLY can gain exposure to a broad range of companies that benefit from consumer spending trends. This ETF offers a convenient way to invest in the consumer discretionary sector as a whole, rather than selecting individual stocks. XLY provides investors with the opportunity to participate in the potential growth of companies that thrive when consumer confidence and spending are strong.
XLY holds a model grade of “B” indicating it is in the top 25% for accuracy within our data universe. This makes its forecast, along with our current market reading, a prime signal for a great opportunity.
Overall, XLY serves as a popular investment option for those seeking exposure to the consumer discretionary sector and the potential opportunities it presents in the stock market. But if XLY is to see growth, then it would be wise to find a symbol within which we can profit additionally.
TRADE OF THE WEEK - Fast Track: Best Obesity Drug Trade
Eli Lilly and Company (LLY) is a global pharmaceutical company based in the United States. Founded in 1876, LLY has a long-standing history in the healthcare industry and is renowned for its contributions to the development of innovative medicines. The company focuses on areas such as oncology, diabetes, immunology, and neuroscience, striving to improve the health and well-being of people around the world. Eli Lilly and Company's portfolio includes a diverse range of prescription drugs, both for human and animal health, and it has a strong track record of successful drug launches and ongoing research and development efforts. With its commitment to scientific excellence and a mission to make life better, Eli Lilly and Company has established itself as a prominent player in the pharmaceutical industry.
LLY is making significant strides in the pharmaceutical industry with two promising drugs in development. Donanemab, aimed at treating Alzheimer's disease, has shown a remarkable 35% slowing in disease progression during recent clinical trials. This breakthrough brings hope for effective Alzheimer's treatments.
However, I’d like to focus on the second drug which has made rounds in the news recently: tirzepatide. The drug targets obesity and diabetes and has demonstrated substantial weight loss and improved glycemic control in patients with type 2 diabetes.
These advancements underscore Eli Lilly's dedication to addressing unmet medical needs and improving patient outcomes. While further research and regulatory approvals are needed, these positive developments hold the potential to greatly impact patients' lives and contribute to the company's future growth. I am closely watching these advancements, recognizing the opportunities they present and their potential influence on Eli Lilly's financial performance.
And my A.I. toolset agrees!
With a model grade of “A” LLY is in the top 10% of accuracy within our data universe. Looking at the 10-day forecast we see several encouraging signals. The vector trend for LLY is not only positive but is one-directional and consistent which is encouraging considering our reading of the current market conditions. When considering inflation and recession fears weighing on the larger market, I have faith, and my A.I. agrees: LLY should persevere. See 10-Day LLY Predicted Data:
The strong and positive trend I am seeing for LLY goes in line with the expectation that the healthcare sector is often recession-proof and should maintain gains as the year progresses. Additionally, the current levels for both LLY and XLY show that this is a great entry spot to get these symbols!
This week, I’ll be adding $LLY to my portfolio!
Our track record speaks for itself from the standpoint of a Winning Trades Percentage, Average Return Per Trade, and Net Gain. Just take a look: