Welcome back Power Traders, to another edition of our journey through the financial landscapes with the help of Yellowtunnel. As we immerse ourselves in the currents of change, I'm reminded of the collective sentiment that hung in the air as 2022 drew its curtains – the ominous anticipation of an impending recession. Yet, here we are, navigating the turbulent tides of 2023, and that economic storm never quite arrived.
Reflecting on the projections we made last year, I found myself donning a bearish stance, predicting the looming recession either in the first or second half of 2023. However, against the forecast, the market has proven itself to be a tricky and strong sea of volatility, refusing to succumb to the anticipated downturn - pushing higher against most expectations. The unexpected heroes in this financial saga turned out to be generative AI and NVDA earnings, catapulting the market from the $430 to $460 range, a plot twist difficult, if not impossible, to foresee in at the dawn of 2022.
Nevertheless, the narrative took a detour as inflation revealed its stickier side, defying popular expectations. The Fed, contrary to my predictions, held firm on interest rates, sparking volatility with March's regional bank solvency concerns and August's pullback triggered by apprehensions around sustained higher interest rates. Despite these twists and turns, the SPY stocks remained modest, inching towards a flat to slightly positive trajectory for the year. The heroes, the "Magnificent 7" and a handful of mega-cap tech stocks, with their robust balance sheets, propelled the market to a surprising $460, a storyline I hadn't anticipated.
Now, let's peer into the crystal ball for 2024. The script seems poised for a sequel, with echoes of 2023 reverberating through the narrative. My bearish outlook persists, particularly in the first half of the year, envisioning a potential 15-20% pullback from current levels. Why? The inflation target appears elusive, the Fed maintains its 'higher for longer' rhetoric, and signs of an impending recession may begin to cast shadows. The first half of the year doesn't seem to promise a rate cut from the Fed either.
In this ever-evolving traders' market, a lesson learned in the chapters of 2023 is crystal clear – trade what you see, not what you think!
Real earnings, adjusted for inflation, decelerate and dip into negative territory, challenging the resilience of SPY top-line revenue growth. The DXY and interest rates, now in oversold territory, rest on the assumption of a Fed rate cut in the first half of the year. Yet, should this assumption prove false as macroeconomic data unfolds, brace yourselves for a potential market pullback, possibly revisiting the lows of 2022 in the worst-case scenario.
While I won't venture into the realm of predicting black swan events that could disrupt our assumptions, the financial tapestry we're weaving seems to hint at a mild recession with a soft landing. As we navigate these dynamic markets, keep in mind the ever-shifting currents, where each twist and turn or latest data release holds the potential to reshape the narrative in unexpected ways. Stay tuned for the final chapters of 2023 and the start of 2024 with our weekly Power Trading and Markets newsletter, where the story of finance unfolds with every tick of the market clock.
Recent Trade Review
In our recent live trading session, our Dynamic Power Trader (DPT) system cut through the noise to highlight a solid profit opportunity, focusing on iShares Silver Trust (SLV.) This week's trade, documented in our Tuesday live trading room recording, showcases how the DPT model works to identify potential wins.
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CURRENT TRADING LANDSCAPE
As we kick off December, the market is traversing through a mix of Federal Reserve signals and economic cues. Here's a comprehensive look at the events shaping the ongoing saga:
- Powell's Nuanced Take on Inflation and Monetary Policy
Federal Reserve Chair Jerome Powell recently addressed the progress in taming inflation, bringing it closer to the 2% target. Despite this achievement, Powell remains cautiously optimistic, emphasizing the Fed's readiness to tighten monetary policy further if deemed necessary. The core PCE index, a pivotal measure excluding volatile components, stood at 3.5% in October. Powell underscored uncertainties in the economic outlook, citing factors such as the unwinding of pandemic-induced demand and supply-chain challenges.
- Market Dynamics and Rate Cut Sentiments
Investors responded to Powell's remarks with a subtle uptick in stocks. A swift recalibration of expectations ensued, with the market now factoring in the potential for multiple rate cuts in 2024, possibly as early as March. This adjustment played a pivotal role in driving the S&P 500 to its most robust month since July 2022. The positive sentiment from Fed speakers, coupled with diminishing inflation and falling interest rates, has fostered optimism, evident in the upward trajectory of assets like $TLT and $LQD.
- Earnings Landscape and Overbought Conditions
Recent earnings reports, notably from $ZS, $PANW, and security stocks, painted a picture of resilience with solid performances. Despite beating expectations and projecting future revenue growth, overbought conditions led to stock declines, witnessing drops of up to 4%. This dynamic underscores the delicate balance between strong corporate performance and market conditions.
- Insights from the Beige Book: A Mosaic of Economic Realities
The Federal Reserve's Beige Book unveiled midweek, offers a detailed mosaic of economic conditions nationwide. The report paints a nuanced picture, revealing a broad softening in the labor market, with flat to modest employment growth. Six of the 12 Fed regional banks reported slight declines in economic activity, providing a real-time tableau of region-specific challenges. This nuanced narrative offers insights into the complexities of the economic landscape, contributing significantly to expectations of a more accommodative monetary policy.
- Manufacturing Contractions and Economic Barometers
The ISM's Purchasing Managers Index for November highlighted the manufacturing sector's contraction for the 13th consecutive month, falling below expectations. This prolonged contraction, the longest in decades, raises pertinent questions about the trajectory of economic growth. With key economic indicators like CPI, PPI, unemployment figures, and Powell's appearance, the market is poised for potential shifts in the coming weeks.
- Caution Amidst Market Dynamics and Future Trajectories
In the wake of a short-term overbought state, caution prevails, with expectations of a shallow pullback in the next few weeks. The SPY rally is approached with discernment, recognizing a capped range between $450-470 and anticipations of short-term support between $400-430. The market's gaze shifts towards individual stock movements and macroeconomic data as potential catalysts, steering the course of future trends. For reference, the SPY Seasonal Chart is shown below:
- Charlie Munger's Wisdom and Legacy
Acknowledging the passing of Charlie Munger, his timeless quote to Warren Buffet resonates: "A great business at a fair price is superior to a fair business at a great price" Munger's wisdom, a guiding light for many investors, leaves a notable void in the market. His legacy continues to remind us of the importance of sound investment principles.
As we inch closer to 2024, December begins with plenty of data to look back on as Fed signals, earnings dynamics, and economic indicators continue to flood our feeds. Powell's measured stance, coupled with earnings surprises and the insights gleaned from the Beige Book, sets the stage for a nuanced analysis of interest rates, inflation, and economic growth. As market participants contribute their perspectives, December's market narrative awaits the unfolding of economic data and market reactions, promising an intricate and dynamic storyline.
For this week's strategic move, our attention turns to a sector that seems poised for significant gains in the current market conditions. With indicators pointing towards cautious optimism and a nuanced economic landscape, this sector appears to be in a prime position for growth. Drawing insights from the Beige Book's revelation of a broad softening in the labor market and the potential for multiple rate cuts, our analysis suggests that now may be an opportune time to consider a strategic entry into this particular sector. As we navigate the complexities of the market, this sector showcases promising signs for traders seeking well-aligned opportunities in the weeks ahead. Stay tuned for the big reveal as we delve into the specifics of this compelling sector poised for potential growth.
Industrial Select Sector SPDR Fund (XLI) is an exchange-traded fund (ETF) designed to track the performance of the industrial sector. Composing a diverse range of companies, including aerospace, machinery, and transportation, $XLI offers investors exposure to the heartbeat of economic activity.
Amidst the current market landscape characterized by cautious optimism and nuanced economic indicators, the industrial sector appears poised for growth. Factors such as the potential for multiple rate cuts, positive sentiments from Fed speakers, and a broad softening in the labor market, as highlighted in the Beige Book, create an environment conducive to industrial sector growth.
With a keen eye on companies within $XLI that are well-positioned to benefit from economic rebounds, this sector offers a strategic entry point for traders seeking opportunities aligned with the prevailing market dynamics. One company in particular, is catching my, and my A.I.’s, attention this week.
TRADE OF THE WEEK: $BA - Soaring Profits Ready For Takeoff
For this week’s Trade of the Week, we turn our attention to Boeing ($BA), a company synonymous with the aerospace industry. As global economic conditions show signs of improvement, Boeing stands out as a compelling stock poised for potential gains in the upcoming week.
Boeing is a leading aerospace company, known for manufacturing commercial jetliners, defense, space, and security systems. With a rich history and global footprint, Boeing plays a crucial role in shaping the aviation landscape.
Based on the insights gathered from the Beige Book and market dynamics, Boeing represents a strategic investment opportunity. The potential for increased demand in the aerospace sector, coupled with positive sentiments surrounding the broader industrial sector, positions $BA for a potential takeoff. Looking at our forecast, we see Boeing has backed off its 52-week high and is positioned for a good run to end 2023 and begin 2024.
As the global economy recovers, Boeing's diverse portfolio and solid fundamentals make it an attractive prospect for traders seeking a well-rounded investment in the week ahead. Keep a close watch on $BA as it readies for a potential ascent in the current market environment.