6 4 Associated CointreeAlex on 01/02/2022 - 14:07 cointree.com (142...Read More
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Having lived through other rough times like 2000-2001 and 2008. I have seen this movie before, and a lot of you haven't. You may have heard a lot of Wall Street cliches in passing and never gave them much thought. Many of them are cliches because they're true.
Do you remember the Seinfeld TV show? Recall the episode where George Costanza realizes that every decision he makes is wrong, and from then on, he's gonna do the opposite? Then he is successful beyond his wildest dreams? Well, it's something like that. The only other piece is to recognize the patterns and pay attention to the right indicators in order to take advantage of the cadence. Our community has been settling in and they now work with me to understand what the 10-year interest rate means at the moment, what the level the VIX is at, and how that influences the market. Over the last two weeks, the movement of Apple (AAPL) has become very important is it falling under 140, is it reaching toward 150+, is it about to break its recent low, and how do these and all the other little pieces of data fit together. For instance, on Tuesday it was reported that a Fed president on a visit to Frankfurt said that he expected that the Fed will not only raise the FFR 1/2% in the next two meetings but in every meeting this year. Usually, something like that would have caused a +100 point drop in the SP 500 lickety-split. It was 48 points, bad not catastrophic. And, instead of the selling lasting for days, we anticipated that Thursday would rally.
In fact in last week's article, I stated that we trimmed and hedged because we felt that it was likely that Tuesday and Wednesday could sell off. We were happily buying those days, and when Thursday came around, we were back to trimming and hedging even outright shorting individual stocks. On Friday we were back to buying but kept the powder dry for what might happen on Monday.
We aren't 100% sure how Monday will shape up, we are leaning toward a rally. So we left money on the side to anticipate any downside volatility. On the other hand, the thing that we think could buoy the market is in the aftermath of the split in Amazon (AMZN). I expect that there will be excitement in that name and Alphabet (GOOGL) will follow. What I mean is, that GOOGL is going to split 20 shares for 1 in mid-July. Seeing that AMZN could bounce 5% to 10% this Monday adding to its previous 10 trading days move of 20% could get GOOGL some new incremental buyers, this, in turn, push it up possible 5% as well. With these two names so heavily represented in the cap-weighted SP 500 and the Nasdaq 100, it could turn the whole market positive. Or at least the tech names we feel still have room to run. We could combine that with the seemingly perennial upward march of Oil and Gas, and you have some modest rallying going on. Also, since Friday was down so strong perhaps it would be natural for Monday to carry the day. Let's keep in mind that the indexes are still in an over-sold mode so a bounce from here is not so unexpected.
Still, we don't know what we have in store after a weekend. It's possible that we have another "Merger Monday" revealing another blockbuster acquisition, or a series of smaller ones. As I have said multiple times by now but worth repeating, if we see this level of acquisitions the message of the market is that stocks are super-CHEAP. So I will say the odds for a good Monday are 60-40 or perhaps 65-35. All bets are off if there is some unexpected news. Unless of course, the market shrugs it off like an armadillo. I thought it would be a good exercise to review the progression of the SP 500 so far. For the past 2 weekly market analysis I started charting a very nascent break of the downward trend, then last week it was more pronounced. This week we should do it again, and just like last time I have not charted it yet. So this will be fun for both of us. First the last two charts:
This was the 5-day chart to May 22. Now the next Chart the 1-month up to May 26
Finally, the new one. It's a 1-Month chart of the SPY with last week's consolidation turning into a nascent bull pennant.
Here we see the inverse head and shoulders, predicting a further move upward. Now we are consolidating that move since in prior articles I did note that we should have resistance at about 4150ish. The pennant has not fully shone its course except for a steady rise of the higher lows as it scrapes against the overhead supply of sellers. My thought is that the excitement of the split, along with GOOGL moving with it, and going with the odds some new merger announcements will give us a decent rally tomorrow. By the end of the week perhaps this pennant will be ready to foretell the breakout into the 4300s. If tomorrow rallies, you know what I will be doing? That's right I will be trimming positions, in anticipation of downward volatility Tuesday or more likely Wednesday. When that happens, I'll be buying. Is this starting to make sense? I hope so. Whether it makes sense or not, why don't you check out our community Dual Mind Research? I am having a hoot sharing my thoughts every day and giving the minute-by-minute stats and where the next move is taking us. Anyway, I do still love to share my thoughts with you all. You know what comes next? That's right...
I wanted to explain in detail what makes UiPath (PATH) so valuable. I go into detail about how much money it can save, and how much faster enterprises can create more cloud applications that make them more competitive. I got burned on PATH when it was flying so high. Since I have stopped building a position in it, the company has still been growing at a furious rate, it is generating free cash flow if not profits, and it has no debt and well over a billion in cash on its books. If you want to dig deeper, go ahead and read the rest. If you want to skip to the next move because below is TL DR, that's find.
If large enterprises are slowing hiring this gives an opportunity for small businesses - SMBs to hire talent. Yet, also a hiring slowdown should provide the impetus for large corporations to do more with less. Last quarter American Businesses bought a record amount of robots, and this will only accelerate, as the use cases grow.
That leads me to a tech company that the market destroyed price-wise, which pretty much describes nearly every such company. I am going to start building a long-term position in UiPath. PATH is the leader of RPA, robotic software. What is robotic software? It actually remotely types information from one system to another. Sounds like a toy, right? Well, there are thousands of clerks that have to enter and renter information from one data source to another. This is super-boring low-value work. So RPA can free up these workers to concentrate on more productive work, and of course, reduce headcount. Ok, that doesn't sound so impressive. How about this, so many old application systems with all kinds of operational know-how have been embedded into them over decades of updates. Yet applications are moving to the cloud, or it needs to interface with vendor-provided enterprise software. The choice is to rearchitect, respecify all the business rules embedded in this software, and it will call for literal $billions, take years to release, and years more to reinject all that operational wisdom that isn't in any old documentation. Another choice is to maintain a software technology staff that knows how to program this dinosaur (in the defunct language it was built in -- try to hire a Gen-X to program COBOL; good luck), which will take ten times the amount of time to get into this patched up, spaghetti code overwritten over the decades. This is a fraught process, one wrong set of code could knock out the delicate balance of data processing. Needless to say, updating this monster will stop an enterprise from being able to react to this crazy fast volatile business world let alone seek out new opportunities. Would it be great to leave that dragon to do what it does without disturbing it yet be able to build new cloud software, much more flexible, much faster processing applications? How much money will that save? How much better would that company be at fighting off the competition and taking advantage of new opportunities? That is what this robotic software can do, it can type the data into the old system from the new and vice versa. Keep in mind all the mouse moves, typing and entering new data, or searching for records and transferring data into the new application at nearly real-time speed. There are so many ways this can lower costs, and more importantly raise the productivity of the most expensive outlay of enterprises -- legions of software engineers. Moreover, PATH is employing AI-powered instruction for the robots so those office workers with only a little training can command the robots to do what needs to be done. PATH was a super-expensive stock that wasn't profitable and had little in the way of cash flow because every penny was reinvested in the business. Now the company has matured, and built a very effective sales organization, that while not yet profitable, losses are narrowing, and cashflow is rising. They have well over a billion(s) in cash and marketable securities and growing. Yesterday PATH reported and ran up strongly 17%, yet its market cap is now only $10B. It's trading at $19, the ATH was $79. I don't think it is going up 400% tomorrow, or maybe it falls hard at the next downdraft, so I am not going out to buy a thousand shares or even 100. I just wanted to explain why I am changing my strategy right now and widening my focus from the mega-tech names. That doesn't mean I am selling all my GOOGL, AMZN, INTU, ADBE, or even my UPST. I won't get rid of my reopen or security plays, I may trim here and there though.
I finally pulled the trigger on the multi-leg options configuration on UCO the 2X ETF. My theory is that WTI will leap to 125-130 despite pledges from SKA that it will raise production, and may raise more if the President comes to visit Prince Salman. SKA may even publicly state that they will put on another 300K barrels just to pay lip service to Biden. They just don't have that extra 300K, they are not stupid. They know the president has declared war on his own oil industry let alone KSA, so why would they throw good money after bad. Saudi Arabia is mostly a desert with barely any cloud cover. It is ideal for solar energy generation. Why wouldn't they invest any incremental dollar in using solar to make green hydrogen, or even power their oil refineries instead of burning oil to do it. So when the trip was first announced WTI dropped hard in the premarket but then started to rise. The message of the market was, that it saw right through this political theater. It was then that I asked my partner in Dual Mind Research to help construct a Bull Put Spread on UCO. Then I just layered on a conventional Call spread on UCO. By the time I was able to execute, I believe WTI was already almost touching 115, and it didn't stop there it closed at a high of 120.23 pushing UCO to a 52WH of over 52. I need it to clear 55 for my Put spread to yield the full alpha, but I am pretty sure it will be happening.
I also shorted Chewy (CHWY) when it popped after beating expectations. Since it had 23% short, I believe much of that pop was short covering. Like almost every other stock that reports this one will lose buoyancy. Also, it does have competitive issues, otherwise why so many shorts. I may add a bit more to the short and wait to see if it does lose altitude. I really am not risking too much capital in these shorts right now. This is a learning process. I did do decently with Dollar Tree (DLTR), so I think I am developing a style inspired by Serop but more along with my qualitative, instead of quantitative style.
I haven't covered the SPAC (DWAC) I fully expect this SPAC and Truth Social to implode. I am also shorting Carvana (CVNA) as late as I am to the party I believe there is more downside to come. It's almost like a fintech in sustainability at this point. Except for adding to my Alphabet in anticipation of the stock-split euphoria that's really all that is new.
If you enjoy my weekly stock analysis articles, You will be happy to learn that I offer a subscription service Dual Mind Research. Serop Elmayan, a brilliant young man who brings a quantitative approach to surface high probability fast-money trades, and I are partners in this service so you get the benefit of two unique investing approaches. My narrative style and his engineering approach will give you a unique value indeed. The first 2 weeks are free so check it out
6 4 Associated CointreeAlex on 01/02/2022 - 14:07 cointree.com (142...Read More