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November 19, 2021

Nvidia nears $1T in market 🧢

Good morning traders,

Welcome back to The Daily Setup. Markets were up yesterday, with the S&P 500 and Nasdaq setting new records. Here’s what’s on the docket today:

  • Dicerna Pharmaceuticals gains nearly 80%
  • Nvidia beats earnings and nears a $1T market cap
  • CVS announces store closures

So let’s act busy for a bit, drink some coffee, and cut out early for the weekend. See ya at happy hour.

Jeff

BIGGEST MOVER

A Match Made in RNAi

Therapeutics Heaven
*looking up what RNAi means so I sound intelligent while writing this article*

Shares of Dicerna Pharmaceuticals (DRNA) skyrocketed to the tune of +78.49% during Thursday’s trading session following an announcement that the company’s research partner, Novo Nordisk (NVO), would be acquiring them for $3.3B. Dicerna develops “investigational ribonucleic acid interference (RNAi) therapeutics.”,or, in layman’s terms, is a technology that silences or renders genes responsible for disease ineffective.

  • The deal will allow Dicerna to continue using Novo’s proprietary GalXC RNAi platform that could help the company develop treatments for diseases like Type II Diabetes and obesity. *pretending I didn’t just eat cookies at 10am*
  • Novo will offer $38.25/share in cash and will be financed mainly by debt.
  • The deal is expected to close in Q4 2021, which we are currently in, and according to Novo, would have an initial negative impact on profit growth in 2022.
  • Despite the costs associated with the acquisition of Dicerna, Novo does not expect their profit outlook for 2021 or the company’s share buyback program to be affected. *scratches head*
  • Shares of NVO closed Thursday up a whopping 0.52%.

Like every other time in human history when there is a positive event, satan’s helpers *read lawyers* have to get involved. Following Thursday’s news of the deal, the global investor rights law firm of Halper Sadeh LLP issued a press release stating that they are investigating whether the sale price of $38.25/share is fair to Dicerna shareholders. And this, ladies and gentlemen, is why we can’t have nice things. I’m keeping an eye on DRNA and NVO for any news regarding the deal that may emerge in the coming days or weeks.

 

When the chips are

not even a little bit down

^ Nvidia after every earnings call

Nvidia surpassed $800B in market cap Thursday after beating quarterly earnings estimates again (and again and again), raising murmurs that the computer chip manufacturer could be the first $1T semiconductor company. The star of the earnings-call was NVID’s data center, which grew its revenue 55% this quarter.

  • Their gaming sector wasn’t anything to scoff at either, beating expectations by $40M and continuing to net the lion’s share of the company’s revenue. Let’s check in on the gaming sector at Nvidia HQ.
  • Nvidia has Meta to thank for some of the recent surge, as the metaverse is likely to increase demand for cloud computing processors and utilize Nvidia’s Omniverse, a software platform used to create virtual spaces. Guess everyone’s just spitting verses out here.
  • NVID stock was up 8.25% when markets closed Thursday, and is up 141.54% YTD. Their astronomical growth has led some to speculate that it could become the biggest company on the planet.

Most thought that Nvidia couldn’t meet their targets this quarter, but they said f*ck that noise and vaulted an almost impossibly high bar. To pull it off again next quarter, they’ll need to do something really big– like, oh, I don’t know, acquire British chip designer Arm for $40B. The deal’s far from a sure thing– it rang antitrust bells the world over– but if it somehow gets the regulatory green light, NVID may well keep its ridiculously hot streak alive.

 

Store Closing, Everything Must Go

^ my friends and I doing yoga at one of the HealthHubs

CVS Health (CVS) is taking the wrecking ball to its retail footprint, announcing plans to close 900 stores over the next three years. The company’s rationale behind the move is customer behavior shifting to online, and this surely has nothing to do with the hordes of shoplifters targeting drug stores in cities like San Francisco and Chicago in recent months. CVS shares were up 2.81% on the day, continuing a strong 2021 where they have risen 40%.

  • CVS will focus on store concepts such as MinuteClinic (think: urgent care) and Pornhub HealthHub, which focus on screening for chronic ailments and offer space for wellness activities like yoga.
  • The company apparently doesn’t think ‘rona vaccines will be an annuity that continuously drives consumers into stores to buy candy bars and toothpaste after receiving their quarterly boosters.
  • CVS will take an impairment charge of about $1B in fiscal Q4 tied to the announcement.

While no specific store locations were disclosed, it doesn’t take a high priced consultant to point out that closing stores in areas hard hit by shrinkage (the actual retail term used to describe theft) could offset redevelopment costs in transforming traditional stores to HealthHubs. Whether or not people indeed go to the drug store for yoga remains to be seen.

Pass the Bill to Know What’s In It

Crypto Corner

The recently passed infrastructure bill contained cryptocurrency specific provisions that impose onerous tax reporting requirements on brokers. Those are all the big words I know… With Congress being Congress however, they neglected to properly define brokers. A group of House representatives are trying to fix this (well, make it less awful) by assigning a definition to brokers and not subject other players in the crypto space like miners and software developers to tax reporting.

  • The Keep Innovation in America Act also addresses a section of the infrastructure bill that defines cash to include digital assets and requires reporting on large transactions.
  • Without the fix, developers could head overseas to avoid any confusion caused by the original bill’s overly broad scope.
  • This fix was originally put into the infrastructure bill as an amendment but was killed by Senator Richard Shelby (R) in retaliation for other Senators shooting down unrelated Defense industry amendments he had championed. Congress could teach middle school girls a thing or two about pettiness.

Clarity will certainly be good for the crypto industry as a whole, but blockchain technology companies who do not broker transactions should benefit most from Congress clarifying things by passing this law. Watching the geriatrics in Congress attempt to regulate the crypto space while demonstrating zero understanding of it is like watching a Yoko Ono concert: There’s a lot of noise and squawking, and you leave wondering what on Earth just happened.

Can’t Keep an Average Department Store Down

Rumor has it

Shares of Macy’s, everyone’s favorite department store, *said no one ever* rallied harder Thursday than trying to find one of their salespeople to help you. The company announced that they are working with consulting firm AlixPartners to help review their business structure. The news comes six weeks after activist investor Jana Partners urged the department store to separate its e-commerce business from its brick-and-mortar stores, which is a move that Jana feels could help double Macy’s share price. To say investors reacted positively to the news is an understatement, as the stock closed the day +21.21% and is now up 232.27% year-to-date.

  • In a separate announcement, Macy’s reported their Q3 earnings report that easily topped analysts’ expectations according to FactSet.
  • Macy’s reported Q3 EPS of $1.23/share on $5.4B in revenue vs. estimates of $0.31/share on $5.19B in revenue. This may also have something to do with the big jump for the day.
  • The company also raised their fiscal year sales guidance to between $24.12B-$24.28B from $23.55B-$23.95B.
  • Jana Partners said, “Macy’s decision to engage with advisers to review its business was commendable.” *image of an owner patting a dog on the head comes to mind*

It remains to be seen whether Macy’s will move forward with separating their e-commerce division as more consumers shop online. That said, the company does have some incentive to do so after it was announced in October that Saks Fifth Avenue is looking to go public with a $6B valuation.

Author: Jeff Bishop

For anyone looking to learn about what can make a good swing trade idea, 8Ball has identified one of the original meme stocks with a setup that checks all the boxes.

He likes the setup so much that he decided to make this stock this past week’s “Pick of the Week.”

I’m about to teach you how simple it is to incorporate key fundamental inputs into your screening process.

In addition, I’m going to show you how to use technicals to determine when a stock’s price is ready to move in the direction of its fundamental valuation.

 

The fundamental setup

 

When we think about some of the “OG” meme stocks, Nokia Corp. (NOK) was among the first to earn this classification.

From a fundamental perspective, 8Ball’s bullish thesis is pinned to NOK’s excess Free Cash Flow.

 

Teachable Moment:

 

Free cash flow is the surplus cash remaining after a firm has run its basic operations, paid dividends, and spent the cash required to keep up with the competition and to continue growing.

Free cash flow is important because it represents surplus cash that a firm could use to raise dividends, buyback shares, or expand into new business areas.

Quite simply, these are the nuggets that investors look to for signs that a company is increasing shareholder value.

While it is always better for companies to have high levels of free cash flow, it is also possible for a company to have negative free cash flow.

This is usually the case when a company is “burning” too much money.

Companies stuck in this category either must cut expenses or dividends, or they will have to raise cash by selling more shares (which is dilutive) or by borrowing, all of which decrease shareholder value.

A common way to measure a stock’s free cash flow is to calculate something called the free cash flow yield. I’ll walk you through the process of how to screen for this in just a moment.

For example, a company would have a free cash flow yield of 10% if the stock is priced at $200 per share and is generating $20 per share of free cash flow over the past 12 months.

 

Recent analyst upgrades favor higher prices

 

On 07/05 NOK was upgraded at BNP Paribas, with a price target of $7.70. 

Barron’s also joined the mix recently, stating that there is an inflection in demand for this technology.

 

How technicals may reveal when it’s time to trade the fundamentals

 

From pattern breakouts to momentum signals, there are numerous ways technical tools may help traders decide when it’s time to speculate on a relatively large price move.

8Ball’s view coming into this week was that NOK’s setup resembled a “Bullish Swing” pattern.

Let’s break down the reasons why.

As the chart directly below shows, NOK began the week trading above its gap level created between 06/24 and 06/25. 

This big-volume gap was formed when Goldman Sachs upgraded the stock to $6.50 (from $4.90), and it developed just days after the stock forged the low-end of a rising channel originating at the 03/15 high and 04/23 low.

Lastly, as recently as this past Thursday, the MACD Histogram witnessed its first positive reading since June 10th.

 

Figure 1

 

With the MACD indicator signaling a turn back in favor of bullish momentum, a swing trader could then begin to speculate that the stock will soon begin to move up to the high-end of the rising price channel discussed above (currently $6.16).

As always, such a setup is desirable not just because of the timing signal provided by the MACD indicator and the potential target produced by the rising channel, but because of the well-defined stop-out zone created by the combination of the 06/24 to 06/25 gap, rising-channel support, and the 06/23 pivot low (all in the area of $5.15 to $5.30). 

Remember, well-trained traders should always enter a trade with a plan.

If you were to enter this particular swing trade, your thesis would be grounded in your belief that the series of higher swing lows (see green circles) of the past several months was about to continue.  

Therefore, any downside violation of the $5.15 to $5.30 stop-out zone would signal that your thesis is wrong and it’s time to take a small loss and move on.  

How can traders use Finviz as a tool?

 

Anyone with an internet connection can screen for stocks with high levels of free cash flow, for free.

One way is to use the free version of Finviz.

Below, I’ve provided a screenshot of the simple steps one needs to take in order to find this input.

 

Figure 2

 

From there, all you need to do to create a powerful screen that also incorporates a strong technical component is screen for higher trending stocks.

To do this, look for stocks that are trading above their simple 50- and 200-day moving averages.

Author: Jeff Bishop

 

All traders, both retail and institutional, have overreacted to a rogue headline or a baseless tweet at least once in their careers.

In this new world where information and news, much of which is completely unverified, is thrown at us from every angle possible, it’s often hard not to overreact by exiting a position prematurely or entering a position at a poor price point.

This is why it’s so important to always know where the stock you’re trading stands on multiple timeframes, and not just uber short-term intra-day charts.

Today I’m going to break down how the Fed impacts the markets, and how you can prepare yourself for their next move.

 

The Fed is now looking for higher inflation over the years ahead

 

This past week, the Federal Open Market Committee (FOMC) held one of the eight meetings it holds each year.

The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve System (FRS) that determines the direction of monetary policy by directing open market operations, which is the practice of buying and selling primarily U.S. Treasury securities on the open market in order to regulate the supply of money that is on reserve in U.S. banks.

Essentially, the FOMC’s main purpose is to set monetary policy in order to fulfill the mandates of the Federal Reserve, which include price stability, maximum employment, and stable long-term interest rates.

This past week’s meeting was particularly important because it was the one meeting that is held each quarter which includes a Summary of Economic Projections.

Although the FOMC made no substantive policy changes at Wednesday’s meeting, the Summary of Economic Projections revealed a change in the FOMC’s outlook on inflation.

 

 

Specifically, for the past several months the FOMC’s stance has been that increased inflation resulting from epic levels of monetary stimulus making its way through the economy is only transitory.

However, from this meeting we have learned that the median FOMC policy maker now expects two interest rate hikes by the end of 2023, up from zero in the last meeting.

Perhaps even more significantly, 7 of the 18 committee members expect that rates will be higher at the end of next year, and 13 members look for higher rates at the end of 2023.

In other words, the Fed believes the US economy will more quickly approach its dual mandate of inflation averaging 2% and maximum sustainable employment, which leads to this key point, which is that market participants now respect the possibility that the Fed may move to normalize policy more quickly than before.

 

The Fed is notoriously wrong, so pay closer attention to markets

 

If you’re new to trading, it’s important to understand that the Federal Reserve is notorious for being poor at timing changes in its policy direction.

As it pertains to the latest FOMC meeting, there’s no denying that the change in the Fed’s inflation outlook is important.

Why is it important?

Because it goes against the narrative it had been pushing for several months heading into the meeting, which is that it believed recent inflationary pressures would prove to be “transitory,” and that no meaningful change in policy would be needed to halt the spread in inflation.

While the change in the Fed’s inflation outlook seems to have spooked the market during the 2nd half of this week, since any action taken by the Fed to slow inflation would mean the removal of stimulative measures that help support risk assets like stocks, it is important to understand that important changes in the Fed’s language rarely mark THE turning point in markets.

Instead, it typically begins a process where both institutional and retail investors look for signs that either confirm or negate the Fed’s new language.

 

 

Common signs typically come in the form of economic data, along with movement in key economically sensitive markets like interest rates and commodities.

When it comes to economic data, investors will be looking to see if the numbers, for the most part, come in “hot” over the coming weeks-to-months, as this would support the inflationary outlook.

When it comes to price movement in markets, investors will be looking for any indications that the strong uptrends in interest rates, industrial (base) metals, and agricultural products seen over the past 12 – 14 months have resumed.  

As the chart below reveals, these key markets are all in corrective mode right now.

 

 

Lastly, when it comes to stocks, this is where pattern analysis really comes into play.

Specifically, because a process of confirmation must now take place to determine if the Fed will indeed move closer to taking action to thwart inflation somewhere in 2022 or 2023, the market’s opinion of this information will start to reveal itself in some sort of pattern in the S&P 500.

For investors that may be growing anxious about the prospect for increased volatility as a result of this past week’s monetary events, remember these two items:

  • with volatility comes opportunity
  • topping is a process

Right now, with the S&P 500 trading less than 2.0% below its all-time highs (still shy of the very common 3% to 5% correction seen over any decades) and within its rising post-November ‘20 channel, the chart below reveals that there are NO indications that a major topping process has even begun.

 

 

The train keeps rolling…make sure to stay on track.

Author: Jeff Bishop