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To be successful in this business, simply getting up in the morning and sifting through your favorite social media sites for the hot trade idea of the day simply isn’t going to cut it.

Sure, this method may allow you to find some trading ideas that work for the day.

But, finding trades that work over several days to weeks takes a lot more time and effort.

Some of this hard work has to do with identifying sector and group rotation.

The group we’re going to examine today, which was one of the strongest groups coming out of the pandemic but has spent much of 2021 digesting those gains in a large downside corrective pattern, is starting to show subtle signs of leadership again.

 

Stay-at-home stocks are on the rise again

At its core, the price action that develops across the market’s many groups and sectors result from the different viewpoints held by millions of investors around the world.

Throughout history, this crowd wisdom has resulted in the stock market becoming a discounting mechanism that often forecasts the future roughly 6 months ahead of time.

I mention this because I find it interesting that these stay-at-home stocks are just starting to perk up again as the winter months are drawing closer.

Remember, it’s the differing investor views and opinions that cause prices to move in cycles.

Therefore, it’s possible that traders and investors are starting to forecast that the winter months may bring small clusters of Covid outbreaks that cause people in areas not affected by the outbreaks to become a bit fearful and hunker down until the spring.

 

What are stay-at-home stocks?

Stay-at-home stocks became popular shortly after the stock market found its initial Covid-panic lows in early 2020 after the coronavirus outbreak led to worldwide restrictions.

These companies provide consumers with things like online educational tools, complete in-home fitness programs, and the means to have a pet’s favorite toy delivered with just a few clicks of a mouse.

The technicals also support the case for a tradable bottom in stay-at-home stocks

Love ‘em or hate ‘em, the media can often play a key role in driving industry trends.

This is especially true if the narrative involves widespread fear.

In the case of stay-at-home stocks, just the smallest hint of an early-winter Covid outbreak starting anywhere in this country would likely be something the media would try to blow out of proportion. Why? Because fear sells.

For traders, though, this is a “necessary evil” that drives the kinds of feedback loops among global investors that fuel big trading cycles.

While I am just speculating that the potential for such a narrative exists, the technicals have already shown me that downside momentum in many of these stocks has slowed and looks to be rotating positively.

Peloton Interactive Inc (PTON) and Chewy Inc. (CHWY) are two stay-at-home stocks that I focused on buying this past week.

Figures 1 & 2  below show one of the main reasons why.

Specifically, these charts show that the relative momentum of these stocks, when measured against the benchmark S&P 500, has slowed significantly of late.

Not only that, but these stocks are starting to show subtle signs of leadership against the benchmark.

Figure 1

Figure 2

Correlation is a key concept when focusing on certain groups of stocks

When trading across groups, it’s important to understand the concept of correlation.

 

Trade Lesson: Correlation

In the investing world, correlation, a statistical term, measures the degree to which two or more instruments (i.e., stocks, ETFs, futures contracts, etc.) move in relation to one another.

Correlation is presented on a scale of 1.0 to -1.0, where a correlation of 1.0 means that the instruments being compared move in perfect relation to one another, a correlation of -1.0 means that the instruments move in a perfect inverse relationship, and a correlation of 0.0 means that there is no relationship at all.

Correlation is a tool many traders and money managers use to diversify their portfolios, especially when there may be an anticipation of increased volatility in certain areas of the market.

As Figure 3 uncovers, at a correlation of 0.80, these stocks trade with a very strong relationship to each other.

Figure 3

Conclusion

While it is no guarantee that the very recent rotation toward leadership by stay-at-home stocks shown here today is going to continue uninterrupted, the supportive momentum signals I showed you give traders the best odds of success when buying stocks that have been beaten up.

When you decide to concentrate on adding exposure to a certain group of stocks, it’s important to understand that group constituents often trade with strong correlations.

Why is this important?

Because having too much exposure to one group can cause losses in your portfolio to become amplified, in the event you are wrong.

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

 




October 22, 2021

The Trump Effect on DWAC

Good morning traders,

Welcome back to The Daily Setup. Markets were mostly up yesterday, minus the Dow edging out a 6 point loss. Here’s what’s on the docket today:

  • A new SPAC gains 356% during trading thanks to former President Donny Deals
  • The Fed bans stock trading by its senior officials 
  • WeWork is public again

So let’s BS around the water cooler, send a few emails, and ride into the weekend. 

See ya next week,

Jeff

 

Chart of the Day – HP

 

Shares of Hewlett Packard (HPQ) gained 6.89% Thursday following the company’s announcement of an increased dividend and bullish outlook for fiscal 2022. The annual dividend was raised 28% from $0.78/share to $1/share. But more on this later…

HP and the Fed

BIGGEST MOVER

Make SPACs Great Again

The stock of Digital World Acquisition Corp. (DWAC) was up super mega bigly on Thursday. DWAC was up more than 350% on the day after news broke that it would be the vehicle that former President Donald Trump would bring his social media platform TRUTH to market with. Shares of DWAC closed at $45.50, but hit an intraday high of $52 and were halted several times due to massive volume.

  • President Trump announced he will be rolling out TRUTH, a platform to compete with Twitter and “stand up to the tyranny of big tech”.
  • Over 470M shares of DWAC traded on Thursday and the company was the most traded name on the NYSE and Nasdaq consolidated tape.
  • The biggest question about the announcement is why the ticker symbol was not changed to MAGA? 

A press release stated that the TRUTH app is currently available for pre-order in the Apple App Store and a beta version of the platform should roll out in November. An immediate catalyst for user growth should be the flood of blue check Big J journalists signing up for the service to parse through every TRUTH President Trump sends out with a fine-toothed comb. Here’s an inside peak at how much in earnings the company is projecting by EOY.

 

Today was a good day 

-Ice Cube and HP shareholders

 

Now, as we promised. Back to HP earnings. CEO Enrique Lores and CFO Marie Myers held the company’s virtual analyst day, the company’s first since 2019. As with all virtual events, I’m assuming pants were optional. Hopefully there were no Jeffrey Toobin moments.

  • Adjusted non-GAAP profits are now expected in the $4.07-$4.27/share range for fiscal 2021 which is sharply higher than Wall Street’s consensus estimate of $3.78/share.
  • Due to the increased need for PCs for remote schooling *parents experiencing PTSD hearing that term* and remote work, HP’s stock rallied throughout much of the pandemic.
  • Myers stated that the “company now has $4.5B in free cash flow according to GAAP (the accounting principles, not the clothing store) and expects to return 100% or more of it to shareholders in the form of buybacks or dividends over time…unless the company sees higher return investment opportunities.” 
  • Lores said that the company is better positioned than its pre-pandemic status.
  • Fun fact: HP has exceeded $2B in annualized revenue from gaming PCs and related peripherals. I had no idea nerds playing Fortnite in their mom’s basement spent that much money.

HP’s stock is down 15% from its May 10th peak of $36 but is up 16% from its most recent low of $26.11 put in on October 13th. This puts the stock smack in the middle of its trading range for that time period. This may lead to range-bound trading in the near term as bulls and bears battle it out to gain perspective on future price movement. 

 

Fed Outlaws Fun

Joe Bastianich Cooking GIF by Masterchef - Find & Share on GIPHY

The Fed announced on Thursday that they’ll ban their senior officials from owning individual stocks or bonds, limiting them to the gray, joyless arena of mutual funds, which they’ll have to hold for at least a year. Additionally, whenever they want to buy or sell the securities that aren’t off-limits, they’ll need to notify the Fed 45 days in advance.

  • These new restrictions come on the heels of last month’s scandal, when presidents of two regional Fed branches stepped down after the public learned that they had invested in large companies before the central bank bought trillions of dollars of asset purchases that included bonds from those same companies.
  • The goal of these new restrictions, aside from saving face, is to resolve the conflict of interest created by allowing Fed officials to make personal investment decisions based on insider knowledge of how Fed policy will drive stock movement. 

The Fed could begin tapering these problematic asset purchases as soon as November. The result would (hopefully) be the mitigation of inflation, which could mean you wouldn’t have to spend a lot of your life savings on everyday expenses. In all seriousness, early tapering would make hedges against inflation less urgently necessary.

The Maverick Makes the Brand

Buy the Rumor

Sexy Top Gun GIF by Pit Viper - Find & Share on GIPHY

Ford has announced that the 2022 hybrid model of the Maverick, their new tiny wittle pickup truck, will probably sell out by November. After that, customers won’t be able to order a Maverick until next summer. The gas-guzzling, nonhybrid model hasn’t exactly flown off the shelves, but maybe that’s because a tank of gas costs way more than it did a year ago.

  • The cheapest hybrid model clocks around a $20k price tag–“ less than half the cost of a Tesla model 3.
  • The EPA reported that the Maverick gets 42 mpg in the city and 33 on the highway for a total fuel economy of 37 mpg, making it the most efficient pickup truck in the country. That’s not quite as good as a Prius, but driving a Maverick won’t make your balls disappear, so it’s a fair trade. 

Ford’s stock is already surging. Shares closed on Wednesday at $16.04 —their highest point in 6 years and many (including Credit Suisse) believe that the upward momentum will continue given Ford’s impressive entry into the EV market. Considering the promising demand for EVs and the economic health of some of the companies providing their raw materials, it’s possible that Ford’s looking at a sustained period of growth.

Everyone’s Favorites: Mortgage and Jobless Claims

Other News

Hello Neumann

Two years after an IPO attempt that was as successful as Notre Dame in the College Football Playoff, WeWork finally went public on Thursday via SPAC. Shares of WeWork (WE) were up more than 13% on the day because apparently people never learn. Remember, this was the company that hemorrhaged cash and whose founder and former CEO, Adam Neumann, turned out to be a gigantic slimeball.

  • The newly public WE was recently valued at $9B, much less than the 2019 SoftBank Group valuation of $47B.
  • WeWork basically signs long term leases with building owners and then enters short term subleases with tenants.
  • Adam Neumann trademarked the word “we” then tried to transfer it to the company for a fee of $6M. This paragon of virtue and ethics walked away from the dumpster fire he created with a reported $1.7B package because life truly is not fair.

 

Internal controls will be something to watch anytime the company releases a public filing, given its history of financial mismanagement and questionable practices. The team at SoftBank is currently in control of the company and something tells me this stock will be one to keep an eye on, either for trading or entertainment purposes.

 

How low can you go? 

Weekly jobless claims, everyone’s favorite and rarely accurate labor market statistic, fell to its lowest level since the beginning of the pandemic in March of 2020. 

  • Initial claims for state unemployment benefits fell 6k to a seasonally adjusted level of 290k for the week ending on October 16th.
  • Claims data in the range of 250k-300k is seen as a sign of a healthy labor market. 
  • Jobless claims, which are used as a proxy for layoffs, are well below the most recent peak of 424k in mid-July, but still above 2019’s weekly average of 218k.
  • Labor market shortages still persist, yet economists are optimistic that this will ease as the pandemic continues to lessen, schools reopen, and unemployment benefits expire in the coming weeks. 

Nothing Gold Can Stay (Below 3%)

This week, mortgage rates crept from 3.05% up to 3.09%, the highest since April. That number is still very low, though, making this the best autumn for buying a house in 15 years. Unless you’re a first-timer, that is, in which case you’re f*cked.

  • A historic drop in mortgage interest rates below 3% in August drove home sales up 7% in September to a seasonally-adjusted annual rate of 6.29M, beating estimates.
  • Aside from mortgage rates and remote work, covid-era savings have driven more buyers to the housing market, but a shortage of materials and labor has ground construction of new homes to a halt, driving up housing prices.
  • The median price of an existing home sold in September 2021 was $352k, which is 13.3% higher than September 2020’s price.


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Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

A few weeks ago, I discussed VWAP, an indicator I recently added to my trading arsenal. I explained how institutions use VWAP to fill clients’ orders and how we can use it to identify the trend and potential areas of support/resistance. You can read about that here.

Today I will discuss how I use ANCHORED VWAP to:

Identify where market participants can be positioned and use it to make more informed trading decisions. The trading action in TESLA INC (TLSA) from this year shows how anchored VWAP indicated who was in control of the stock throughout the course of the year.

 

The volume-weighted average price (VWAP) is a trading benchmark used by traders that gives the average price a security has traded at throughout the day, based on both volume and price.

ANCHORED VWAP

The Anchored VWAP indicator ties VWAP calculations to a specific price bar chosen by the trader. Like the traditional VWAP, it incorporates price and volume in a weighted average and can be used to identify areas of support and resistance on the chart. 

Anchored VWAP allows you to specify the price bar where calculations begin, making it easy to see whether the bulls or bears have been in charge since a very specific point in time. The starting price bar that is chosen generally marks a shift in market psychology, such as a significant high or low, earnings, news, or other announcements. The Anchored VWAP line is charted using price and volume data from that significant event onward.

Let’s study Anchored VWAP and TSLA from this year:

Daily Chart of TSLA with thick Blue Line Indicated VWAP for the year

BULLS VS BEARS in TSLA

As we can see, for most of the year, VWAP for the year, that is, the anchored VWAP from January 1st, 2021 was resistance. Sellers took control right at or slightly above VWAP for the year in April and June and the anchored VWAP was trending down. Short sellers were in complete control, and it looked like finally, their claims of TSLA being significantly overvalued might be true. Dr. Michael Burry had a significant short position in TSLA from last year.

However, $550 was a major support level that was tested twice and could not be broken. From the low made in May, TSLA made higher lows and grinded tighter and tighter against VWAP for the year. Finally, in September, TSLA broke above the anchored VWAP for the year and continued trending. 

From a psychology perspective, what does that mean? It means that all the short sellers that had been controlling for most of the year were finally wrong. The price of TSLA was above the VWAP for the year which now meant all the shorts selling for most of the year, keeping the price of TSLA down, were now underwater. This meant that it was now highly likely that they would be forced to cover and push the stock even higher. 

Once the $740 level held above VWAP, all the moving averages I use were pointing up. There were many opportunities to get long TSLA to take advantage of the fact that shorts had lost control and that bulls were in charge. TSLA went on to make a significant move to $800, and then to $900 to make new all-time highs post-earnings. 

Bottom Line

Anchored VWAP allows you to specify the price bar where calculations begin, making it easy to see whether the bulls or bears have been in charge since a very specific point in time. The starting price bar that is chosen generally marks a shift in market psychology, such as a significant high or low, earnings, news, or other announcements. 

I use ANCHORED VWAP to identify where market participants can be positioned and use it to make more informed trading decisions. The trading action in TESLA INC (TLSA) from this year shows how anchored VWAP indicated who was in control of the stock throughout the course of the year.

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.