The market works in waves. It never goes straight up or straight down.
Strong trends usually climb in steps: optimism builds, expectations rise, stocks rise until profit-taking starts and the market corrects its own optimism. From there either the optimism was misplaced and bulls will let go, trends break, and that’s it. Either it wasn’t, and a new leg will start once bulls take over the tape and start buying strong supports again. Between uptrends and downtrends - which is the case 90% of the time, the market is choppy. Short term volatility up and down, not breaking any trends, just uselessly moving.
May to July was the market breathing and correcting its own optimism. it got carried away, traders took profits and funds went to liquidate Leopold. Since then, the market pushed on optimism after the liquidation news, but what we are seeing isn’t the return of an uptrend, but choppiness between strong supports and resistances.
As expected, ranges are forming.
Bulls and bears are fighting on different data at the moment, with valid reasons on both sides.
On one side, inflation remains “too high” and Kevin Warsh has left the door open to rate hikes depending on the data while the situation in the Strait of Hormuz remains uncertain for energy prices and inflation.
On the other side, AI earnings are extremely strong. Companies are raising guidance across the entire supply chain, from hardware to software, reporting more demand and proving that customers are getting real value from AI, etc...
Macro environment is uncertain, as always. Micro is improving. That’s the battle the market is trying to resolve right now: macro versus micro.
I’m betting on micro.
The correction brought high-quality companies back to levels where the risk/reward is more attractive than they were a few months ago. This is what I wait for: better fundamentals, lower prices, great risk rewards with a clear invalidation.
Optical names are a good example. Many of them corrected sharply from their highs while demand for optical connectivity continues to accelerate. I’ve already shared a few that have delivered good returns including AAOI at $91, ANET at $140 or $SOI ~€90. I’ll share another one today.
Photonics used to be what everyone wanted to buy. Now is the time to do so. An upstream company, directly exposed to demand for any kind of AI-optics, now sitting at the support level I’ve been waiting for, for months.
