Time To Slow Down
Fewer trades, sharper focus - how I'm positioning for a choppy summer.
The S&P 500 is down ~3% but most portfolios are down ~25%. Mine is down more than 30% in a month while my equal-weighted portfolio is healthier, at 75.92% YTD.
Why such a difference between my content’s portfolio and my own? Because I have been overtrading, and I am sure many of you also have.
Volatility and noise are the worst combination, they trigger your emotions and reduce your focus; nothing matters anymore but to make up the loss of the last day or week, and doing so ends up making even bigger losses. Mistakes, on mistakes, on mistakes, until your spirit - and portfolio, breaks.
This is a classic pattern in investing and we are all guilty of it. The good thing is that we can work on fixing it and while my own mistakes were made earlier this year, this last week has been great. I stuck to my system.
Reviewing last month’s plan, most was spot on - getting rid of space names before the SpaceX IPO and trimming core hardware names like Soitec. There was one mistake: believing in SaaS. Those gave a pretty violent retest this month and went on to chase traders stop losses. The core thesis behind those names is the right one, but we have to give time for price action to develop - some are interesting today.
Short term, I see profit taking on AI hardware, a healthy leg up on energy and SaaS. I intend to play this by trading SaaS names - already started with Elastic and Oracle, hold energy names, and accumulate hardware when they reach my buying targets - which Founding Members have access to.
On the index, the important data is that buyers stepped up at the D50, once again, on both the S&P and Nasdaq.
But this isn’t a beautiful candle, the wick went to test that W21 and wicks have the bad habit of being retested. And evening was sold. The most important time of the market is the last hour, when buyers and sellers fight to decide the value of an asset before the market closes. When sellers overwhelm buyers for days in a row, the consensus is overall bearish, it means the market isn’t ready to bid higher just yet. Daily timeframes are really short, not what I use to make decisions, but it is worth noting.
So far, we are holding key supports, but without any fireworks. I wouldn’t be surprised if we were to start some choppy months with more pain in extended sectors.
Anticipation is Everything
The markets always focuses on the next wider narrative. For months, it has been the war in Iran but rapidly moved to the coming resolution, as both countries proved over the weeks that the conflict wouldn’t be long. So the market anticipated its conclusion, anticipated oil prices going back down and supply chain reopening. Because it had to happen, soon.
Now, it has. So the market focuses on the next narrative, inflation - as expected. The market always anticipates, you can’t buy the news, the market prices in anticipation. Inflation is expected, so the market prices it, now.
The Fed didn’t help with a hawkish tone and the removal of key forward data - which were mostly bullshit but the market used them as a support for projections. And BoFA added another layer with a note the market read as “inflation will kill us all” while it was more like “be mindful of the potential inflation”. So let’s start by putting some color on that.
What BoFA said is that they expect three rate hikes this year, for a total of 75bps. No one can predict this, but this is their view and they have every right to share it. But instead of panicking, let’s focus on what we know, can control, and our system.
Interest rates aren’t as important as they used to be. They create panic and hurt some businesses, but with the constant and accelerating fiscal deficit, higher rates are only taming slightly liquidity inflows, not stopping it.
Investing is about liquidity rotation; money goes to the highest potential returns. With higher interest rates, where are those? Not real estate, not cash, defensives or gold and silver, as both are falling after a massive speculative run. Meanwhile, private companies are developing the most deflationary technology ever created. So, where are the highest potential returns?
We have a system. We don’t know, we can’t know how the market will react. We buy strength and cut weakness; we don’t need to anticipate the market’s volatility spikes. If our stocks are weak, we sell. Strength, we buy. The in-between doesn’t matter.
To me, there is nothing else to it. I can comment but can’t anticipate. What I can do is manage my book, and I do so by following my convictions and price action.
Micron Earnings
There isn’t much to comment on, Micron is the new Nvidia; memory is the new GPU, and we already know and said many times that this trend of personalized hardware won’t slow down any time soon so more memory means more connectivity, more GPUs, more bandwidth…
The market focused on GPUs, focuses on memory, and will focus on another vertical tomorrow because eventually, they all matter and all grow in volume - and prices, eventually becoming the next chokepoint. No one can accurately forecast where this is going just yet, which means the market will continue to price in the best case scenario as it would rather create a bubble than miss out.
So this quarter was what anyone could have expected: a banger quarter with the confirmation of everything we’ve heard for months. I am not sure why anyone was surprised to be honest while every hardware management told us this would happen.
The quarter was amazing and the market responded to it, without much fireworks after such a run and anticipation, but it didn’t sell the news so it means it still can be surprised - which is a good thing as expectations were sky high.
Those stocks are going much higher, it’s just hard in terms of risk management to size a position here, and yet I could bet that most of those who bought on Friday will outperform the market by next month. But I won’t, because it doesn’t fit my system.
Overall Appreciation
Fundamentals are as strong, but the market is giving us some signals.
The next weeks will be different from the last. This isn’t a time to accelerate, but to slow down. It actually was a time to slow down the moment I shared this article about how close we were to the breather, but I - and probably you, didn’t. I saw that the market was starting to shift against my trades but kept going, thinking the next one was the good one.
The reminder of this article will look at strength and weakness pockets, review my own positions, watchlist and my short/medium term plan especially when it comes to liquidity rotation and inflows - as I still have some cash left.
I remain a buyer but keep in mind that some sectors might be starting their struggles, which could go on all summer after amazing performances this year. Some trades are crowded, and crowded by the wrong population while some other names, not less important, are completely deserted. Those are the ones I’ll be buying.
