The following is NOT financial advice.
Monday
Good morning…
You might want to put a little something extra in your coffee.
Pete
// This Week’s Key Themes
1-27-25: The Wall Street spin machine will shift into ludicrous mode today.
The week we expected chaos has begun with an implosion.
I planned to write about the massive mix of economic data and major earnings for the week. But that fire just got doused with lighter fluid by DeepSeek claiming to build AI models with less than $6MM in chips raising doubts about tech valuations - specifically Nvidia. As of this moment (5AM EDT) NVDA is down 10.55%.
Over the last couple of months I’ve read many articles on what DeepSeek could do, but this is the first we’re hearing about how it was built. During our game plan meetings we’ve focused on the amount of money invested in AI, and the fact that they needed to start showing some profits to justify the R&D.
Sooooo similar to 1999.
No need to panic if you’re in for the long haul, but you might want to keep up on this story if your portfolio is tech heavy.
If the valuations start to see doubts after those investments, look out below. I don’t think it’s a shock this news came out after last week’s announcement about the Stargate Project.
Let’s be clear it’s only one news story, let’s see if it has legs. Look for the talking heads to defend Nvidia today. Maybe it’s a discount, maybe the tide rolled out and we see who has no bathing suit. (Famous Warren Buffett quote)
Last week our research showed potential weakness and we put on a bearish hedge. We’ll likely sit on that before adding to the short sale. I need to see confirmation before building a new position.
I’d love to be a fly on the wall discussing this investment today.
Source: mashable.com
Market Analysis
We ended last week with the possibility of major indices pausing near all-time highs, absorbing the new economic data and the earnings, and then kicking in the rocket boosters for a new bullish move.
In early trading the SPY ETF sits at $593 and below the coveted swing trading 50 SMA. This feels similar to the big gap down we witnessed on August 5, 2024 which became the buying opportunity of the year. But at that time stocks were already going down for a few weeks. This is different.
During Saturday’s swing trade session we discussed market breadth improving. More sectors started to show a bullish tone. But let’s be honest, as technology goes, so goes the markets. Seasoned traders will be loving this volatility. Newbies should watch and learn.
Be smart, play the long game.
Prior to this AI news unfolding we spent some time discussing the tsunami of news this week, which by the way includes a Fed announcement. And specifically how I planned to allocate capital, or the amount of risk I was willing to accept.
Prior to this I planned for lower risk on swing trades, but to seize the day trading volatility. That hasn’t changed, but the short term volatility just expanded dramatically.
Heaven for active traders. Expect me to wear out the keyboard this week.
Ideas to consider ahead of this week's economic data:
Macroeconomic Factors Affecting Investments
Interest Rates
Interest rates are a key driver of investment returns. When interest rates rise, the cost of borrowing increases, which can lead to lower corporate profits and stock prices.
Conversely, when interest rates fall, borrowing becomes cheaper, which can stimulate economic growth and boost investment returns. Interest rates also affect bond prices. When interest rates rise, bond prices fall, and vice versa. This is because investors can now buy new bonds with higher interest rates, making existing bonds with lower rates less attractive.
Inflation
Inflation is the rate at which prices for goods and services rise. When inflation is high, the purchasing power of money declines, which can negatively impact investment returns. Inflation can also lead to higher interest rates, as central banks try to control rising prices.
Inflation can have a mixed impact on stocks. In the short term, higher inflation can exert a drag on revenues and profitability. Over the longer term, because many companies can raise prices and protect their margins, the stock market has generally provided a good hedge against inflation.
High inflation can cause market volatility and unpredictability. Investors may become uncertain about which companies can weather higher inflation, leading to shifts in investor sentiment and increased market fluctuations.
GDP Growth
Gross Domestic Product (GDP) is the total value of goods and services produced in an economy. GDP growth is a key indicator of economic health.
When GDP growth is strong, businesses are more likely to invest and expand, which can lead to higher corporate profits and stock prices. Conversely, when GDP growth is weak, businesses may cut back on investment and hiring, which can lead to lower returns.
Economic Reports:
Monday: New Home Sales
Tuesday: Durable Goods Orders (MoM), CB Consumer Confidence
Wednesday: Crude Oil Inventories, FOMC Statement
Thursday: GDP (QoQ), Initial Jobless Claims
Friday: Core PCE Price Index (MoM), Core PCE Price Index (YoY), Chicago PMI (Jan)
Headline News:
DeepSeek Shakes Up Stocks as Traders Question US Tech Valuations
(Bloomberg) -- Chinese artificial intelligence startup DeepSeek rocked global technology stocks Monday, raising questions over America’s technological dominance.
Buzz grew over the weekend about DeepSeek’s latest AI model being cost-effective while running on less-advanced chips, casting doubt on the validity of the sky-high valuations for companies like Nvidia Corp. Nvidia has led the global AI stock boom as its chips have been seen as essential to the technology.
Boeing may soon sell some of its businesses. That could finally boost the stock.
There are a few discrete businesses within the aerospace and defense behemoth that could generate cash, including Boeing’s Jeppesen navigation unit and Boeing’s parts distribution business.
Some investors also have raised the possibility of changes to Boeing’s satellite-launch joint venture with Lockheed Martin Corp.
Earnings Highlights:
Major companies geared up for this week’s earnings ready to support the bullish tone. I have a feeling expectations will be furiously adjusted.
AAPL declined nearly 14% ahead of this week, will we see a “buy the news” price action? It’s setting up that way as the stock sits in front of a big support level.
Sector Rotation
Things firmed up the last two weeks on election euphoria.
Fast momentum catches the attention of novice traders and always gets them to buy at the wrong time. Higher prices attract buyers. But many of those buyers have no concept of risk reward. As one of my mentors said “when the ducks are quacking, feed them.”
Last week’s game plan meetings focused on the gap between optimal entries and order flow. The bullish side was obvious, but the time to buy was not.
With major tech names set to report earnings this week, my planned focus was on the financial sector. WFC, Wells Fargo sits on the cusp of new highs after a great earnings report, and forward guidance.
Heck even C, Citigroup looked good coming into the week. Investors will likely see this sector as a place to park money with tech in need of an epi-pen.
The industrial sector perked up the last few months. BA, Boeing being a major story. Are the problems behind them? Last week they “pre-announced” they expected a $4BB loss from last year's strike.
Look for them to “lose less than expected” which will be seen as bullish. We have our earnings gap open price setup ready to deploy after they announce.
CAT, MMM, GE and DE show bullish stacked order flow for the last few earnings reports, but it’s the lower priced stocks in the sector offering the best reward potential. Stocks include: BE, LUNR, KTOS, RKLB and RDW.
Airline stocks posted solid earnings, and raised guidance, but after an incredible 2024, they seem to have run out of gas. I’m not adding to positions up here.
