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Market Note to Members (7/9/24)

HERE IS THE MARKET NOTE I SENT TO EDUCATIONAL MEMBERS TONIGHT.

I tweeted that I reduced my equity exposure today and I received many emails asking me questions. The first main question is “why?” No one ever needs to justify locking in some profits. The simple answer is I’m up nicely to start the quarter and I just wanted to lock in some gains while things are a little extended. Remember, I always discuss knowing your timeframe. My active style of investment management isn’t for everyone. Not everyone has the time to vary their investment levels, nor does everyone have the mental capacity to make decisions in the market. I don’t say that to be mean, it’s just the truth. As always, don’t copy me or anyone else, and please continue to work on your OWN plan.

The second question has to do with fear. Some members tell me they get scared when I call for pullbacks. I have several responses to this:

1) Never trade from a position of fear. I always encourage “calm and confident” trading. When you’re scared, you will likely make bad and emotional decisions.

2) I could be wrong. That’s why I said I reduced exposure. I didn’t move to 100% cash! If the market continues to grind higher, I will likely participate. I’m just trying to reduce volatility for clients in case we pull back because I have a portfolio of concentrated positions. Again, this style is not for everyone.

3) I’m not calling for a crash. Just a normal pull back over the next 3-6 weeks down to the 50-day moving average. I think President Biden will drop out of the race soon and that announcement will cause uncertainty in the markets. I don’t think it will be a big deal, but we could see a kneejerk reaction and it could give the market an excuse to correct modestly (approximately 3-5%).

4) If a 3-5% pullback scares you, then you shouldn’t be in the market. I’m sorry, but that mentality is weak. You’re probably scared because you’re using excessive leverage. Trust me, I’ve seen it happen too many times when the market pulls back 5% and people lose 25-50% of their portfolio. If this has happened to you, then you might want to reconsider how you use leverage.

5) Do you just expect the market to go up every single day? Have you ever studied price action? Has the market spoiled so many people that we’re now entitled to gains every day? Again, I’m not cheering for downside, nor am I calling for anything major. I’m simply saying that a pullback would be normal, especially considering all the call writing on many Mega Caps for August and that August is traditionally one of the weaker months.

Again, stop living in fear and stop being so impatient. No matter what your time frame is, get strong entry points and manage your positions as best as possible. Thank you and good luck!
 
I can be reached at: jfahmy@zorcapital.com.

Disclaimer: This information is issued solely for informational and educational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. None of the information contained on this blog constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. From time to time, the content creator or its affiliates may hold positions or other interests in securities mentioned on this blog. The stocks presented are not to be considered a recommendation to buy any stock. This material does not take into account your particular investment objectives. Investors should consult their own financial or investment adviser before trading or acting upon any information provided. Past performance is not indicative of future results.

The Bull Market Continues

We started a new bull market powered by artificial intelligence in May of 2023. I wrote about it on this blog several times and discussed it during this TV appearance last year. Here are my updated thoughts.

1) Some people say the bull market started around the October 2022 lows, and others say it started when we took out the late 2021 highs. My response is: Who Cares? It’s all subject to interpretation. The main point is that the average bull market goes on for 3-4 years. It doesn’t matter when you think it started, all that matters is that we’re only a year into it.

2) Throughout history, bull markets have been powered by inventions and innovations that revolutionize our lives. Examples include railroads, airlines, television, drug discoveries, personal computers, smart phones, and the internet. What do all of these have in common? They help to increase productivity. The current innovation is artificial intelligence, and we are still in the early stages of seeing its effect on our lives.

3) Another reason I believe this bull started in May of 2023 is that the true leaders show up at the beginning of these strong uptrends. That’s when the true leader, Nvidia (Symbol: NVDA), exploded to new highs on the greatest guidance in the history of the stock market. In 27 years of finance, I have never seen a company who was estimated to do $7.2B in revenue guide to $11B, over 50% higher!

4) Speaking of NVDA, they have produced over $60B in revenue over the past four quarters. I believe they can achieve $150B – $200B in revenues over the next few years. Their GB200 product could generate over $100B by itself, and it has an average selling price of $1.5M to $2M. The bears will say all this is already priced into the stock. The bulls will say it still has significant upside from here. I’m leaning towards the latter scenario based on the strong fundamentals, profit margins, technicals, and the insane bullish options flow over the past month. Full disclosure: I own it for clients. It’s been my biggest position for a while, and I still like it over the next 6-18 months. They won’t have any meaningful competition until 2026.

5) One lesson I learned in the markets is just when you think something can’t go any higher, it usually does, and just when you think something can’t go any lower, it usually does. Am I saying this market will go straight up? OF COURSE NOT! We will still have normal pullbacks, shakeouts, and corrections along the way. In fact, the average intra-year correction for the S&P 500 is approximately -14%. In my 2024 Preview for Educational Members, I discussed the reasons I expected this year to be more muted, with pullbacks only occurring in the 3-7% range.

6) In April, we saw a -5% pullback in the S&P 500. What I love about this from a contrarian point of view is that sentiment got extremely negative. I don’t know if it’s because everyone’s using insane leverage, watching their portfolios tick-by-tick, or if it’s just the weakest generation of investors ever. Either way, it’s great to see that normal pullbacks are causing “end of the world” bearishness. If you don’t see this, just talk to 10 people next time the market corrects -5%.

7) I constantly get asked about sector rotation. I think it’s healthy and the hallmark of a strong bull market. I like the fact that many different sectors are participating, and that this market is not driven by only 5-10 stocks. For me, I don’t try to chase this rotation because it’s impossible to keep up with the machines. I simply try to stay focused on the best growth stocks and accept they will regularly pull back while money rotates into other sectors.

8) Outside of AI, I still think there’s great potential in Biotech. Big pharma will generate greater than $1 trillion in free cash flow through 2028. Merck alone will generate more than $100B. This bodes well for continued M&A and growth in the sector.

9) Anyone who says a recession is coming is telling me they haven’t left their house recently. Yes, prices have gone up, but so have wages. The consumer is strong, and you can see it in many specific stocks. Also, for those saying a bear market is right around the corner, we just had TWO bear markets in the past FOUR years! Again, this bull is still in its early stages.

10) For the record, I am not being complacent. I just don’t want people to constantly live in fear when I feel there are still great opportunities out there. I’ve been doing this for a long time and these situations don’t occur too often, so I’m going to do my best to take advantage of it. If I’m wrong, or if one of my positions starts to break down, then I simply stop myself out and move on. Even though it’s a bull market, you still have to manage risk and approach the market with humility. Good luck!

Below is a video discussing all these points.

 
I can be reached at: jfahmy@zorcapital.com.

Disclaimer: This information is issued solely for informational and educational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. None of the information contained on this blog constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. From time to time, the content creator or its affiliates may hold positions or other interests in securities mentioned on this blog. The stocks presented are not to be considered a recommendation to buy any stock. This material does not take into account your particular investment objectives. Investors should consult their own financial or investment adviser before trading or acting upon any information provided. Past performance is not indicative of future results.

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Wall Street’s bull market continues…but for how long?

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