A Review And Update Of Our 2023 Investing Playbook
The markets reversed and most stocks are down big from their highs from [checks notes, checks the charts] uh, yesterday morning. TSLA down 7%, QQQs are down more than 3%, IWM is down more than 4% and the SMH semiconductor index is down nearly 5% since [checks notes, checks the charts] uh, yesterday morning.
The markets had gotten giddy as greed and FOMO (fear of missing out) had become the dominant emotions of traders and investors. The good news is that we are already seeing a shift back to fear as the bulls who bought stocks in the last week are now trapped and looking for exits. The bad news is that they probably haven’t exited any of those recent purchases just yet.
One of my old colleagues from TheStreet.com, Helene Meisler, has always reminded traders that there’s “Nothing like price to change sentiment.”
Another famous saying on Wall Street that applies in spades right now is that “There are buyers higher and there are sellers lower.” When stocks rally, people want in. When stocks fall, people want out. Most people don’t want to buy low and sell high. They want to buy high and sell higher.
As for me, the last time I got outright bullish was back in December when the markets are at new lows and the overwhelming consensus was that the markets would fall in the first half of 2023 and that the markets would rally in the second half of 2023. Here’s what I wrote at the time:
“I doubt we’re going catch the exact bottom on any of these purchases today, but I am putting a little money to work on the long side for the first time in while, not just selling puts and covering shorts today. I’m selling lots of puts that I have on as hedges in the hedge fund and am doing some nibbling on the long side there in AMZN, SHOP, UBER, INTC and a few calls on QCOM, NVDA, META, and U. Mostly buying calls dated out 4-8 weeks, slightly out of the money.
And yes, bought some TSLA calls in the hedge fund and am even buying a little TSLA common around $122 here.”
There was real fear in the markets when I was at that time, for the first time in a year, doing significant buying and opening up long exposure.
And a couple days later, as the markets were bumbling along those new lows, in a column full of predictions for 2023, I wrote:
“1) It’s just possible that the huge leap forward in productivity per worker that ChatGPT and its AI ilk will unleash on corporate earnings and the GDP will rival what spreadsheets, word processors and the internet did over the last thirty years. Except this productivity gain will happen over the next 3-5 years instead of over a span of 30 years…
2) Meanwhile, the operating margins will expand more than any analyst is currently modeling for 2023 at companies like Meta and Amazon and others in the tech space that have cut jobs and luxuries from the last few years as the Bubble-Blowing Bull Market fueled such excesses at all these tech companies. FANG and mega caps actually have a pretty good year in 2023…
3) The Fed won’t cut rates but they will keep them near 5-6% for most of the year…
4) The DJIA will be down 3-5%, the S&P 500 will be flattish and the Nasdaq will be up 5-10%. Small caps will be wild to watch, as there are hundreds if not more than a thousand small caps (and a few stocks that are still mid caps and/or large caps, of course) that are headed that will run out of money and are headed to zero next year. But with the huge sell off in 2022 that we saw in all speculative small cap stocks, taking almost all of them down 70-99%, some will come back and will be up 10-20x. Overall, I’d expect the IWM small cap index to underperform even the DJIA.”
Let’s update each of those predictions now:
1) ChatGPT and AI were still novel back six months ago when I wrote that. It’s now mainstream to believe that the world and especially giant corporations will be more profitable because of AI. In fact, The AI Revolution is crowded now and while I certainly still believe that AI will change the world and create trillion dollar economies in years ahead, it’s probably overhyped for the near-term.
2) Oh boy has FANG had a good year so far. Unfortunately, I think most of the upside in these names are probably already in the names and that the rest of the year will be much harder for these mega cap tech stocks but that at the end of the year they will probably still be up pretty nicely from their December levels when we were buying them even if most will likely be down a bit from their current levels.
3) I think the Fed will leave rates here or slightly higher than here at the end of the year. The consensus remains that the Fed will cut rates by the end of the year while I think the only way that will happen would be if the economy tanks and/or there’s an outright giant financial crisis (the recent regional bank financial crisis doesn’t qualify as outright giant).
4) The DJIA is down slightly on the year so far, the S&P 500 is up 8%, the Nasdaq is up 20% and small caps are up about 1% on the year so far. I still expect the DJIA will down 3-5%, the S&P 500 will be flattish, the Nasdaq will be up about 10% and small caps will be down more than 5% at the end of this year. Obviously, I’m not trying to game market moves per se, but having a framework of expectations for the markets is helpful in guiding how and when we buy and sell.
Perhaps the single most troubling problem for the economy and the markets right now is the giant moves that rates have made over the last year or so. 5% yields on Treasuries are an attractive alternative to stock market. Treasuries demand with rates at 5% is probably impacting prices of real estate and corporate bonds and eventually stocks too. Look at these charts of rates moving higher over the last year.
And a five year chart of the 20 year Treasury rates is just as shocking:
I think rates are going to be a major focus for stock investors for the rest of the year, driving people to buy stocks when rates drop and to sell stocks when rates rise.
Overall, the markets are playing out a lot like I thought they would this year. I tend to think we will probably get another good opportunity to buy many of our favorite stocks at lower levels in a panicky sell-off at some point in the next few weeks or so. By the end of the year most likely. In the meantime, I think we should be a bit cautious about putting new money to work or chasing AI and semiconductor stocks. I think we should have raised a little cash during this recent run up but that we shouldn’t be too worried that market will crash over a US debt ceiling crisis. That said, I do think there’s some possible risk that the wildly partisan positioning of both Republicans and Democrats could cause the government to dink around for another few weeks before getting a debt ceiling done and that the markets will not like that near-term.
So steady as she goes for now. We’ve been following our playbook since the December lows and I think we’re set up for some volatility and some downside this summer and perhaps later in the year. If and when we get another great opportunity to buy stocks and call options in our favorite names during the next panicky whoosh down, I will of course end out Trade Alerts and analysis to you all as I pull the trigger. In the meantime, I think having some cash and not being greedy while following our playbook is, well, the playbook here.
Rock on.
