Great Expectations

Brit Ryle

Posted February 22, 2023

As you are no doubt well aware of by now,  I look at the stock market in terms of “windows of opportunity” for trading purposes. It is often said that the stock market is a discounting mechanism. That is to say, investors and traders try to account for as many variables as possible, assess what that means for the future, and then apply all that to stock prices. 

Now, obviously, this is a completely subjective process. If you sat down on the barstool next to me and tried to tell me with a straight face that that shares of Amazon (NASDAQ: AMZN) are worth $110 if the Fed hikes interest rates by a .25 basis points, but the same shares are only worth $100 if the Fed hikes rates by .50 basis points, well, I would definitely start laughing.

But I’d also buy you a beer, because you’re not wrong, exactly, and I’d probably even order us some wings because we’re at the start of a pretty good conversation. (And, the wings would come with blue cheese as the good lord intended, wings with ranch is an abomination.)

Let’s go ahead and dispel the notion that there is any specific intrinsic value for companies or stock prices right from the start. Value? Sure. There are plenty of times where it’s reasonable to think that a certain stock represents a value. 

Like, I wouldn’t argue (much) if you said that buying Pfizer (NYSE: PFE) at $42 and getting that 4% annual dividend looks like a decent value. But I would say that to call it a value means that you probably have expectations that the stock price will go higher and that if it was simply about the dividend, why not just buy a 1-year Treasury bond and make 5%…

You could even point out that if you average out the price target that the 17 analysts who cover Pfizer have on the stock, it’s $52 a share, and even if they’re wrong and the stock only goes to $50, well, that’s pretty good. 

And back in December, Pfizer was a $50 stock, so there is an appetite for the stock at $50…

I would agree that price targets are always about what investors have been willing to pay in the past and what they might be willing to pay in the future, and then I’d probably say something about how my appetite was piqued more by those wings than buying any Pfizer stock…at least right now.

Great Expectations

So, windows of opportunity. They open when expectations get out of balance with prices. Right now, I don’t wanna say it’s easy, but with expectations so focused on inflation, interest rates and possibility of a recession, we don’t have to tie ourselves in knots to get a feel for what investors are expecting…

And in fact, because the consequences are pretty severe for getting it wrong, it adds to the fun. 

Back at the end of December/early January, expectations shifted to bullish as inflation data eased and recession fears dimmed. And we got a powerful rally, because that’s what happens during the first stage of a new bull market. 

So when that NonFarm payroll number came in way, way better than expected, and it was followed up by stronger than expected inflation data, the bulls that had been furiously chasing stock prices higher had a true Wile E. Coyote moment – suddenly aware that maybe they’d run off a cliff, and as they hung in the air out there, realizing that there might be a little downside coming, held up a little sign that says “was that really the start of a new bull market?”

Last week I told you that Bank of America put options at the $35.50 strike price that expire this Friday were a good idea. Available at $0.45 after that recommendation, they are currently trading for $1.20. That’s a pretty good return for not really working all that hard, so take that gain today…

Back to the Chart

To finish up today, let’s have a look at the updated S&P 500 chart….


Source: Yahoo Finance

Now I know, I keep saying that I’m a simple guy and I like a simple chart and you’re looking at all these ridiculous lines and thinking: simple? WTF is he talking about…

Lemme break it down real quick. The two horizontal lines – purple at the top, red at the bottom – are the big support and resistance lines. They contain the action since mid-October pretty well. 

Last week I drew a new line – the blue one that angles up from left to right. This is the rising trend line. I like how this line, as it crosses above the horizontal red line at the start of 2023, coincides with the market rally. As lines go, that’s pretty good. 

Then there’s the light purple line and the black line. The light purple line is the 50-day Moving Average, and it sits at 3,979 today. The black line is the 200-day Moving Average and it’s a 3,940 today. 

Now, these lines are not meant to be predictive, but rather, suggestive. Trading is much more like painting a picture than solving an algebra formula. 

And to me this chart suggests that we could well see some support at the 50-day moving average at 3,979. But for the immediate future, I’m far more interested in the imminent collision of the black and blue lines – the 200-day moving average and the rising trendline – at 3,940…

If you wanted to make fun of me, you could certainly compare my line drawing skills to those of a 6-year old with a crayon. And in a way you’d be right – just about anybody could draw lines that point to 3,979 and 3,940 on the S&P 500. But more to the point – I just nailed a nice gain on a BAC trade, and I can guarantee you I’m not the only one looking at a move down to 3,979 and maybe even 3,940… 

That’s the thing about expectations – the more expectations align, the more likely they are to happen. 

That’s it for me today, take care and I’ll talk to you on Friday. But if you got something on your mind, I’ve gotten back on Twitter @BritonRyle and Pro Trader Today is there too, 

Briton Ryle
Chief Editor and Strategist
Pro Trader Today