Making the Next Buck

Brit Ryle

Posted September 25, 2023

The fourth quarter – October through December – is typically the best time of the year for stocks. It is time to prepare for an end of year rally…

The market is following the time-honored tradition of driving stocks lower in September, because: “buy low, sell high.” Best way to get a rally going is to start with stocks at oversold levels. That’s what the algorithmic trading machines are doing right now.

The machines account for over 70% of trading everyday. And their playbook is pretty simple. First of all, you gotta remember that direction doesn’t matter to the machines. They aren’t inherently bullish or bearish. They simply target the best way to make the next buck. If that means pushing prices up a dollar, fine. If it’s easier to push prices down a dollar to make the next buck, also fine. 

I know, discussing how machines trade the market isn’t terribly interesting. But when you’re watching a stock you own get pushed lower when there’s no worrisome news, when nothing fundamental has changed – you sit there and think “why? I must have missed something…”

Look at what’s happened to a stock I wrote up on September 13 – Carnival Cruise Lines (NYSE: CCL). The stock closed at $15 when I told you about the big earnings recovery it has coming for 2024. The stock closed 4.5% higher at $15.63 the very next day. Looked pretty good…

Since then, the stock is down 13% to $13.50 since that recent high. Why? Has something changed? Have analysts lowered their estimates for when Carnival reports this Friday? Nope. Nothing has changed, except I guess oil prices. 

But demand for cruises is soaring. Analysts haven’t lowered their earnings expectations (which tells us that oil prices are not impactful).

All that’s changed is the machines had the opportunity to make a couple bucks driving Carnival share price lower and that’s what they did. 

So, I didn’t specify that I was adding Carnival Cruise Lines (NYSE: CCL) to my “recommended buy” list back on September 13. But I’m making it official today. I think you should own this stock. As I wrote on the 13th: 

“From 2015 to 2019, [Carnival] was at least a $40 stock, and traded as high as $70. I can’t tell you it’s going back to the range over the next year, but if earnings grow like analysts expect, somewhere around $30 a share is likely.”

The Rising Tide

September hasn’t been kind to Apple (NASDAQ: AAPL) either. The stock is down $15 over the last couple of weeks, and $20 since its August highs. 

Yes, new iPhones don’t hit the market with the same level of hype that they used to. Investors seemed to greet the most recent phone – the iPhone 15 – with a collective “meh.” There’s no doubt that China’s mini-ban of iPhones has weighed on the stock…

But Apple says demand is huge. Order today and you won’t get your iPhone 15 until some time in November. 

Now normally, Apple is a tide that lifts all boats. Strong iPhone sales is good news for semiconductors, good news for the carriers, good news for retail sales and consumer demand…

When the machines remove their thumb from the “down” side of the market scale, I’m sure “strong iPhone demand” will be part of the narrative. So will “travel stocks demand exceeding pre-COVID levels.”

I think “Electric Vehicle (EV) demand” will be another bullish narrative during the final three months of the year. I already told you that EV sales are hitting critical mass in the U.S. A massive lithium discovery on the Oregon/Nevada border is likely to be part of the EV demand story.

Consumer Discretionary is another sector that should do well through the rest of the year. I know, the narrative right now is that inflation is weighing on the consumer and even when we spend money, we’re getting less due to package “shrinkage” – where the actual volume of the product is shrinking. Still, I bet we have a strong holiday shopping season this year.

The thing is: consumer discretionary isn’t easy. It’s the ultimate “haves” and “have-nots” sector. But when you find a brand that customers identify with, there’s a lot of upside. I’ve already written up Yeti (NASDAQ: YETI) as one of those brands with loyal customers. 

A furniture company called Lovesac (NASDAQ: LOVE) has caught my eye. Can’t see that name without doing a double-take…

But the stock is darn cheap at $19 a share. Forward P/E of 10 and a big discount to revenue – Price-to-Sales is 0.5. Lovesac is profitable and earnings are expected to grow 52% in 2024. The company has physical stores, but most business is done via its website, which helped it become a pandemic darling back in 2021. Shares rallied up to $90. 

That’s not likely to happen again anytime soon. But it was around $29 for most of July – a move back to those levels is likely over the next ~6 months, so long as the earnings picture stays strong.

S&P 500 to 4,300 

I told you last week that the S&P 500 was likely to test 4,300. If you want my full analysis on this, just check that link – there’s a chart and everything! My point today is that, well, here we are…

As I write, the S&P 500 is trading at 4,312. Machines gotta make a buck, right?

I can’t say the market’s totally ready for a rebound just yet. After all, we still have the UAW strike and Congressional idiocy going on –  Seems like some sideways action – a little consolidation – while these things resolve would make some sense…give investors a little time to get comfy that the market’s not about to plunge lower…

But ya know, investors don’t tend to get what they want. If the machines decide to flip the switch…

We are much closer to a bottom than we are a top (Bank of America just raised its year end target for the S&P 500 to 4,600). Don’t sweat the last few percentage points of downside – use the current weakness to add quality for a year end rally. 

Earnings season is right around the corner – JP Morgan (NYSE: JPM)reports on October 15.

Normally, analysts start lowering their earnings estimates as earnings season approaches. Over the last 10 years, analysts lower their earnings estimates by an average of 2.7% in the month before earnings get reported. In other words, history says that estimates for the coming earnings season should have been coming down during the month of September…

But that hasn’t happened.

In fact, analysts have been raising their estimates for the coming earnings season. 

Interesting, right? Because we all know how the earnings game is played. Analysts make low-ball estimates that companies can easily beat, and then they get a nice pop to their stock prices.

If analysts are raising estimates, the coming earnings season is very likely to be pretty darn good…

That’s it for me today, take care and I’ll talk to you Wednesday…

Briton Ryle
Chief Investment Strategist
Pro Trader Today