Position Updates May 15, 2023

Brit Ryle

Posted May 15, 2023

I know, I know – the financial media is overrun with the U.S. debt default story. We’ve got administration officials preaching an apocalypse of spiking unemployment and stock market crash. We’ve got a presidential candidate advising his Congressional party members to go ahead and pull the pin on the default grenade, blow it all to hell…

A tsunami of ink is getting spilled to hash out potential solutions as the deadline looms. Maybe hold social security payments hostage…maybe shut down the government…maybe an unprecedented executive order to raise the debt limit…

It is truly the theater of the absurd. 

Of course there are plenty of points to rack up on whichever political scoreboard the debt limit players are watching – none of which will amount to a hill of beans when the next elections come around. 

But don’t forget – our honorable elected leaders have made sure their trading activities remain unencumbered by any restrictions. The real score for pulling the stock market through the ringer with this game of debt default chicken will be tallied in their brokerage account P&L statements. 

A few simple lines on the chart of the S&P 500 illustrates the situation pretty well…

GSPC 05152023

Source: Yahoo Finance

The angled red lines show how the action has played out over the last couple weeks. The S&P 500 has been unable to break above that top red line, creating a series of lower highs that conform nicely to the downward slope of that line. 

In terms of support, the S&P 500 has found it around 4,100 over the last few sessions. And now, the rising red trend line is hitting 4,100 today. 

Technical analysis will tell you that what we are seeing is a pennant formation – and we can expect the daily action to be contained within the upper and lower bounds of the pennant, until the range between the upper and lower boundaries gets so tight the price action breaks outside of the boundaries…

Same Old, Same Old…

A pennant formation tells us that the market is indecisive. The bulls do not have enough conviction to take prices higher, and the bears don’t have enough conviction to take prices lower. It’s a standoff.

And the thing is – it’s impossible to predict which way the market will break out of a pennant with any degree of certainty.  Traders and investors need new information in order to determine whether to buy or sell. The wrangling over the debt limit is clearly one area where more information is needed. 

We can probably add inflation and interest rates to the list if we want. But the thing is – Congress and the administration can’t really raise the anxiety level and jerk the market around by talking about the Fed. But they absolutely can apply pressure to the stock market with inflammatory rhetoric about the debt limit and default. 

So while it’s little better than a coin flip as to which way the S&P 500 moves once this pennant indecision is resolved, I can’t help but think the risk is to the downside.

If you’re a long term investor and your time horizon is longer than a few months, then don’t sweat it. No matter how bad the rhetoric gets, the likelihood of the U.S. actually defaulting is nil. Feel free to take advantage of weakness to add quality…

Of course I got ideas…

Position Updates

Both of the AI stocks I’ve recommended, C3.ai (NASDAQ: AI) and Schrodinger (NASDAQ: SDGR) are looking good. 

C3.ai is flying today after it pre-announced a better than expected quarter. The stock was crushed 6 weeks ago by a hatchet job from short seller Hindenburg Research. But shares found support at the 200-day moving average. And this quarterly earnings report should help convince investors that the Hindenburg short report was a bunch of hooey. You can check out my analysis on C3.ai here and here.

At $27 a share, drug development platform company Schrodinger (NASDAQ: SDGR) carries a market cap of just $2 billion. Seems on the cheap side to me, read my analysis here

I know nobody wants to hear any more about Rivian (NASDAQ:RIVN), even though I think the negativity around its recent earnings report is way overdone. Still, with the stock trading at 3 times forward revenue, there’s a lot more optimism priced into Rivian shares than with EV maker Fisker (NYSE: FSR). 

Fisker trading just over 1 times forward revenue indicates there is very little optimism. I expect the shares will react much better than Rivian did to any good news. And Fisker reaffirmed production forecast of 32,000-36,000 of its Ocean SUVs just this morning. Yes, that’s lower than the 42,000 forecast from my original write-up, but if the lower forecast stands, there’s upside for the stock. 

If you want to skip the EV hype altogether, I just put Yeti (NASDAQ: YETI) on my recommended buy list on May 5. Yeti reported earnings last week were met with a big jump higher for the stock – over $45 – that quickly faded. And really I was a little surprised at that ramp job, because the quarterly report wasn’t a blowout. Revenue grew 3% and gross margins ticked higher to 53%.

The reason to be bullish on Yeti is those margins. The company expects gross margins to improve to 55% for the year, and that’s huge for a drinkware company. But it points to the strength of the Yeti brand, and that’s why I like the stock. 

At $110, Amazon (NASDAQ: AMZN) is an easy buy. I mean, it’s trading for 2x this year’s revenue and has 12% revenue growth coming next year. I expect the 200-day moving average down at $106 to act as support.

Don’t forget to check out my recommendation for upstart insurance company Lemonade (NASDAQ: LMND) from Friday. 

Finally, I’m gonna get into Nutrien (NYSE: NTR) and MP Materials (NYSE: MP) in a bit more detail on Wednesday, so we have that to look forward to…

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

Briton Ryle

Chief Investment Strategist

Pro Trader Today 


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