TQI Weekly - Issue #8
Hello and welcome back to The Quantamental Investor’s Weekly Newsletter series. After being on a two-month-long hiatus, I am resuming production of TQI Weekly in a new format that I believe will provide greater value to you. Please feel free to share feedback with me at "the.quantamental.investor@gmail.com".
Going forward, TQI's Newsletter series will bring you up to speed on weekly market action, provide you with new investment ideas & research, and share portfolio strategies & investing best practices to help you build a robust investing operation.
Weekly Market Round-Up
For this trading week (5-9th December 2022), all major market indices closed in red, with S&P 500 (SPY) falling by ~3.35% and Nasdaq 100 (QQQ) registering a decline of ~3.5%.
We are now out of the Q3 earnings season, and macroeconomic data is once again dominating market action. While FED chair Jerome Powell's somewhat dovish commentary at Brookings Institutional in late November sparked a market rally of ~5%, recent economic data has poured cold water on the possibility of a FED pivot! In the last couple of weeks, a stronger-than-expected US jobs report (+263K jobs added vs. est. +200K) showed annual wages rising by +0.6% m/m (+7.2% annualized), with the unemployment rate staying flat at 3.7%; and Friday's PPI report came in hotter-than-expected. At this stage of the market cycle, we are in a good news (for the economy) is bad news (for stock markets) environment. And recent jobs and inflation data means the FED will need to keep up with its quantitative tightening for longer.
While equity markets have sailed higher by ~15% since hitting a new low in mid-October, I think we find ourselves in yet another bear market rally, and shared the thought process with my marketplace members in this note on 26th November 2022:
Exclusive: Big Week Ahead For The Equity Markets, Proceed With Caution | Seeking Alpha Marketplace — seekingalpha.com
Ahan Vashi's note from 26th November 2022, highlighting the potential formation of a local top in the S&P 500 at 4,100 level with discussion on VIX structure, fundamentals, valuations, and more.
In the above note, I shared that S&P 500 may form a local top at 4,100 to 4,150 level based on fundamental and technical analysis. As of market close on Friday, S&P 500 closed well below its 200-DMA level and the falling trendline marked on the chart below. Also, the rising wedge pattern is seemingly broken, and S&P 500 looks primed for another leg lower.
What's Ahead...
Next week could be pivotal in determining market's direction for the near term, with two big events/data releases lined up:
December 13, Tuesday: November Consumer Price Index Report arrives, where CPI is projected to come in at +7.4% y/y, and
December 14, Wednesday: The FOMC will announce its rate decision, followed by a press conference by Jerome Powell. A 50-point rate increase is highly likely, and Jerome Powell may need to be more hawkish than he was at Brookings in late November.
A cooler-than-expected CPI inflation print and a dovish FED could trigger another short-term bounce in the equity markets, which could mean a Santa Claus rally to end this dreadful year. However, the outlook for 2023 remains grim.
The FED is tightening into a deeply inverted yield curve (a potential policy mistake), raising the likelihood of an economic recession in 2023. Treasury bond yields have been tanking lower, which is a tell-tale sign of an impending recession. And yet, equity markets are sitting at valuations well above historical average trading multiples (S&P 500 is currently trading at ~18.5x forward earnings, and consensus EPS estimates are still calling for +5% growth next year despite the rising possibility of a recession). Something has to give, and I believe that equity markets are in for a reality check sooner than later (most probably in H1 2023).
At TQI, our investor community is positioned cautiously going into 2023, with tactical option-based hedges guarding our portfolios against a possible 25-50% crash in the market (S&P 500) from current levels. And I urge you to proactively manage your risk too.
TQI's Research
Yes, we are operating in a bear market, but that doesn't mean we stop researching for opportunities to make money. Over the last week, we published three research notes, and here's a summary for your perusal:
1) Pair Trade: Buy Oil (USO), Short Oil Stocks (XLE)
Historically, oil and oil stocks tend to move in lock-step. However, a rare divergence has formed over the last couple of months, creating an incredible tactical investment opportunity.
After the publication of my report, this divergence was also covered on CNBC, and the recommendation from one of the technical experts there was to short XLE. At my marketplace service, we are accumulating a short position in XLE via PUT options since early November, and this position is already up +30%. In the following note, I discussed the dynamics causing this divergence and shared a high-conviction pair trade for investors:
2) Apple Stock: A Troublesome Tryst With Technicals
Apple's stock has been trading lower throughout 2022 in a bearish megaphone pattern. Within this megaphone pattern, Apple has formed a symmetrical triangle pattern in recent weeks, and a breakout or breakdown could lead to a big move in the stock.
Due to fundamental and technical reasons, I rate Apple a firm "Avoid/Neutral/Hold" at $141. The full report is published at Seeking Alpha:
3) Bi-Weekly Portfolio & Market Update + Three Q3 Earning Recaps (CRWD, ZS, OKTA)
In a TQI Exclusive (pay-walled) report, I shared our market outlook and portfolio updates with TQI's marketplace subscribers. In addition to these recurring bi-weekly market and portfolio updates, I also covered earning analysis for three companies from our cybersecurity basket at TQI's Moonshot Growth portfolio - Crowdstrike (CRWD), Zscaler (ZS), and Okta (OKTA).
You can access the detailed article at Bi-Weekly Portfolio & Market Update + Three Q3 Earning Recaps (CRWD, ZS, OKTA)
Top movers at TQI
At TQI, we offer multiple portfolio strategies that cater to different stages of an investor's lifecycle. Regardless of your stage on the investor lifecycle curve - Early, Accumulation, or Distribution - The Quantamental Investor has got you covered. Here's a list of our investment mandates:
While the past week was relatively quiet across our portfolios, we did see some big swings in our Moonshot Growth strategy, and I personally think that sharing thoughts on some of the top gainers and losers every week could be beneficial for TQI Weekly readers. Please let me know if you like this section.
Top gainers
The two big gainers for this week were Hims & Hers Health (HIMS) and DocuSign (DOCU), with stock price increases of 8% and 5.5%, respectively.
In my opinion, Hims & Hers stock is moving higher due to an improvement in investor demand based on the continued business momentum observed in its Q3 report last month. Despite this rally, HIMS remains grossly undervalued.
For Q3, DocuSign reported a top and bottom line beat last week, which is probably the driving force behind the bounce in this beaten-down pandemic darling. According to our models, DOCU is currently undervalued by ~20%, and it is a decent buy here. However, it is not one of our top ideas.
Top losers
The two top losers for this week were Carvana (CVNA) and Opendoor (OPEN), with stock price declines of -37% and -24%, respectively.
Last week, Carvana's debtors signed an agreement to negotiate together in the event of a debt restructuring (WSJ article), stoking fears of imminent bankruptcy. At its low, CVNA was trading at $3.55, but it has since rallied to move back up to $5 per share. Unfortunately, the bankruptcy risk in this counter is extremely high and rising with each passing day. Fortunately, our position in Carvana is minuscule (~0.1% of TQI's Moonshot Growth Portfolio's AUM). That said, we will not be deploying fresh capital in this counter for the foreseeable future.
On 1st December 2022, Opendoor's founder Eric Wu stepped down from his CEO role, with CFO Carrie Wheeler stepping in to fill his boots. While this is a blow to the investment thesis for Opendoor, it may be a blessing in disguise for the company. Eric is now focused on building Opendoor Exclusives (3P marketplace), and Carrie (a seasoned capital markets pro) is leading the company through a financial crisis of sorts. Despite widespread fears of impending bankruptcy, Opendoor is flush with cash, and the worst is behind us. As we get into Q1 2023, Opendoor's business fundamentals should start to improve, and this should be followed by a recovery in the stock too. With the macroeconomic environment still uncertain, the housing markets may remain under pressure, but going forward, I expect to see a slow burn lower in home prices - something Opendoor is well-equipped to deal with. I am long OPEN, and I will continue to accumulate more shares in this counter. If you are interested in reading my latest analysis of the company, please head over to Opendoor Q3 Review: Don't Miss The Forest For The Trees
Member Spotlight
The Quantamental Investor is a rapidly-growing investor community, and for this edition of TQI Weekly, we asked one of our first members - Isaac Ben-Avi - two simple questions:
What does investing mean to you, and how is TQI helping you meet your investing goals?
To which, Isaac said -
INVESTING to me means owning a part and being partner of real businesses for the long term, and making sure I'm partnering with the correct management team. I learned the hard way that VALUATION and having a margin of safety matters dearly to outperform, and that, together with deep research of companies, earning recaps, new stock ideas and portfolio structure, is the help I'm getting from TQI to meet my investing goals.
I would like to thank Isaac for sharing his definition of investing with us, and I am sure you have your own story. If you are a TQI Marketplace or TQI Network member, and you would like to be featured in the next member spotlight, please email us at "the.quantamental.investor@gmail.com".
Investing Best Practice Tip
Before you go, take this piece of investing wisdom and internalize it. In his letter to shareholders in 2007, Warren Buffett, one of the greatest investors of all time, said -
You only learn who has been swimming naked when the tide goes out
Honestly, the tide has gone out in 2022, and will probably continue to go out in 2023 as our economy goes into a downturn. There will be winners and losers in this market of stocks, and as you know, bear markets are periods where investors make the most money (they just don't know it at the time). In my view, 2023 will be a stock pickers market, and active investing will come back in favor. That said, active investing with proactive risk management is the right strategy to navigate a challenging bear market.
Final Thoughts
Thank you for reading, and I hope you enjoyed this note. Please subscribe to our newsletter to receive the next issue of TQI Weekly delivered directly to your email.
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See you next time!