Weekly Article - Ep 26
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This is the weekly article and Pod/Video Show 26. The markets were smacked this week and we’re officially in what we believe to be a short-term correction into the September FOMC meeting.
Plus, we’ll talk about Mag 7, The Nasdaq Market Correction, Housing and Carvana in this weeks show.
If you’re new here welcome, make sure to subscribe on YouTube and/or Spotify – you can get free daily market updates on LongVolReport.com.
We publish the article of the week every Friday here on TheLongVol.com and then the podcast/videocast is on Spotify and YouTube.
Three main topics for today’s show – as always, a life update then:
- Articles of Interest from This Week
- Mag 7 Stocks Sell Off
- Broad Market Overview + Correction into September
- Carvana
- Q&A for The Week
Quote of The Week
Favorite Articles This Week
Now on Spotify
Mag 7 Stocks Sell Off - Finally.
So, finally the sell off in Mag 7 names as we’ve been talking about here since we started Q3 and that sell-off post market Tuesday into Wednesday was pretty nasty. I think we all want to rationalize why but sometimes it’s just market structure at play (discussed last week) and we’ve been discussing a few things since the star of Q3:
1. That the market on highs (Mag 7) was in the 8th/9th inning.
2. That $SMCI was giving a very bearish signal and that it was signal for other semis as well. – The stock is down over +$200 points in the last two weeks alone.
3. This is a Nasdaq Market Correction (explained below & in the video)
Episode 22/Article of The Week
- Google & Tesla earnings: the scapegoat or was this already brewing?
- Weakness in the consumer is starting to show and I think that’s a concern
- Add in the move we saw Wednesday and the impulsive leg down and that changes things a bit. Market structure comes into play with risk off across the board. Something I talked about last week as well with a post from Twitter.
- This goes back to overleverage in Mag 7 – once one domino falls, they all do and fast – great situation for short-selling the next 4-8 weeks.
We had something I call “open air” – there are situations in trading where you need to be surgical with trades then there are situations where it all aligns: Macro/Fundamentals/Charts and you can take a “sledge hammer” approach to the positioning – this week was the sledge hammer.
(Explained in the video)
Broad Market Analysis.
The sell-off in Nasdaq and SP500 are corrective trend changes in our models as of Wednesdays market close. While we expect maybe 3-4 days of rally here and there the consensus is now that we have a shift from bayside order flow to sell-side/risk off into and through August as we get toward the September FOMC meeting. As talked about the past few weeks in The LongVol Report there was not much signal on high beta equities to want to be long but now we have confirmation and signal to work with into September.
In my view, this is ideal. You now get a reset on many broad market names at more attractive prices v. having to chase at all-time highs (a strategy I don’t believe in). Second, this also brings short-selling back in play up until then – we like this as a long/short advisor.
Where some advisors are either long-only, or buy wait and hold, we can move freely throughout the markets and capital structures to generate returns so this is welcomed.
In our view, this move will be technically driven given the impulsive legs/moves in many names causing risk off (taps on the shoulder) across pods, CTAs, and systematic program trading.
- We’ve seen the high on the year and we trade back into the April range (stabilize on Mag as well)
- $19,700 key spot – slim chance, but a weekly candle close above that negates the trend correction (not our view)
- Expectation to be short/risk off sentiment on broad market names through August
This is all positive however. Both for those on the sidelines and for us and our clients as we’re now able to deploy short strategy across select names – this is where we can shine where others tend to struggle. Volatility is a tool and short-selling correctly in times of heightened vol produces great short-term portfolio revenues.
The light at the end of the tunnel is this –
- The Fed Cut in September should be the end of the sell-side pressure.
- That should also prepare some of these names (esp. semiconductors like TSMC – which I want to own from lower for clients)
The bad news is that the consumer might be “too far too gone” through this cycle we’ve been in making the rally on lows in September short-lived….but we’ll explore that when we get there, for now, the plan is risk off, selective short selling and continued research to begin to allocate as we come out of Summer into the September FOMC meeting.
I’ve been hammering that home builders are a trade-only. We took a trade long a few weeks ago but this is very close to a technical signal to topping out as well as a fundamental signal.
I reiterate this idea: home prices WILL NOT increase to the pace we saw in 2020 and that is a narrative being pushed by conflicted parties.
I’ve been hammering that home builders are a trade-only. We took a trade long a few weeks ago but this is very close to a technical signal to topping out as well as a fundamental signal.
I reiterate this idea: home prices WILL NOT increase to the pace we saw in 2020 and that is a narrative being pushed by conflicted parties.
- $XHB is in the “no mans’ land” zone for price. $125-$115 is a spot where we are looking for sideways action/selling and I think we’re going to find ourselves in another big short like we saw last August in this sector.
- Will be discussing this in the report again.
Wrapping it up: This is risk off into September and we still think there’s an inflection point but now we’ve added short-sided flow to that.
- Inflation linked equities still in play.
- Regardless of the data the price charts on the indices are very bearish and that is the purest, most-direct indicator there is.
Carvana: We Meet Again.
This stock is like that one ex-girlfriend you just can’t seem to forget no matter how hard you try so here we are again. Before I start and for those new here, this was a big short in 2022. To be clear, I don’t really care to short fraud/nefarious companies anymore – it was fun a decade ago but now there are easier index/too far too fast shorts to just pile into. I wrote a short piece on this that led to a few pieces in magazines as well as a lot of emails from people in the industry.
- This led to a piece from the journalist at Forbes uncovering Carvana and Hypersport (worth a read)
- It also led to me talking with industry experts so I’ve come to learn this business really well
That out of the way the stock has had a meteoric run on creative re-structuring and decent numbers; it’s been a good trade.
BUT
The same issues they had that got them from $160 to sub $5 are the same issues they have today and like the housing boom we saw in 2020 from PPP money etc., Carvana too, was also a benefactor.
However, this is not 2020 anymore and we don’t have PPP money or shortages of chips with new cars. What do we have?
- A consumer who is tapped out (despite what the IG bros in Miami, Scottsdale, Newport and LA want you to think)
- The large automakers are also having a brutal quarter – forget the used side of the business.
- We shorted this in the AST Alerts last earnings for +14%
- Earnings are July 31 – I hope it trades higher, the higher the better because the drop will be that much more impulsive
- Options implied vols have dropped (I wanted to see this and it helps the structure)
- Not short yet – just discussing this! This is also not trade advice.
Final Word.
- Report out this weekend Issue 28
- More market downside to come + stock picking working again
- Q&A for this week
Opinion, not advice. Not a solicitation.
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About the Author
Daniel Bustamante is the founder, managing partner, and CIO of Bustamante Capital Management L.L.C., a multi-strategy investment management fir. He has over 15 years of experience in the financial industry, specializing in equities, futures, and event-driven trading strategies.
He is also the founder of TheLongVol.com, a blog and newsletter that shares his insights on his investing process, travel, and other private investments. He has been featured in Bloomberg, Arizona Business Journal, Business Insider, Yahoo! Finance, Forbes, Seeking Alpha, and other publications over his career on Wall Street.
