larrycheung

August 31st Daily Market Note: Can Broadcom (AVGO) revitalize the AI Trade?

Added 2023-08-31 18:17:43 +0000 UTC

Hi Folks, here is my 8/31 Daily Market Note.

Daily Market Note: August 31st 2023 by Larry Cheung, CFA

Bulls turn what was originally a difficult August to one of hope for better days ahead

Forward-looking Conclusions of this note:

Macro: U.S Indices are set to close out August with very minor losses after the technology correction from the beginning of the month
Stock-Specific: U.S. Retail Thrift Shops continue its industry indigestion of a very challenging backdrop with profit margin erosion, guidance cuts, and rising investment capex spending. Previously discussed name Broadcom (AVGO) in Private Group Chat is near all-time highs ahead of earnings this evening. Longer-term, regardless of its earnings outcomes tonight, I see AVGO reaching/touching 930-940+ or better in late 2023/early 2024.

From Private Group Chat on 8/24 when AVGO traded 900. Now at all-time highs 920 ahead of earnings. Just a reminder that when Members first join group chat, they see a blank chat channel as previous message history is not shown (just a quirk of Whatsapp Functionality)

Bonds: I will now be watching for the inverse correlation between the 10Y Yield and the Nasdaq-100 to see if it continues to break down, which will be an initial sign that falling rates stops being tailwinds for the market if the correlation breaks.
China: Pinduoduo continues its advance and I’m now setting my sights on New Oriental (EDU) as my next longer term portfolio position idea should the name dip severely. Will discuss EDU and the private tutoring market in China more in the future as to why I think this.

Daily Market Note & Context

The driving force behind the market’s stunning comeback over the past 2 weeks has been the large move on the 10Y Yield from 4.35% down to 4.08% (where it is now as of this post). Part of the reason was that Bonds were oversold and that the Rates had run up to overbought levels. Another reason is that macro data from Consumer Confidence, Core PCE, JOLT Jobs Openings, and the private ADP employment report all suggest a softening in macro picture. In my research estimates, a 27 Basis Point move down (4.35% to 4.08%) in the 10Y Yield has the ability to lower the Discount Rate (also known as the Weighted Cost of Capital – WACC) in Wall Street DCF Models by as much as .4-.6%. If a typical technology stock in QQQ has a Discount Rate of say 9-11%, and the new Discount Rate is 8.5-10.5% coupled with stronger Forward Estimates in Revenue, EBITDA, and operating margins, such stocks should move about 5-8% on the upside.

This is consistent with the move that we’ve seen in tech leaders such as AVGO, META, AAPL, MSFT, GOOG, AMZN, and AMAT over the past 10 sessions during which the 10Y Yield moved down by this magnitude. In other words, fundamentally speaking using financial modeling, this latest move higher has a valuation rationale behind it and this it does “makes sense” per se.

My call for a rebound in technology stocks back on 8/17 was based on this premise, and has been validated. But now that the 10Y Yield has entered “no-man’s land” and technology is no longer oversold, visibility into seasonally weaker September is much more difficult. At certain points during the year, some market-wide setups are quite clear to me and I think not taking calculated risks at those moments often turn into missed opportunities. However with VIX now at 13.6, near local lows, it will not require much of a market shock to take the index back to 16-17. Put Sellers like myself are also indirectly Volatility sellers, so the VIX is an important index to follow along with the broader indices. The VIX is a bit low for new Sell Put positions.

The cost to insure positions using Long Puts is now near yearly lows, and although I generally stay away from Long Puts, I do think there will be a 1-3 day window in September/October where such positions may work well for hedging purposes for an extremely limited and brief amount of time. I’ll keep monitoring the options chains to see if there’s opportunity there, though I must say that being Long Puts is generally a trade where selling them for profits early is far better than staying too late and having to close them under cost. Long Puts is generally a losing transaction over a longer time horizon and should be traded and not held.

I’ll be on the lookout for new opportunities as they resurface. There’s really no rush at all if you’re in a position of strength in 2023. Far better to sit tight and patiently wait for setups to be high-probability than to rush into new positions and “see what happens”, in my view. Have a great long weekend!

-Larry

Quick Reminder that there is no Pre-Market in Private Group Chat or Email Daily Market Note on Fridays as I publish Mon-Thurs. Enjoy your weekend.

I will do my best to keep you as updated on my research, ideas, and setups. I cannot take any 1:1 questions related to individual positioning or guide on individual transactions. My work here is solely an expression of my personal journaling, but must not be treated as formal financial advice.

Thank you again for a wonderful Community, and please encourage friends & family to join our group here.