Just when we thought the market would get a little break from inflation/interest rate volatility, Meta Platforms Inc. (META) (AKA Facebook) had to spoil the party.
META reported earnings on Wednesday, after the market closed, and beat expectations for profits and revenue but disappointed in its outlook for the rest of the year. Management's outlook is usually the biggest X-factor that triggers a rally or drop when earnings are reported, and in this case, META's outlook was a stinker.
META's expected spending on A.I. development represents a much larger than anticipated line item than analysts had planned, and the payoff isn't likely to occur in the short term. Usually, a report like this would fall into the "it's a META problem, not a market problem," but it was a little bit of both in this case.
The last big market breakout happened on Feb. 22, just after the NVIDIA Corp. (NVDA) report. The breakout before that one was on Feb. 2, following the META and AMZN reports. In both cases, the enthusiasm was triggered by a positive outlook for A.I. development.
So, we were worried that the market had gotten ahead of itself in its A.I. expectations and that we would get more of the same on Thursday after the market closed when Microsoft Corp. (MSFT) and Alphabet Inc. (GOOGL) reported. Fortunately, it appears that the latter two reports may have saved expectations, and we could get a sustained bounce back up toward the prior highs.
If only tech earnings were the only issue in the market...
The two biggest factors pushing the market higher or lower are inflation expectations and tech performance. For some good reasons (and many nonsensical ones), traders view the market's and tech's future as one and the same, so yesterday's positive reports should support stock prices.
If tech earnings were the only factor, we would likely want to move into a more aggressive stance in our recommendations. However, there was an under-covered inflation report this week. Quarterly GDP was released on Wednesday, which showed inflation running just over 3%. Investors priced that news into long-term interest rates that put pressure on stock prices to the downside.
The bottom line in this case is that we are confident the market has escaped the worst-case scenario of bad earnings and inflation. Still, the likelihood of continued volatility is high. However, on the positive side, there is room to move higher without stretching valuations too far because the market has reached support after a pullback.
That means we stick with our current strategy of bracketing trades with a "Good 'til Cancelled" limit order at the target price identified by Predictive Alpha. We may be quicker to close trades on short-term rallies than we would otherwise. That approach has been paying off for us over the last month, and it will continue to perform well while we wait for a break above resistance.
In the video below, we walk you through what is happening on Wall Street and how each of the new trades we will have in the Predictive Alpha portfolio will likely perform. (10:19 min. watch)
Each week, we will update you on our open trades, organized by their initial "target price" date.
To be clear, these trades are straight stock buys; we will not pursue any options trades in this service.
Predictive Alpha's unique A.I. system allows it to predict, with astonishing accuracy, where a security will move over the next month (or, to be more specific, the next 21 trading days).
Because this A.I. is so sensitive and updates its predictions every single day, a predicted target price may change from one day to the next.
We watch those changes carefully and will alert you when we think an exit is optimal.
Target Price/Date: $152.10 by May 22, 2024 (we set a GTC limit order to sell the stock at its target price on Apr. 24, 2024)
Current Return: 0.75%
DHI dropped a bit this week with the rest of the market after the META and inflation reports. However, our outlook for the position remains positive as the underlying market fundamentals are still in bullish territory.
John Jagerson & Wade Hansen Analysts, Predictive Alpha
P.S. For any questions or concerns, check out your brand-new Frequently Asked Questions page, which you can access here. Otherwise, reach out to or contact your Customer Concierge Team at 866-385-2076 or JohnandWade@tradesmith.com Monday through Friday, 9:00 a.m. to 5:00 p.m. ET. Our dedicated team will be glad to assist you.
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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