Is the reward worth taking the risks for?

NYu
8 min readMay 30, 2023

May 30, 2023

“Participate only in worthwhile moves, if that is what it takes.”

Is the reward worth taking the risks for?

World Indices are trading near August 2022 highs.

The $TQQQ last peak was on August 15, 2022 trading at 40 while May 26 2023 managed to close at 35, which is just 10% away. That’s due to the decay on the triple leverage on the $QQQ ETF. However, if one were to check August 2022 versus May 26, 2023 — we have already surpassed the previous peak and are now attempting to trade with the next target of either 360 or 370 in the $QQQs.

The $SPY sits at 420 this May 2023 which still trades slightly lower than the August 2022 rally which peaked at 430, but that’s still a very strong rally. The question remains, is this a double peak in the $SPY? Do we retest only to get rejected?

The $DIA this May is also consequently lower at 330 versus the 340 it registered last August 2022.

Why is the Doom Scenario Defied?

In a nutshell, the doom scenario has been defied due to the AI revolution. It so happens that the largest market-cap weighted companies are all benefiting on the AI craze and it remains to keep beating in terms of guidance.

Companies like $ANET Arista Networks trading at 52 week and all time highs

Arista Networks (ANET) makes communications hardware used in cloud computing

But the company’s trading at 3.55 PEG and with a lot of insider selling.

Why do Bears Continue to Scream Doom Scenario?

Are Valuations Better and Are there Buying Opportunities Available?

Some full resets on the China Reopening Rally being fizzled is getting my attention

Hongkong’s largest fastfood chain- Cafe de Coral — trading at multi year lows (2006 levels)

$341 HK or Cafe de Coral now trades at $10HKD when the situation over the last 12months have recovered from the Covid pandemic and shut downs.

I believe dividends will start recovering as well although likely in the realm of 30–40 cents only (as previous years were still reeling from the Covid)

Key Risks:
1.) Rising Rental Costs — Operating Expenses

2.) Rising Wages

3.) Industry Profitability — Razor Thin Margins

4.) Retail Slump or Slow Recovery

China Big Tech Buybacks and Restructuring

  • TENCENT BOUGHT BACK 1.1 MILLION SHARES FOR HK$352.1 MILLION ON MAY 29- HKEX FILING

Tencent trading at its lowest for 2023 but filled with company buybacks.

Disney has not been as low as 84–88 ever since March 2020 pandemic lows which is why we believe longterm believers of DIS are entering at a very good price

Key reasons:
1.) Cost restructuring => increasing ARPU on Disney Streaming by increasing prices , bundling Hulu, espn and Disney within one app
2.) Discontinuing costly content spending in 2023 — so should lead to better margins by 2024
3.) Expansions and franchises continue with a better movie turnout. The franchises of Guardians of the Galaxy and Mermaid are decent. Not blockbuster like Super Mario Bros but its decent enough
4.) Closing of Star Wars Themed Hotel — Closing of Losing entities

no job = no income = no ability to spend

= consumer slowdown.

I continue to believe there’s consumer discretionary selloffs so with the case of $TCOM or $9961, I continue to be bearish until it falls at least 20% from current.

Most shoppers’ budgets remain under pressure. Inflation is weighing on Americans across income levels. The better way to capitalize these things is to short the retail sector. We just need to be SPECIFIC with the companies that are deteriorating.

All retailers are grappling with a noticeable shift in consumer spending patterns. As discretionary spending shrinks, consumers are prioritizing needs over wants. They’re opting for fewer and smaller purchases and showing a renewed focus on value.

$CROX

$DKS

IPO Issuances and Delays Show Cautious Outlook and Deteriorating MacroEconomic Conditions:

Components of Demand:
1.) Consumer Spending

A Few Charts to Check:

$LULU — After Earnings Beat and Raise, market sold it off.

$LULU

$LVMUY — Weakening Chinese demand from competitor Chanel

2.) Home-Builders

$LEN $KBH $DHI looks to be peaking with mortgage rates rising to 7%

3.) Business Fixed Investment

4.) Inventory Growth

$NKE

5.) International Trade

Southeast Asia’s $SE still having a hard time with profitability given muted sales growth.

6.) Government Spending

Debt Ceiling = Fiscal Tightening ($4 Tril and a serious government spending freeze)

Other Themes:

Gold Bulls Being decimated with Strong Dollar

Consumer Staples Sector is no longer treated as a very defensive sector

Walmart, Coca Cola, McDonalds, Procter n Gamble are all being sold off, its either one of two things

1.) Retail Spending Sales is Muted and Weak-Americans aren’t just cutting down spending on consumer discretionary — even discount retailers are feeling the pinch to the point of trading down towards private label goods (as evidenced and echoed by $WMT ceo) (hence $ROST Ross Stores is a short idea)

2.) The Valuation Premium to pay 35X P/E ratio to a sector that displays declines or flat sales and earnings going forward shows people don’t want to pay valuation extremes to recession plays.

Either way, interesting that these “staples” are being sold, not just the consumer discretionary.

Overarching thoughts, if you cannot see the rewards favorable, its best to stand aside and observe until you see the risks less and the rewards more :)

  • Nikki Yu Gillo, CMT

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NYu

I’ve been trading stocks for awhile but understandably I’m likely to trade or invest for the rest of my life. Here’s my way of thinking about things