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Assessing the Recent Sell-Off and the Future Outlook I Foresaw Last Week’s Selloff, Not The Ferocity. Now, I’m More Bullish

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As mentioned in the article from last Sunday, the anticipation for more selling in the recent week was evident. The selling on Friday signaled a continuation of the trend, attributed to tax-motivated profit-taking. Thus, while we braced for the selling, the intensity of the sell-off caught us off guard and has altered the outlook for this quarter.

We still have cause for optimism

Despite the prevailing circumstances, there are several positive factors that merit our attention. With the Fed refraining from increasing rates, the discussion has now shifted to the timing and extent of the impending rate cuts. Personally, I lean towards an extended period of heightened rates. In fact, I believe this expectation prompted the considerable market upheaval. It appears that market participants are awakening to the notion that a rate cut by the Fed in March is unlikely. As the economy continues its upward trajectory and inflation growth moderates, the market is poised for an upward ascent once the realization dawns that the β€œdessert” will have to be postponed until later in the year. Additionally, with earnings season commencing imminently, starting with the reports from numerous major banks, I foresee a commendable performance on their part, effectively stemming the prevailing selling trend – at least momentarily. We will now zoom in on the S&P 500 via the ETF (SPY), this time focusing on the one month…

I don’t intend to dampen spirits, but it appears that a downward shift to approximately 4550 on the SPX is imminent, marking a subtle downturn of around 5% from the high of 2023. I forecast a period of consolidation at the current level, with the broader market potentially lending support to the indexes. Notably, the impending CES event represents a catalyst for the tech industry this week. The event will place a significant emphasis on AI, in addition to the accompanying hardware and software components. I envisage Advanced Micro Devices (AMD), Intel (INTC), and Micron (MU) reaping the rewards from the AI-PC frenzy. Furthermore, with a myriad of electronic devices vying for AI integration, Nvidia (NVDA) is projected to garner significant attention at CES. I will expound further on this within the trades and investment section towards the end. It is crucial to underscore that this is not a winner-takes-all scenario. While tech stands to benefit, so do the financial and biotech sectors. Personally, I anticipate favorable outcomes for small-cap biotech, medtech, fintech, and regional banks, whereas certain stocks such as Apple (AAPL) and Tesla (TSLA) are unlikely to enjoy unfaltering support. In the past, I faced criticism for expressing my reluctance to invest in AAPL, primarily due to the absence of revenue growth and innovation. It is my firm belief that AAPL will undergo a decline, exemplified by the lackluster response to the $3500 Vision Pro and the ongoing patent dispute with Masimo regarding their blood oxygen detector. Considering that AAPL constitutes 7% of the S&P 500’s weight, a surge in the index’s other components will be necessary to counterbalance its stock depreciation. As for TSLA, although it holds a smaller market cap weight, it nonetheless stirs significant enthusiasm for stocks. However, I am confident that NVDA will compensate for any setbacks endured by these stocks.

Let’s take a brief look at the AAPL chart…

The occurrence of an inverted cup-and-handle formation is a rare sight in my experience. While a standard cup-and-handle pattern denotes an optimistic chart formation, the inverse holds a negative connotation. I anticipate a downward trajectory for the stock, highlighting the area on the left-hand side as the focal point of its movement. Let’s now examine TSLA

Notably akin to each other, TSLA is also headed downwards. On a positive note, Meta Platforms (META), Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOGL), alongside NVDA, are expected to fare well this week, especially in light of CES, as previously mentioned.

Let’s summarize since I’m trying to impart a complicated message tonight

Prior to the Friday sell-off, we had already anticipated the possibility of Q1 witnessing a degree of selling. Once the selling ensued on Friday, there was little left to do, given that we had already retained 30% to 40% in cash, alongside several downside trades and a long position in the VIX using Calls. At that point, I advocated for the implementation of hedges. However, the deluge of selling surpassed my expectations. I had initially assumed that the selling would begin to wane by Wednesday morning. In my typical instinct, I acted prematurely, swiftly closing my short side trades and transitioning to a long position. The age-old adage from Mike Tyson, asserting that everyone has a strategy until they are met with adversity, rings true. This experience serves as a learning curve for me, compelling me to adopt a more astute approach going forward.

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