December 4, 2023
Weekly Update
The bulls once again pushed the market higher last week as the S&P 500 gained 0.77%, the Dow was the big winner with a rally of 2.42%, and the Nasdaq rose marginally by 0.38%.
Stocks on Watch
I have two ETFs on my radar for new positions after strong recent performance, as well as bullish option activity. Interestingly, despite the fact that they couldn’t be more different in terms of the make-up of the ETFs, the Regional Bank ETF (KRE) and ARK ETF (ARKK) might both be benefiting from the shifts in the bond market. First, here are the options trades that caught my eye last week:
Friday - Buyer of 16,000 Regional Bank ETF (KRE) January 50 Calls for $0.50 – Stock at 46
Wednesday - Buyer of 5,000 ARK ETF (ARKK) February 50 Calls for $2.50 – Stock at 47
Wednesday - Buyer of 18,000 ARK ETF (ARKK) January 47 Calls for $2.72 – Stock at 47.
Both of these ETFs looked very suspect just a month ago, yet in the blink of an eye the KRE is higher by 10.5% in the last month while ARKK is up 22%. One potential reason these sectors have gotten in gear is the narrative surrounding interest rates has swung violently recently as the fear of “higher for longer” has flipped dramatically, and now the bond market is pricing in an interest rate cut in March, or four months from now.
While I don’t personally think a rate cut will happen so soon, the performance of the KRE and ARKK may be telling me that I’m wrong.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week marginally lower at 12.63. Of note, unless something “funky” happens in the market, I would expect the VIX to remain relatively low this week, perhaps rise marginally next week for the December Fed announcement, and then drift lower again into Christmas and year end.
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Monday – 5
Tuesday – 6
Wednesday – 6
Thursday - 5
Friday – 5
Events for the Week to Come
This week will be fairly slow in terms of economic data releases, though traders will be focused on the November Jobs Report on Friday, as well as PMI and ISM on Tuesday.
On the earnings front, it will be pretty quiet as well, though traders will be interested in MongoDB (MDB) and Toll Brothers (TOL) on Tuesday, Veeva Systems (VEEV) and C3 AI (AI) on Wednesday, and Dollar General (DG), Broadcom (AVGO) and Lululemon (LULU) on Thursday.
What Traders are Saying
The next couple of weeks Wall Street firms will be posting their expectations for the market in 2024. Here are a few of the early guesses (yes, I think they are mostly taking educated guesses as who knows what will happen).
Morgan Stanley: We expect the SPX to finish 2024 at 4,500, virtually flat from today. Our bull case price target is 5,050 and assumes a stronger earnings backdrop in 2024 (+13%). Our bear case price target is 3,850 and reflects a weaker earnings environment (-7%).
JPMorgan: We expect a more challenging macro backdrop for stocks next year with softening consumer trends, lackluster global earnings growth. For the S&P 500, we estimate earnings growth of 2-3% next year with EPS of $225 and Price Target of 4,200 with a downside bias.
Deutsche: 2024 year-end SPX target 5,100. We see the multiple well supported at 20x and our base case for EPS remains $250 with our upside scenario with EPS of $271 with some multiple expansion points to 5,500.
BMO: We are once again enthusiastic about stock market potential heading into 2024. We continue to believe that U.S. stocks are in a bull market that has now entered its second year. [2024] S&P 500 Price Target: 5,100.
Jacob: As is always the case, my total guess is the S&P 500 will gain somewhere between 5-15% next year, which is somewhat in line with historical performance.
Open Positions
Cameco (CCJ) March 40 Calls – CCJ gained 1.2% last week, and continues to look outstanding. Of note, on Friday I set a mental stop of $7 on our calls that are at a potential profit of approximately 70%, so as to protect us should the stock start to give up its big gains.
DraftKings (DKNG) January 25 Call – DKNG gained another 1.2% last week and our position is now at a potential profit of approximately 230%. Of note, today I am moving our mental stop on this trade from $10 up to $12.
Intel (INTC) January 34 Call – INTC was mostly unchanged last week as semiconductor stocks were just so/so. Though of note, on Wednesday a trader bought 14,000 Intel (INTC) December 45 Calls for $1.47 – Stock at 45.3.
Li Auto (LI) June 40 Call – LI was our big loser last week as the stock fell 10%. This is a disappointing development as LI stock had looked on the verge of breaking out. Such is the “fun” of China-related stocks.
Nutanix (NTNX) April 37.5 Calls – NTNX reported strong earnings on Wednesday afternoon and we took advantage of the stock reaction to lock in a profit of 72.64% on a piece of our trade. Following the earnings report here were some of the price target hikes on NTNX shares:
Needham – 54 from 44
Northland – 52 from 45
RBC – 54 from 47.
Palantir (PLTR) April 19 Call – PLTR gained 5.6% last week and continues to look great. The only negative last week was PLTR stock was not added to the S&P 500 on Friday, which may be disappointing to some shareholders.
On Wednesday a trader bought 5,000 Palantir (PLTR) April 21 Calls for $2.60 – Stock at 20.
TJX (TJX) April 92.5 Calls – TJX was down marginally last week and continues to mostly chop around. While our calls have nearly five months until expiration, I may decide to bail on this position as the stock is not participating in the market’s rally.
Financials ETF (XLF) March 33 Put – The XLF is now our lone bearish position in the portfolio and I will continue to hold it just in case the market unwinds again.
Energy ETF (XLE) January 85 Calls – The XLE traded marginally higher last week, which is “fine.” That being said, time is running out on our January calls, and decay is going to be a real issue. For those reasons, unless the XLE gets going soon, I may sell our position.
