Transcription
Hello and welcome back to Braavos Research. This is your host Peter.
The markets are very calm over the last few trading sessions, not just in terms of the price action, but also in terms of the volume, which is normal at this time of the year. So, what this means is the price action, breakouts, breakdowns, strength or weakness, is to be taken with a grain of salt. There's no use reading too much into any individual move as all of this is happening on relatively low number of transactions.
Now, that being said, there is some key economic data points that have been released over the last few weeks and including today that I want to take a look at in this video. And that includes the initial claims data that was released this morning at 199,000 which came in below expectations. So this is the number of people filing for unemployment in the United States in the most recent prints I should say have come in below expectations and right around essentially the lowest level they've been at over the last few years.
Now just for some context low initial jobless claims tends to be a good thing for the market. When initial jobless claims are falling and are generally low that's when you see the market experience moves higher. Let me infer initial jobless claims. You can see the relationship fairly clearly right here. If I match these lines a little bit closer, you can see that the two rise and fall together. Generally, they rise and fall together. And so, yes, the current data that we're seeing of initial jobless claims coming in low is quite constructive, especially given that this is combined with relatively low levels of inflation as we had that inflation print coming in at 2.6 six 2.7% for the month of November which was also below expectations.
So you have this combination of a resilient economy with low levels of inflation which allows the Fed to stimulate and cut rates and that's been the Goldilocks type of environment and that has allowed stocks to thrive. Not to mention of course that earnings in the last couple of quarters have begun to reacelerate higher which is generally a bullish thing for the market. All of these periods where you see earnings at these levels at 10 to 20% coincide with very strong market rallies, right? When earnings are growing at a 10 to 20% per year while the market rises based on those higher growth expectations. And that coincides, by the way, with real GDP, that real GDP numbers here in red that tend to track the earnings of companies very closely. Of course, the real GDP data, the GDP numbers that come from the government are very lagged and we can't use that in order to understand where the market is going. By the time you get the low GDP prints, the markets are already way off their highs. But when you look at GDP now, for example, that's a model from the Atlanta Fed that measures the GDP week by week. The most recent reading came in at 3% which you can see a 3% real GDP growth would put that red line right around where we currently are. So it suggests that GDP is hovering stable at around this zone which is typically where earnings experience a 10 to 20% growth rate.
So and we also don't have any of the typical leading indicators that could damage growth flashing right now. For example, oil prices that are huge huge drag on growth when they rise. they're hovering quite low right now. And bond yields, right, government bond yields that impact interest rates across the economy, they're also hovering quite low right now and are generally trending lower. And by the way, when these things start tarting up, when oil starts moving higher, the possibility of a real economic recession playing out for the first time since 2020 or 2008, that really comes back in the picture and opens up the possibility for real downside on stocks, but not necessarily something that we're too worried about right now. In the short term, you could see some choppiness of course, but a significant draw down is just based on the macro at least, not something that we think is particularly high risk right now, especially with corporate profit margins that are so high and not really having an administration that seems to be trying to damage those.
Of course, tariffs came in and put some doubt regarding corporate profit margins and how resilient they could be in face of tariffs. But what we've seen in the last couple of quarters is that tariffs have not damaged corporate profit margins in any real way. In fact, if anything, they've been accelerating higher. You can see S&P 500 operating profit margins have been accelerating higher here in the last couple of quarters. So, we have this backdrop that's quite interesting and quite bullish from a macro standpoint.
Where we are or maybe a little bit more concerned is the price action that we're seeing underneath the surface on quite a few of our new trade setups, especially in regards to stocks, individual stocks. And so our general thesis is that we have this broader view on where the market is going that sets the tone for how we approach our allocation strategy. But if we see that our setups are not working, if breakouts on stocks are not following through, that from a trading standpoint is a warning sign that we should be weighing in, right? And that's something that I've learned the hard way over time, even if I have a certain conviction in regards to the macro environment and where things should be going. If stocks that should be breaking out and should be moving higher based on those breakouts, based on those fundamental setups that we've been looking at, if they're not working and we're getting stopped out of those positions, that on its own is a warning sign and something that should make us a little bit more cautious. And while we're not experiencing that to an extreme level right now, and again, currently there's relatively low volume in the market, we are getting some of that.
And good example of that is XL is a stock that we initiated on this breakout. Very clean breakout above a horizontal level of resistance at $46 that failed and came back down very violently, which again doesn't necessarily mean that the stock is due for a massive collapse. But it suggests that the stock is not ready to really materialize that strength that we expected it to actually take place in an environment where the entire market is rising. And let me put up the RSP here just so you get a good sense for what I'm talking about here in an environment where most stocks are rising like for example here in 2024 and this is a moment we were very exposed to the market because of that underlying strength and because breakouts in stocks were generally working well you can see what the breakout in Excel looked like right very clean breakout above a key technical level the stock was in a very strong fundamental posture here we initiated a trade on that and it ended end up being following through and being very successful. Again, another breakout here following through additional upside. So, the price action that we're seeing right now is quite different on a stock like XL that is currently seeing a big false breakout. Now, again, that looks maybe more like what was happening right here, right? You can see there was a breakout on XL in February of 2025 along, by the way, with the S&P 500 that was breaking out to new all-time highs right around that zone, right around that same level. And then shortly after that breakout occurred, you can see that it failed, came back below that breakout zone, and began to trend lower. That was very much in line with broader weakness in the market. So, in other words, when you're seeing your individual setups begin to fail, that can be on its own a warning sign regardless of what the macro is doing. And it should be something that you consider as a reason to be cautious and a reason not necessarily to double down and substantially increase your exposure.
Now, I do want to be clear. There are setups that are looking really good, right? And that are seemingly following through on their breakout. One of them is Twiio. We've talked about a few times. It's breaking out here above a very nice pattern. Again, very strong fundamental setup with this company seeing its earnings accelerating. I'm not going to get into the details of the fundamentals here, but this is a company that's becoming profitable and has grown its revenues substantially since 2021. So, it's a much larger company than it was back here and yet it's low level from a price standpoint and we think it can potentially catch up all the way back here depending on how excited the market gets. But this breakout is holding and this is why it's one of our largest positions. But we also have CB right Chub Limited that has so far held its breakout very very strong. Charles Schwro although it's experiencing a little bit of weakness so far. It's a nice breakout that does not look like it's failing in any way right now. GE, same thing. A little bit of weakness, but overall very strong posture still. And WAB as well, right around all-time highs, broke out above this line. A stock that is growing its earnings very, very rapidly right now. But most importantly, is consistently growing its profit margins. You can see WAB going from a 5.5 profit margin in 2020, steadily growing up up to now an 11% profit margin. And that's with rising revenues and a price to sales ratio that's reasonable, right? At 3.4% the momentum and the price action that we have today on WAB could easily get the stock up to a price to sales of five, right? And so all of those stocks that I just mentioned are for now holding their breakouts and looking quite good, right? And again, WAB was a great example back in February of a stock that was breaking out to new all-time highs, right? early February of 2025, right with the stock market that was breaking out and then big fail here. That actually happened right before the market made its final peak. That was a good sign that things could get choppy right here as WAB, but a lot of other stocks were failing the breakouts in February of 2025 despite good strong fundamental setups and strong price action. The fact that the setup failed led to weakness and led to broader weakness across the rest of the market. So typically that's the sequencing of how a decline in the market actually takes place. You see weakness in the individual stocks and then on the broader index.
Another example of a stock that is failing its breakout right now that we have exposure to right now is KAC. That was a really really nice setup breaking out to new highs here. And you can see it is failing as I'm making this video. Now there is still potential support right there but this is definitely not the type of price action that you want to see. And so in terms of the market's health right now, it might be a little bit disappointing in terms of the lack of clarity, but it is a little bit of a mixed bag. We're seeing some breakouts hold, some definitely not. So we're not necessarily in an extremely risk-on environment right now where we should be expecting where we have high conviction that the market is going to resume higher. We've had that type of conviction before, right? It could happen. It definitely could be the case. that's what materializes, but we're not necessarily convinced. There could be more choppiness before the market resolves higher. Ultimately, that is our base case, though.
The trades that have been working well on our end are the metals. We initiated a trade on copper in early December. That's run up very nicely. We've managed to book profits on copper at resistance. That's been consolidating here along with the rest of the metals, but overall quite constructive. Silver as well. Initiated a position on silver towards the end of November. We're able to ride that very nicely and we may be closing the rest of our position on silver this week depending maybe even today depending on the price action. And then finally aluminum that is also sticking its breakout. You have a really nice cup and handle or inverse head and shoulder continuation pattern here right below a large basing pattern that we were able to capture a trade on right on that breakout and that is following through very nicely here. So you can see there are still opportunities to take advantage of even if stocks are a little bit iffy. They're not in an extremely strong posture and we may be continuing to look for opportunities in the commodities space until a commodity space or of course other less correlated parts of the market until we get real evidence that breakouts are actually holding.
One part of the commodity market that we are eyeing very closely is uranium that we've talked about before because it's in a long-term structural bottoming that broke out in 23, retested in 24 and 25 and has again here been consolidating and forming a really nice base around right above this huge huge level. And uranium is a long-term bold play from a fundamental standpoint where we have a structural under supply of uranium and what seems like a pretty likely increase of demand and inelastic demand for physical uranium. We've talked about this before, but there's been a record number of uranium plants built around the world. And once these plants actually get built, there's a big concern regarding their profitability. Because a lot of the times the power plants make up the larger portion of the price relative to the raw material, the uranium that actually gets used in the plants. And so large debt burdens get accumulated in order to actually build the plants. Once the plants are in operation, they essentially buy uranium regardless of where uranium's price is at. And so that's why you get these types of parabolic squeezes very similar to other commodities, but it seems even more powerful on uranium. Parabolic squeezes as these uranium nuclear energy providers are essentially hedging themselves against the possibility of a uranium shortage by going on a panic buying spree of uranium regardless of what the price is. We're not going to dive into the specific charts here, but there is that background behind uranium. This is not the cleanest trend line, by the way. I should be readjusting this a little bit, but we do something like this. It captures these two bottoms right there and then captures a few key lows right there. One of them being very, very recent. And you have a very nice inverse head and shoulder pattern that could be on the brink of a breakout here. So, definitely something that we are looking out to participate in if we get a confirmation.
Now, I did want to cover a few trade ideas that are on our watch list because, as I mentioned, it's a mixed bag regarding the market's health right now, but it could very much be that it begins resolving to the upside. Right? You have the market that looks like it is trying to inch towards all-time highs. You still have a reasonable structure on the RSP, the S&P 500 equal weight ETF that is simply consolidating around all-time highs. We just need buying power to come back in. And so, we see that happen in a big way. and we start to see some of those setups that we've been watching begin to break out. That may be something that we actually participate in.
One of those setups is HR OW Harrow, which is a pharmaceuticals company that we love from a technical but also a fundamental standpoint. You can see this is a company that has been growing its revenues quite rapidly and is projected to increase its revenue generation substantially, but also its earnings and coming out of unprofitability. This is a company that's been unprofitable for years and is potentially right around the corner of getting into profitability. And so when we look at the performance of this stock relative to the S&P 500, it's also one of those stocks that we would be willing to actually initiate even if we're not in a fully riskon environment because of the lack of correlation that there is between the S&P and the stock. You can see that just by looking at some of the S&P 500 corrections that we've had over the last few years. Big 20% correction on the S&P, big rise on this stock. As the S&P 500 was correcting in 2022, this stock was generally forming a bottom and beginning to move higher. But we do want to see the stock actually being able to first of all clear that $50 resistance and also clearing that $57 level. This is a setup that we do very much like and so we may be initiating a starter position on a break out above this pattern and then potentially adding to that position if we get some follow through.
L is another stock that we already talked about a couple times based on the lithium rally. You can take a look at the lithium ETF. It's very correlated to the lithium ETF and it's right below a key level of resistance where you could see if you see a breakout, you could see some squeezing as sellers dissipate. You can see if we dive into the 4hour chart, you can see we've had a lot of rejections off of this zone here several times off of that $6 level. And yet price keeps on coming back to it. So quite bullish price action here. It seems like sellers are dissipating and we're seeing buyers beginning to take control for good of this stock. So we'll see if it's actually able to follow through. This is another one of those stocks that we're on the lookout for that could be interesting regardless of what actually happens with the S&P 500 or the tech sector that's by the way weakening the most on this most recent pullback. And again, all of this is happening with fairly low volume or declining volume. But tech is basically just coming off of this resistance and making yet another lower high here. for it to get back in a bullish structure, tech would need to clear that resistance and begin pulling higher here, which is not something that it's doing as of now. If it does, that'll be a very very constructive signal and maybe would prompt us to increase our exposure to tech more because that would signal maybe a resumption of the tech outperformance that could by the way be driven by Nvidia that could maybe be showing signs of recovering.
First of all, Nvidia has been one of the weakest parts of the technology sector since July. It's been basically just flat. And it looked like it was about to break down here. We thought it was probably the biggest risk to the market back here in December. That if Nvidia did break down, it would drag the rest of the market down. It did not end up breaking down. Buyers stepped in and even took Nvidia back above a very nice, well-defined channel here. And it seems to be doing a little bit of a bottoming here. And by the way, this is the flip side of the story. When it comes to Nvidia, it's still a very, very strong company, growing its earnings extremely rapidly. Profit margins have inched back up to all-time highs. And along with the strength in earnings and the weakness in the actual stock, you have a Ford PE right now that's a 25, right? So, the forward PE on Nvidia is quite unbelievably cheap. And yet at the same time as we're kind of seeing this drop in valuations, at the same time we're seeing a pick back up in growth expectations where analysts are beginning to ramp up their expectations and earnings again. Looking out one year, you can see short-term earnings growth expectations, which are the one-year expectations of analysts have moved from 40% crazy to upwards of 60% earnings growth, which is completely ridiculous, but is definitely not unlike what we've seen so far in terms of Nvidia's ability to actually grow its earnings. Just in the last couple of quarters, we've seen Nvidia grow its earnings from just $6 to $7.5 per share, which is a significant jump in percentage terms. At the start of 2025, we were at four. Right now, we're almost eight. So, that was 100% jump in Nvidia's earnings per share. So, it's been able to actually follow through on all of those growth expectations that the market set. And it seems that it's not yet done with that. And so, it's an interesting setup. This is the other side of the Nvidia story where it's gotten much cheaper recently on a Ford PE basis.
So, we'll keep this episode relatively short. We did a good overview, I think, of the general macro forces, the key economic data points that we think are relevant today along with what the setups are looking at looking like underneath the surface and the general forces at play right now. Again, this is the end of the year and trading is light, so we'll get a lot more information next week when things return to normal. In the meantime, I wish you all a happy new year. Thank you very much for coming along with us on the ride. Although 2025 has not been the easiest market environment to navigate by any means. This has been a very narrow bull market with not a whole lot of stocks actually participating. But unfortunately, some years are going to be like that. We're very optimistic on what 2026 can look like. Even if there's some more choppiness at the beginning of the year, we think there's going to be a lot of opportunities. So, I look forward to continuing this ride with you. If you have any feedback, questions, make sure to leave them in the comment section down below. We'll see each other again on Friday. Thank you for watching.