Transcription
So, first off, here's an urgent warning to all market participants. This is not the time to F AFO, which is f around and find out. I published my latest stock market update in the Traveling Trader Academy, but I did not want to gatekeep this because I think that a lot of people right now are feeling fear and they're not quite sure how to navigate the markets, what they should do. Maybe some of you guys are overexposed in certain positions. Maybe you're wondering if you should take profit. Maybe you're wondering if this is the top, if this is finally when the bubble pops.
So, in this video, I'm going to explain why it's not the time to mess around here. This is definitely the time to be cautious. It's also important to note that October volatility is normal. As a matter of fact, after going 33 days without a minus 1% day, it's important to remember that that October produces more 1% days than any single month in the stock market. And as I said in the Discord, when May, June, and July are each positive months, October tends to perform terribly. Why? I don't know, but historically, it's been very consistent. However, October through January tends to be the best period.
The next thing I want to address is yes, the bubble fears are definitely real, and we're going to talk about why that is. We are definitely in a bubble. The question is, are we at the top or at the at the apex of the bubble where I guess that doesn't even make sense. Are we is the bubble basically inflated to the point where it's about to pop or is there more inflating to do? And fourthly, and more importantly, your goal is to protect your capital. So, how should you do that? And hopefully this video shed some ideas.
Regardless of what type of trader or investor you are, all of you ask me the same question. Should I sell? Should I buy? What should I do? I get messages with people's entire portfolios. People share with me their kids portfolios and they ask me questions on what they should do. Obviously, one, I'm not going to give you personalized financial advice, but two, I'm not your money manager. However, that doesn't mean that I cannot give you some extremely beneficial information, especially if you're not in the Traveling Trader Academy, and let you think about the market a little more logically and reduce some of your fear. And lastly, reasons to be what I call neutral bullish in the short term, which I am. So, without further ado, let's get right into it.
All right, so what has happened in the last few days? Well, the market dropped by 3% on Friday, October 10th. And at the time, it was a seemingly innocuous, pretty harmless headline that it's not like that we haven't heard these tariff war chants between China and the US. However, like I said, we went 33 days without a single minus1% day. Now, since that day, we've traded as of the time of this recording for four straight days inside that candle. However, the VIX has continued to rise. And I promise I'm going to get into some trade ideas and what you should do. As a matter of fact, I put on a pretty large hedge that would net me a large sum of money if it pays out, but didn't cost me as much. So, I will dive into that trade for you. The S&P 500 also is traded four straight days below the 20-day moving average. Now, the last time this happened was before the February drop and then after liberation day. Now, if you pull up the 100 day moving average, one thing you'll note is that between August and October, we always hit the 100 day moving average. As a matter of fact, the last time this didn't happen was 2009. If we hit the 100 day moving average, that would take the S&P 500 down to about 6,300, almost a six and a half percent drop. That is not that bad. Does it mean with 100% certainty we're going to hit that? No, of course not. This is the market. Nothing is 100% certainty. But your goal is to protect your capital while trying to make money and exploit asymmetrical moves. Which means that even when you're wrong, you're wrong by a small margin, but when you are right, it pays you heavily. So, the fact that we are in the worst 2e period historically, which is October 12th through October 27th, the fact that the VIX just has no solution at the moment. In my opinion, this is not the time to go long on every setup that you see. And because of this, one of the things that I told the group that I was doing and something that I suggested was being way more selective here. The market is not going to run away. You don't need to take every setup, which means less short-term leveraged positions. Yes, I want to yolo calls on Amazon and on Meta. There are so many setups in the market that look good. Like Duolingo here looks good. It's retesting former resistance and so much more. There are just tons of trade opportunities, but really with the VIX like this, in my opinion, you do not want to enter so many leveraged opportunities here. Now, if you look at Amazon and you say, "Man, Amazon is just too cheap to ignore. I want to add it to my portfolio." That's a different story. And that's one of the things that I'll talk about in number four is you want to stick to quality here. So, until this volatility blows over, and by the way, this will likely be one of the best opportunities of the year. If we play this right, there can be some significant money made towards the end of the year, if not life-changing money. So after this period of volatility is over, you want to position yourself to take advantage of what is remaining of this bull market. So we are entering year four of this bull market. And if you look at year four, year four tends to be bullish as well. Matter of fact, producing more gains than year three. Also, I showed you this, but valuation is a very terrible metric for single-year returns. So even though valuations are high, some of the best returns have come when valuations are high. And I think that any pullback or correction that we suffer here will be a buyable one. And I think that we will rally pretty hard off that for months to come. I'll talk about what tailwinds we see coming up and why that is in the fifth point here. But for now, let's keep on going.
So the bubble fears are definitely real. We are certainly in a bubble. If you look at the valuation the forward PE this is you know on par with some of the highest valuations of all time. Now another thing is you know if we are in a bubble you see here that valuations tend to be sustained for a few more years. It's not like we hit that valuation and then drop. So that is another reason why I think this will sustain for a little while longer. And usually the last few moments of a bubble bull market tend to see some of the biggest returns. Now another reason that we are obviously in a bubble is because of what is going on with these circular deals. So in a normal bull market in a normal healthy economy where earnings are driven by actual sales of things of sales of goods and services actual demand for those goods and services. what's going on now and the reason that stock prices are being boosted has very little not I don't want to say that obviously it has to do with earnings but there is a an artificial factor an artificial layer on top of that which is causing the these hyperbolic valuations and that is the circular deal. So every time you see someone partnering with OpenAI, $300 billion deal between OpenAI and Oracle, hundred billion dollar deal between Nvidia and Open AAI. Open AAI is a private company that has what, $12 billion of revenue. How the hell is it going to pay Oracle 300 billion? How the hell is it going to buy Nvidia chips for hundred billion? That just doesn't make sense. Even when you look at this partnership between Coreweee and Nvidia, Coreweave uses Nvidia chips and now Nvidia the deal between Nvidia and Coreweave Coree runs uh data centers is that Nvidia is going to rent out its own GPUs from Coreweave. Who knows? There may be some validity there. But if you take a look at this circular deal in general, all it is is basically the vendor being the same person as the customer. So if we take a look at the deal between Nvidia and OpenAI, the hundred billion deal for instance, Nvidia is giving OpenAI the money to invest in Nvidia chips. Now this is the type of stuff we saw in the dotcom bubble. Yes. Because the companies that were actually making money like the Cisco and the Sun Micro Systemystems and the Oracles, these companies were doing the same thing to internet companies that didn't have revenue. So you ask, how is OpenAI going to pay for the AMD chips? How are they going to pay for how are they going to to get to pay Oracle $300 billion when they don't have it? And this is where the talks of a bubble actually become pretty significant and poignant here. It's because it's based on the hope that OpenAI will generate enough revenues in the future to actually pay some of this stuff back. So the hope is that OpenAI finds enough use cases and customers to be useful to generate that revenue. But this isn't typical market behavior or typical business behavior on the open market, right? where a customer has money, they have demand, they want products from a another vendor and they shore up the cash in order to buy that stuff. This is Nvidia basically saying, "How about you buy Nvidia chips? Oh, you don't have money? Let me give you money to buy the Nvidia chips." And then the stock price of of Nvidia soarses through the roof or Oracle soarses through the roof. And it's based on the hope that these revenues will be generated in the future. Yes, of course AI is a paradigm shift, right? Like this is the new frontier, but it doesn't mean that the market has figured out all of the use cases for AI and uh Open AI has figured out how to make money to justify the valuations of it and all the companies around it. And another reason we are in a bubble is if you take a look at the best performing stocks this year, look at these stocks and tell me what they have in common. These are the best performing stocks this year. And this is not Nvidia and Oracle and AMD and Google and uh Microsoft. The one thing you will see here, look at the PE column. Why is the PE column empty for most of these? Because they don't have any earnings. That is why these companies that are up do not have any earnings. A lot of these are the quantum companies. So, Regetti, D-Wave, Quantum Computing. Some of these are pre-revenue energy companies like Ollo, these are ancillary or auxiliary companies that are kind of part of the AI wave, but not really. They're not important like the hyperscalers or the chip manufacturers. And none of these stocks, the best performing stocks, none of these make money. And lastly, the thing I'll say is just like the internet, right? There's going to be hype. There's going to be money spent. and the natural selection process of the market will weed out the players that are here to stay from the players that are frauds that will be part of the bus cycle. And also these companies like Meta, Amazon, Microsoft, Google, they cannot keep this capex up forever. There will come a time when they say, you know what, we are maxed out on capex spending. We're not spending anymore. What do you think is going to happen to the market and to the AI sector?
All right. So, what should you do here? Your goal is to protect your capital while growing it. Here's how I would tackle it. Like I said earlier, you want to be very selective here, right? You want to stick to quality. And it doesn't mean that you have to stick to quality in tech. A lot of the names that I've talked about time and time again on this channel, like Dell, for instance, which is near an all-time high. I talked about ASML when it was in the 600s, currently trading at over $1,000. AMD trading at all-time highs almost at 240. These are names that were lagards, that were quality lagards. Google, right? Google was left in the dust. Remember, search is dead. Google hit another all-time high today as of the time of this recording at 257. But there are still some quality names, right? Amazon obviously is a quality name. Meta is a quality name. These are still at pretty respectable discounts. Nothing too crazy. United Healthcare, this company is still at a discount in my opinion. So you want to be highly selective here especially if you don't have trading experience or you're not interested in being a trader because there are names like Coreweave for instance which I think will have a hand in the next wave of this of this bubble getting bigger but I don't necessarily want to hold coreweave for 10 20 years and definitely while the VIX is up here like I said you do not want to have a ton of leveraged positions like I had a ton of leveraged longs meaning with options or with futures. But the minute that I saw the VIX pop like that and the minute that I saw that drop and I've been talking about seasonality for a while now, I'm like, you know what? I don't need to be in all this. Why Why do I need to stress out? I can just wait it out. There will always be opportunities and setups. I don't need to go ham every single day of every month. Another thing that's important, you do not want to take too many short-term positions in the same direction. So if I have a long on Meta, if I have a long on Amazon, if I have a long on Coreweave and I have a long on Oracle and I have a long on Uber and I have a long on Tesla like and I'm not talking about stocks, I'm talking about uh actual options. These are all going in the same direction. So in a market that isn't bifurcated, in a market that is operating under a heightened sense of volatility, that is like having one large position, even though it is split amongst different tickers. Now, one thing that I've talked before is your time horizon, right? If you are an investor that doesn't have a long time horizon until retirement, this is not really the type of environment in my opinion that you want to try to squeeze out the last bit of a bull market before you retire in a couple years. There are much safer spaces like high yield savings, bonds, corporate bonds where you could still get four, five, 6% on your money, but trying to time your exit at these valuations in my opinion is very tricky. Now, if you have 20, 30, 40 years until retirement, different story.
Now, one thing that's super helpful that I think gives you the upper edge in trading and or investing whether just if you are a market participant is knowing how to trade. Now, you don't have to know how to day trade. You don't have to want to day trade, but knowing how to put on positional hedges, for instance, is invaluable, right? Like I hear these investor only people say, "Oh, I don't touch options." Well, yeah. Nobody's asking you to day trade options, but just saying I don't touch options so that you don't crack a book open and learn what you can actually do with it, even as an investor, is crazy to me. It's like saying I don't buy insurance, right? So, for instance, this positional trade that I have on QQQ that's currently up 24%. I sent this out in the Discord the time that I took it. It's currently up about 20 almost $2,200. If this plays out, right, this hedge didn't cost me nothing. If this plays out, it will pay me about $50,000 if the market tanks. Now, the reason that that's significant is because this is on one of my portfolios that currently has a half a million in value. So, $50,000 is 10%, right? It means that if the market tanks and my stocks end up, you know, losing some of their gains, I will still make 10% on this position, not 10% on this position. My portfolio from this position will be up by 10%, thereby counteracting any drop that we see in uh some of the stocks that I hold. And the beauty is this position only cost me 1% of my portfolio, right? It's 5,000 to make 50,000. Remember in the last video I said that if you want my up-to-date alerts and you want to get notified when I'm doing what and you want to learn how to hedge cheaply and you want to get writeups and notifications like this explaining why I'm cautious at the moment so that you don't get spanked in the market with all of the leverage longs that you have open. Sign up wap.com/thetravelingtrader. Link is in the description below. But yes, I sent out this hedge in the Discord. this 565 555 put spread that I bought. So if nothing happens and the market rallies from here, awesome. My portfolio goes up and that only cost me 1% of my portfolio. But if the market tanks, then that position will bump my portfolio up 10% and say that my portfolio is down 10% from all the stocks being down. If we get if we tank, then that will even out the damage. And obviously at that point I will likely as I always do be buying the dip on a lot of stocks. And by the time my portfolio is back to normal or by the time the market is back to normal my portfolio will have appreciated even higher than it was when the market was at all-time highs.
All right. So reasons to be neutral bullish in the short term. And by the short term here I'm not talking about the next few months. Although I do think from November to January we will get a nice bump. But like I said, year four of bull markets tend to have really good track records. Now, another thing is that the Fed announced that it might end quantitative tightening in the coming months, meaning money printing. And although, as an American citizen and a patriot, I do not like the idea of money printing. I do know what money printing does to the stock market. And don't forget, the Fed is going to likely cut rates on October 29th by 25 basis points and December 10th by 25 basis points. And moreover, the next Fed chair will likely take rates down to 250 to 275 by next year. Now, 95% of the S&P 500 is expected to report earnings growth next year, and the average earnings growth is 16%. But if we just isolate it to the MAG 7 and the mega caps, those companies obviously are expected to grow higher than that. But if you take all of the S&P 500, the average earnings growth is 16%. It's also important to note that unlike the dot peak, the S&P 500 debt to equity ratio is still less than 100%. So, we are not in this maximum leverage environment that we saw in the.com bust. At the height of the dot bubble, the debt to equity ratio of the S&P 500 was over 200%, meaning there was twice as much debt. Companies had twice as much debt as they did equity. Part of the reason why it was so violent when it finally burst. So, there you have it. I do think that the bull market is not over. I don't think that this is the AI bubble burst. Between 1994 and 2000, we had 6 - 10% corrections. So far in this bull market, we had one in 2023 and we had liberation day. So, so far we've only had two minus 10% corrections. And I'm not saying we have to have exactly six, but we are not yet in the territory where the market, in my opinion, is ready to roll over for good. I think there's still a lot more euphoria on the way. If you want to know what peak euphoria looks like, just remember in 2021 where people were buying JPEGs of monkeys for millions of dollars. Same thing in the do-com bus. I mean, there were articles saying, "Do earnings even matter anymore. There were people that were quitting their jobs just to day trade." So, moral of the story is October jitters are very normal. They will lead to a big opportunity in my opinion. If you want to be directed and navigated properly, sign up. wip.com/thetravelingtrader. Trade with me live every morning. If this helped you, leave it a big fat thumbs up. Let me know in the comment section what you think. Do you think that this is the bubble burst? How much more do you think we have left for? What stocks are you waiting on discounts? We would love to hear from you. Subscribe to the channel. Hit that notification bell. Stay safe out there, traders. Peace.