Hi traders,
CPI came in firm and that settled it. The market is now pricing a 90 percent chance of a Fed rate hike next week.
The selling we got over the last week was the market bracing for exactly this. All eyes are on the Fed now. And while it waits, the market’s digesting the fact that a hike is coming, deciding this is probably one and done rather than the start of a new cycle, and trying to look past it.
When I go looking for stocks I want two things: A theme that's strong, and something that's weak.
Here's the trap right now: The strongest names Friday (9/4) are the ones that got sold the hardest. Industrials, transports and the housing related names.
Pull up a 30-day look back adjusted for volatility, which measures each move against that name's normal size, and those same groups are at the very bottom of the board.
That's a relief rally.
It's not new strength pushing into new prices. Those names are bouncing because they fell, and I'm not excited about buying that.
What about the sectors doing well?
Communications have remained strong for a few weeks now. Companies like AT&T (T), Verizon (VZ), Disney (DIS), and Netflix (NFLX) have all held up while the rest of the board bled.
Semiconductors are sneakily bid here too. ADI, ON, QCOM, NXPI and ARM never got pummeled the way the housing and industrial names did, they just went on pause for a month. That's the difference. A stock that hasn't gone down is not the same as a stock that has been working. I want the group with weeks of real strength behind it.
T has already run out of its buy zone.
Paramount Skydance Is Setting Up Next
Paramount Skydance (PSKY) is the one to love.
The stock trades just under 11 with a 52-week range of 7.62 to 20.86. It sits second only to Verizon in the communications group on a 30-day basis, which means it has been quietly working while almost everything else was getting sold.
The chart is what I like.
It has built a pattern here that looks ready to go, and it's the setup T already delivered on.
Now the part you need to know: PSKY is in the middle of a $110 billion acquisition of Warner Bros. Discovery and that deal has not closed.
The company has regulatory clearance in 69 jurisdictions. What's left is two lawsuits, the state attorneys general and the Writers Guild, and a court order blocking the close while they play out.
The market is trading like the deal closes. On a deal like this, options have a built-in stop that protects you if it falls apart.
Carvana Ran Out of Gas
Carvana (CVNA) is the one to leave.
It closed at 70.28, down 4.26%, after opening at 71.91 and running out of gas at 72.88. The 52-week high is 97.38 and it hasn't been close in months.
The pattern is a wedge and it's breaking the trend line now. It ran into a ceiling it could not get through and it's giving up.
A lot of retail names have strung together three and four straight days of selling.
If this one can't rally on a relief rally day, that's a bad sign.
The business fits the rest of this letter.
Carvana doesn't just sell used cars. It writes the loan, bundles it, and sells the paper. There's more than $15 billion of those securitizations outstanding. The whole model needs somebody willing to buy auto loans at a price that works.
A Fed that hikes next week is exactly the environment where that paper gets more expensive.
So which one does the crew take for Monday's Ticker Highlight Show? Tap this link to join for whatever rate you want and get Monday's option trade.
Enjoy the journey,
Tim