Recording
S&P 500
A note on Deep Seek: DeepSeek, a Chinese AI company, launched a new AI model that shook the tech world and caused a significant drop in tech stocks yesterday. Here's a brief summary:
DeepSeek's Impact:
Advanced AI Model: DeepSeek unveiled an AI model that rivals those from industry leaders like OpenAI, but at a fraction of the cost.
Open-Source and Free: This model is open-source and freely available, potentially disrupting the AI landscape by offering a powerful alternative to existing commercial models.
Reduced Need for Expensive Hardware: DeepSeek's model raises questions about the necessity of high-powered, expensive chips like those produced by Nvidia, which are currently essential for AI development.
Why Tech Stocks Fell:
Nvidia's Dominance Challenged: Investors are concerned that DeepSeek's model could reduce demand for Nvidia's high-priced chips, impacting their revenue and profitability. This led to a significant drop in Nvidia's share price, which had a ripple effect on other tech stocks.
Uncertainty about AI Investments: The news sparked concerns about the massive investments made by major tech companies in AI development. If DeepSeek's model proves successful, it could impact the returns on these investments.
Energy Suppliers Also Affected:
Reduced Demand for Data Centers: DeepSeek's model is more efficient and requires less computing power. This could lead to reduced demand for large-scale data centers, which are major consumers of energy.
Impact on Energy Suppliers: Consequently, energy suppliers that rely on data centers as significant customers saw their stock prices decline due to concerns about future demand.
In essence, DeepSeek's launch has introduced a new level of competition and uncertainty in the AI field, causing investors to re-evaluate the value of related technologies and infrastructure. This has led to a decline in tech and energy stocks as the market reacts to this potential disruption.
The S&P 500 closed lower yesterday down 1.5% to 6012
But the real story was the fall in the Nasdaq (chart below) which fell 3%
I was actually impressed with how the S&P 500 held up (so far).
In fact, half of the classified sectors were actually up yesterday (see chart below). The theory some analysts are putting out is that cheaper AI will lead to even higher profit margins going forward.
We will wait for a better entry price.
A word of caution on stock switch high valuation multiples: Investing in stocks with high valuation multiples can be dangerous because it implies significant growth expectations are already priced in. If those expectations aren't met, even with solid performance, the stock price may plummet. DeepSeek's recent AI model launch highlights this risk. By challenging Nvidia's dominance and potentially reducing the need for expensive hardware, DeepSeek disrupted the growth narrative around AI chips. This led to a sharp decline in Nvidia's stock, despite its strong fundamentals, demonstrating how quickly high valuations can unravel when future prospects become less certain.
SPY financed Bear Put spread expiring Feb 21st
Overview:: SPY closed at $599.37 yesterday. S&P 500 futures are neutral today. Nothing to do today with our positions.
Here's a breakdown of the trade so far:
Original Trade:
Bought $590 put, sold $580 put, sold $560 put (Feb 21st expiry)
Initial credit: $45
Recent Action (Jan 22nd):
Sold the long $590 put for $295
Total credit to date: $340 ($45 + $295)
Current Position:
Holding two short (naked) puts at $580 and $560 strikes.
Profit target: $340 per contract if both strikes above expire worthless on Feb 21st.
SPY is now trading at $599.37.
What's next? We're now benefiting from time decay ("theta") on the remaining short puts. As time passes, their value erodes, working in our favor. There is still $486 ($152+$334) of time value left in both ‘short’ options (this jumped yesterday because of the increase in IV). Each day this value will erode assuming the price of SPY remains above $580 at expiry.
Risk Management Options:
Conservative: Close the $580 short put to reduce risk. This will cost $334 per contract based on Friday's closing price.
Active: Hold onto the $580 short put. However, if SPY declines to $590, we can roll the $580 put down to $560 with a March expiry. This lowers our breakeven point and potentially generates additional credit.
My Plan: I'm opting for active management and keeping the $580 short put open for now, monitoring SPY closely for potential adjustments.
Earnings Season
Notable Reports Yesterday (details of earnings can be found in EquityScan):
AT&T: Share price up 6% after earnings beat
Ryanair: Share price up 3% after earnings beat
Reporting Today:
Long Term Buy Watchlist
We've identified fundamentally strong companies with long-term growth potential for our watchlist. However, market sentiment can shift, so we're combining technical analysis with our fundamental views to pinpoint optimal buying opportunities. We're also factoring in potential impacts from the new US administration's policies. Here's an update on stocks from our long-term watchlist that we've recently bought or are considering buying soon.
Recent Buys or considering buying soon:
Entain PLC (ENT.L): Entain PLC (ENT.L) has gone up circa 9% since we bought and remains a long-term buy. While there's potential for a 40% gain, the stock is nearing short-term resistance levels. Keep your exposure to 5% of your portfolio and, if buying on IBKR, ensure you have GBP funds to avoid FX charges.
Coterra Energy (CTRA): This stock closed down 4% yesterday to $27.83. We have warned about short term overbought signals and this pullback is to be expected given the rally in the stock. Plus natural gas prices fell 8% yesterday. Our long-term outlook remains positive with a target price of $35, suggesting a 30% upside.
For long-term investors: Hold tight! This stock has performed well, and we anticipate strong earnings driven by recent energy price increases.
For short-term traders: Consider taking profits now.
JD Weatherspoon (JDW.L): Shares rose 0.33% yesterday. The stock price is showing promising signs, breaking a downtrend and surpassing its 50 day moving average. We believe the stock, currently priced at £6.16, could reach £8.45 within the next 18 months, a potential 37% gain. Despite recent tax pressures in the UK, we see value in JDW.L at its current price.
Here's what you should keep in mind:
Dollar-cost averaging: Spread your investment over time to mitigate risk.
Position sizing: Limit your exposure to a maximum of 5% of your portfolio value.
Currency risk: If you're not a UK investor, ensure you have GBP funds to avoid interest charges on negative FX balances.
Potential Reversal Stocks: Short-Term Trading Opportunities
Key Points:
This watchlist highlights stocks showing potential for a short-term price reversal.
Not all stocks listed have triggered a buy signal yet.
Carefully review the commentary for each stock to understand its current status and potential entry points.
Exercise caution with stocks approaching their earnings announcements in the next few days. Volatility around earnings can increase risk.
We have 6 stocks on the active trade reversal watchlist. See charts below with messaging on each stock.
Removed from Watchlist: TMUS - no longer fits our criteria.
Stocks remaining on the Watchlist:
AAPL: WAIT - not ready to trade yet EARNINGS!
Nice bounce yesterday against the turmoil in the market. Stock was up 3%.
Positive Signals:
The RSI has crossed back above 30.
The Share Price remains above 200 day moving average.
Stock has broken out of the short term downtrend.
Reason to Hold off:
Earnings on Thursday this week.
Trade Parameters (if trade is triggered):
Profit Target: $229
Stop Loss: $216
GEN: WAIT - not ready to trade yet. EARNINGS!
While GEN has shown some positive signals (RSI above 30 and a broken downtrend), we're looking for a more favorable entry point.
Ideal Scenarios:
Pullback: Wait for a slight dip back to the $27 level. Whilst we haven’t got below $27 we continue to be patient and wait for a more attractive buying opportunity with a tighter stop loss.
Breakout: Alternatively, a decisive move above the $28 intraday resistance would signal stronger momentum.
Current Status:
Last closing price: $27.49
Earnings date: Thursday - Avoid trading.
Trade Parameters (if triggered):
Profit Target Prices:
Initial target: $27.50
If breaks above $28: $28.90
Stop Loss Price: $25.70
MORN: Tradeable with Bullish Signals
MORN is showing positive signs and remains a potential short term trade. Here's why:
Bullish Momentum: The stock has triggered a buy signal with the RSI crossing above 30, indicating increasing momentum.
Trend Reversal: MORN has broken its recent short-term downtrend, suggesting a potential shift towards an upward trajectory.
No Immediate Earnings Risk: Earnings are not expected until February 20th.
Trade Parameters:
Yesterday's closing price: $333.49 (nice move up)
Profit Target Price: $337
Stop Loss Price: $315
BKNG: Tradeable with Bullish Signals
BKNG is showing positive signs and remains a potential short term trade. Here's why:
Bullish Momentum: The stock has triggered a buy signal with the RSI crossing above 30, indicating increasing momentum.
Trend Reversal: BKNG has broken its recent short-term downtrend, suggesting a potential shift towards an upward trajectory.
No Immediate Earnings Risk: Earnings are not expected until February 20th.
Shares dropped 1.9% yesterday to close at 4675. This may present a good opportunity today.
Trade Parameters (if trade is triggered):
Profit Target: $5000
Stop Loss: $4135
FICO: WAIT - not ready to trade yet. Still making lower lows.
Positive Signals:
The Share Price remains above 200 day moving average
Buy Signal given on RSI a couple of days ago.
Reason to Hold off:
Made a lower low yesterday.
The stock has broken above a recent short term downtrend but is back testing it again.
Trade Parameters (if trade is triggered):
Profit Target: $2034
Stop Loss: $1700
DSV: WAIT - not ready to trade yet
Why We're Waiting: The stock has jumped up too close to resistance. We will wait for a pullback.
Trade Trigger:
A pullback to 1440 level.
Trade Parameters (once triggered):
Profit Target: 1,481 Danish Kroner
Stop Loss: 1,347 Danish Kroner
TLT Short Put: February 21st Expiration
Quick update on our TLT short put position:
Current Price: TLT is trading around $88.25.
Our Position: We sold the $84 put for $100 premium, giving us a breakeven of $83.
Original Goal: We initially wanted TLT to drop below $84 so we could be "assigned" the shares at that price. This would allow us to buy TLT at a discount, anticipating a future price increase.
What's Changed: With TLT currently well above $84, assignment is looking less likely.
New Plan: We'll let the trade expire on Feb 21st. If TLT stays above $84, the put expires worthless and we keep the $100 premium as profit.
In Summary: While our initial plan to acquire TLT shares may not pan out, we're still in a good position to profit from this trade.
EUR/USD Put Option: March 7th Expiration
Here's a summary of our EUR/USD put option trade:
Current Status: The EUR/USD is currently trading at 1.0436. We sold a put option on the March futures contract with a strike price of parity (1.0000) and received a premium of $488. We are now in substantial profit on this trade. This has been an excellent trade!
Profit Scenario: If the EUR/USD remains above parity (1.0000) through expiration on March 7th, the option will expire worthless and we keep the $488 premium as profit. This scenario favors continued USD strength.
Assignment Scenario: If the EUR/USD falls below parity, the option may be assigned. This means we would be obligated to buy EUR/USD at 1.0000. Note: that this is cash settled.
Current Outlook: No action is needed on this trade for now. We will continue to monitor the EUR/USD and assess the situation as we approach the expiration date. We will let Theta work for us.
Any questions?
Call me or book a web meeting.
Happy Investing & Trading
Stephen
Invest with Confidence