Vlad’s Top Value Trade Set To Spike 50%

October 7, 2021
By Vlad Karpel

RoboStreet – October 7, 2021

Market Oscillations Beginning To Ebb 

Stocks are getting a lift from what is viewed as relief from some of the fears that have engulfed investor sentiment for the past few weeks. The resolution to raise the federal budget debt ceiling, Russia’s assurance to Europe that it will increase natural gas supplies, oil prices have started to ease, continued claims for unemployment were low, private job growth per the ADP report was higher than forecast and some early earnings reports from Levi Straus & Co. (LEVI), PepsiCo Inc. (PEP) and Constellation Brands Inc. (STZ) all came in above estimates. 

What is important to note here is how the market handles the employment data and further inflation data over the course of the month. The full kickoff of earnings season begins next week with the big banks leading off where they may well set a bullish tone as interest rates have moved higher in their favor. 

The bottom line is that the global money supply has grown exponentially with stocks looking more attractive than bonds. So, regardless of the negative headlines that keep crossing the tape about inflation, Evergrande, delays on infrastructure, and global supply disruptions, there is just too much money that wants to go somewhere other than cash, which has a negative return when factoring in inflation. 

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The $SPY continued to trade in the range and settled right below August’s low $436. The value/reflationary traded higher, up 0.2%, and settled below the 50-day moving average. The technology stocks are trading in the green, up, and right below August’s lows. 

The $DXY is short-term overbought and started its topping process near $93, long-term overhead resistance from the September 2020 high. The $TLT has pulled back and retesting key support levels (July and August lows), 200-day moving average. The $TLT pullback is the key development in the market. 

Volatility dropped back to 19 (VIX was at 29) and SPY will continue its rebound this week (extreme levels at $TLT, $DXY, $VIX). The $SPY short-term support level is at $428, followed by $420 (sustained break below $428 is a low probability event at this point). The SPY overhead resistance is at $436 and then $443. 

I expect the bottoming process to continue this week and next. At this point, I believe the recent low at $428 is set. The unemployment numbers this week might push the market briefly below the recent lows. I would be a buyer of value stocks on pullbacks and sell technology stocks on rallies.

I would consider rebalancing portfolio at this time and have bullish portfolio. The market bottoming process may continue for the next 1-2 weeks. Market corrections are never a one-way trade.

Based on our models, the $SPY can pull back 5-7% from the all-time highs in the next 1-2 weeks. If you are trading options consider selling premium with November and December expiration dates.

Based on our models, the market (SPY) will trade in the range between $428 and $455 for the next 2-4 weeks.   

Against this backdrop of rates moving gradually higher as the Fed tapers and looks to tighten Fed Funds next year, the rotation into value stocks should pick up speed in the weeks ahead and take the torch away from the big cap tech sector in what will be a major change in market leadership. 

What is even more compelling about this thesis is that when the supply chain bottleneck issues get resolved, input and transportation costs will come down and profits will widen within the cyclical companies having to absorb the current inflation prices. Since the market looks six to nine months out, some of this assumption will start to show in the bullish performance of value stocks well before the evidence of price relief does. 

In this higher-yield, reflationary atmosphere, the go-to sectors of choice for me are banks and energy. As economic activity picks up and interest rates rise, banks will print profits that fuel higher share prices. And recent data from several energy information sources point to robust demand from around the world for crude. Beijing ordered energy companies to ensure sufficient supplies to avoid outages during winter, according to Reuters and OPEC decided to maintain its stated increase of 400K barrels per day of production. 

The Energy Select Sector SPDR ETF (XLE) is our favorite trading vehicle. The top holdings account for about 77% of total assets and help to eliminate single stock risk. 

When we apply our proprietary artificial intelligence platform models to XLE, we get a very bullish Model Grade “A” rating with a Predicted Resistance price target of $84.30, implying an upside move of better than 53% over the next six months. This presents a powerful investment proposition, and yet XLE is short-term overbought lending itself to some back-and-filling over the next couple of weeks. 

Our next action will be to buy XLE for our RoboInvestor Portfolio when our short-term indicators flash a buy signal, and readers of this blog will want to be ready when we send out our buy recommendation. RoboInvestor is an online stock and ETF advisory service that invests in blue-chip stocks and ETFs that underly market indexes, market sectors, commodities, interest rates, currencies, volatility, and inverse ETFs for shorting. 

Having time-tested AI tools is crucial to portfolio performance, and our history of generating profits goes back over three years since launching RoboInvestor. The Winning Trades Percentage is a torrid 91.87%. Imagine booking gains on 9 out of every 10 trades where capital is put to work. Rest assured this statistic is most important to me as I participate in every recommendation to RoboInvestor members.

Consider the investing environment going forward. The Fed is going to pull back liquidity, interest rates are heading higher, inflation is more sticky than transitory and the prospect of higher income and capital gains taxes are on the horizon. The rate of earnings growth is set to slow and the year-over-year comparable numbers are going to shrink as well. 

So, ferreting out high-reward trades in a market where valuations for many stocks will come under pressure requires a lot of data crunching, and that’s where our AI platform becomes the most valuable set of tools for investors to have at their disposal. I highly encourage everyone on this blog to give RoboInvestor a prominent place in their portfolio management system. 

The ground is shifting under the market that has been fueled by QE for years, and it will take an extra measure of cutting-edge analysis to manufacture the kind of gains realized in the past decade. Make RoboInvestor a difference-maker and afford me the pleasure of welcoming you aboard!

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