5/28 Best Idea For The Week Ahead

We got news last night that Biden and McCarthy have reached a debt limit deal. The market has been front running this as always and jamming things higher. While avoiding a default is good, who knows the details here. More importantly now we can focus on the TGA drain which shouldn’t be good for equities, short term. Last week there was a day where we pulled over $25B in liquidity out and that was about 20 points on the SPX, in theory $700b of liquidity should be about 600 which would be give or take 15%. The last time we had debt ceiling headwinds the market fell by 15% when we resolved them. Of course to this point, nothing has seemed to matter to the market, will this be the thing that finally matters? We will see.

Tech stocks are certainly overbought, as you can see below, the QQQ is finally hitting max overbought RSI readings, that hasn’t been done since 2021. On the otherhand, the tech index is breaking above all key moving averages on a weekly base and looks as bullish as could be right now. This is a tough to gauge, people are positioning for the future and all the AI hype seems to have legs for now, and overbought names can stay so for months as NVDA has been overbought for a few months now. In general though if tech was to cool off it wouldn’t be a shocker as the QQQ is up over 30% in just 5 months this year.

The SPY isn’t as overbought and put in an unbelievable candle this week breaking below trend and then flying higher to have the highest weekly close since last August. This has been about as resilient a market as you will ever see, every dip was bought in the past few weeks. Will that continue though with a debt deal and the liquidity drain that comes? History says no, but history hasn’t mattered at all this year.

My opinion, while the market is overheated, the reality is the majority of the market is a handful of stocks and they are being bought hand over fist for a future that may or may not exist. We really don’t know the potential of AI and what it could bring both good or bad, but for now investors are piling into the megacap tech names to be part of whatever it may bring. The megacap names are not egregiously overvalued like the small cap tech boom in 2020 and 2021. Nor is this the 1999 tech bubble. These names that comprise the bulk of the market aren’t “cheap” but I don’t think anyone can say Apple,Microsoft,Google,Meta, or Amazon are expensive. Even Nvidia, there is a case to be made that it is trading at around 30x next years earnings. With the guide NVDA gave this week, the stock was cheaper AFTER the 30% move than it was before earnings. Bottom line, if passive flows are going to continue to flow into tech it is going to be hard to keep this market down long especially with this AI story ahead.

Best Idea

It was really hard for me to come to a name this week. There are so many nice charts out there, but with the tech index hitting overbought levels, I didn’t think it was time to put on new longs there. I did find a name with alot of bullish flow that Warren Buffett has a substantial stake in. It has underperformed by quite a bit this year but the option flows were lining up and I think now is as good as any to play it.