Daily Brief - Buy or Sell?

TLDR: Be careful to short the market. If you do, you need some very specialized tools.

We’re in one of those market phases.

The rally has been unrelenting. It has pierced through many resistance levels. It brought us to extreme P/E valuations. And it’s concentrated in 5 stocks.

As we face a barrage of catalysts, what to do?

Ahead of us we have tomorrow’s CPI, FOMC & NVDA at the end of the month, then … well then we have the august quiet before the Sep-Oct election storm.

Pre-election summers are generally muted periods, with +/- 2% returns in the past, and it’s likely that this will be the case again. FOMC policy promises to be spicier however, as the Fed might wistfully look for a chance to cut - and not find it. Look at that stable CPI and solid employment, why cut at all? NVDA and other Nifty Five stocks are well past ludicrous valuations, but bull markets can carry valuations well beyond ludicrous.

In short, we want to warn you against the bearish temptation. Now that Kolanovic is gone, Wilson @ MS takes up the bearish mantle and would want us to believe in an upcoming 10% drop. We’re skeptical, this market seems to be unaffected by war and monetary policy alike, so be careful before you get burned shorting.

How to express it

We’ll keep this short. Are you long? Buy some out of the money protection for your stocks, it’s dirt cheap. Not single-digit-VIX cheap, but almost. Are you short, or wanting to be? Our advice is the same as last week: use a skewed butterfly so if the market rallies you are unaffected. And if you’re an asset allocator, it’s time to look for pockets of value in the market - try to select for “Cheap Valuation” stocks here.

Earnings Spotlight: Delta Airlines reports tomorrow

Delta Airlines is set to announce its earnings tomorrow before the market opens, hoping to continue its trend of exceeding expectations.

Over the past four quarters, Delta has consistently outperformed both EPS and revenue estimates. This quarter, the EPS estimate has been significantly raised to $2.36, up from $0.36 in the previous quarter, reflecting strong confidence in the airline's performance.

Company executives already painted an optimistic picture for the 2024 forecast in the last earnings call so Delta will be counting on robust travel demand to drive its financial success and surpass projections once again.

Market Movers: If Delta can beat estimates

Here is the historical 1-month response from airline equities when Delta has previously beaten earnings estimates and was trading below $48:

1. Delta: 3.50%
2. American Airlines: 2.96%
3. U.S. Global Jets ETF: 2.54%
4. United Airlines: 2.22%
5. Southwest: 1.62%
6. JetBlue: 1.34%
7. Alaska Air: 0.06%
8. Spirit Airlines: -4.66%