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 Gainers📈 & Losers📉

Our Biggest Gainers & Losers of the Day in the $100,000 Build Portfolio

For the 4th September 2024:

• I Hate Septembers 😡

• My Spicy Approach🌶️

I Hate Septembers😡

Have you seen the headlines? That September is supposed to be the worst month for investors?

Data says it’s actually about a 50/50 chance you’ll have a red September in the S&P 500. Five days in & it looks like we’re on the bad side of the coin toss this year.

With our seasoned investor brain switched on, logic would say that we should have some cash on hand take advantage of the fall in September.

That’s exactly what I’ve done.

Granted, I pulled the trigger a little early buying in yesterday & we could see more downside but I don’t hate the entries. And you’ll always be wishing you entered sooner or closed later depending on the outcome so I’m not too bothered. Everyone can make a perfect trade with hindsight.

I’ve also decided to go with an approach that’s a little spicier to try & maximise the gains.

Before I get into that, let’s take a look at why we’ve had this drop. It can’t literally be because the calendar reads September, right?

1/ Weak Economic Data

The Institute for Supply Management (ISM) reported that manufacturing stayed in contraction territory for the 10th month in a row, with a reading of 47.6 (anything below 50 indicates contraction). This, combined with a 0.6% fall in construction spending for August, points to ongoing struggles in core economic areas. Manufacturing & construction make up an huge chunk of economic activity so it makes sense they’d be watched closely. Weak performance in these areas usually gives investors shaky boots because it could me the economy is slowing down as an whole.

2/ Low Liquidity

Market liquidity is a necessity for smooth trading & lower volatility. Right now, liquidity levels aren’t great. Futures on the Nasdaq 100 are at year-to-date lows. That means there’s less active buyers to absorb any sell-off. Lower liquidity usually means more volatility because trades can move the market more dramatically, and in this case, it’s mad the sell-off worse than it otherwise would’ve been.

3/ Post-Rally Cool-Off:

August ended on a high note, with markets rallying into the month-end close. Just like you can’t sprint forever, rallies need breathers. It just looks like this “breather” has turned into a spa weekend for the S&P 500 & Nasdaq giving us the third worst market day of the year. The two previous drops have shown us a solid bounce and I like to believe history repeats itself but there’s always the question of if the market can keep its momentum on the back of a drop like this.

4/ Expected Sell Pressure:

Goldman Sachs noted that about $5 billion in paper (stocks, bonds, and derivatives) would hit the market this week, with $3.2 billion after Tuesday’s close alone. Such large volumes of selling create a create a snowball effect. Increased sell orders causes more sell orders which drive prices down further which causes more panic selling which causes… you get the idea. It’s actually a pretty common occurrence when investors rebalance their portfolios after big runs like we saw in August.

5/ Commodity Trading Advisors (CTAs) Flipping to Sell:

CTAs, which use algorithms to trade futures & options, switched to selling mode. They manage massive sums of money & when they start selling, it can create downward pressure on stock prices. Their models usually rely on momentum, so when the market starts to drop, they tend to sell more aggressively, speeding up the fall.

6/ Yen Concerns:

The Japanese yen has been under significant pressure as interest rates in Japan rise. T. Rowe Price’s fixed-income head, Arif Husain, warned that Japan’s rising rates could be a major “fault line” in global finance. Japan is a huge player in the carry trade (borrowing in yen to invest in higher-yielding assets which I went into more detail about here) so any volatility in their rates can ripple across global markets. With the yen weakening even more, there’s concerns the currency’s instability could have a global impact & spook investors.

7/ Slowing Buybacks:

Buyback windows for a bunch of companies are closing as we approach a blackout period ahead of Q3 earnings. When companies can’t buy back their shares, it removes a source of demand from the market. Corporate buybacks have been one of the strongest pillars supporting stock prices over the past few years so when their demand is taken out, it can have a pretty big impact. Without that cushion, prices are more vulnerable to downside moves.

8/ Chip Sector Profit-Taking:

Nvidia (NVDA) and other chipmakers have been red-hot in 2024, thanks to the AI boom. However, seasonality is working against them—semiconductor stocks have historically struggled in September, falling every year since 2020. There’s also the fact that Nvidia have had a subpoena raised against them causing a 9% drop but Nvidia are insisting they’ve done nothing wrong. But when a company makes up between 7% - 9% of an index, when they tank 9% in a day, it drags the whole thing down.

9/ Earnings and Sector Shuffling:

Broadcom’s upcoming earnings report & the Citi Technology, Media, and Telecommunications (TMT) conference are big events in the calendar. Investors tend to adjust their positions ahead of big earnings reports, especially in sectors like tech that have seen huge gains. The uncertainty around these data points has investors reshuffling their portfolios, contributing to the sell-off.

Although that’s quite the list, I don’t think there’s anything in there that has me terrified to jump into the market right now. If anything, it all looks like very cyclical parts of the market & to be expected when investing.

So wow we’re all up to speed on why we’re having a bit of a slump, let’s me tell you how I’m trying to make the most of the dip. 👇

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My Spicy Approach🌶️

First of all, I’ve done some vanilla moves.

I’ve added some no leverage positions to the stocks that have taken the biggest hits in the index. Nvidia, Meta, Amazon, Google have all been given a little more of my cash for a long term play.

Now to step it up a notch.

I like the Nasdaq a little better to buy the dips. It’s a little more responsive & fast moving so suits me. I’ve invested about 7% of the account in Nasdaq futures.

Why futures?

Because I get 20x leverage on them. So if the market moves 1% I make 20%. Word of warning, it works both way which is why it can get a little spicy. But if we see another 15%+ recovery like we did on the last drop then I could stand to pocket a 300%+ return on the cash invested.

If we see rate cutes in September, which people have been expecting for a while now, I think the Nasdaq will skyrocket. Cheaper borrowing for all the high growth tech companies means they’ll have cheaper capital to pump into expansion. Investors will want to be on that ship & I’m just getting the early bird ticket at a discount.

There’s also the “Santa Rally” just around the corner where stocks typically outperform in December thanks to all the spend-happy consumers. That’ll also be pumped if there’s lower rates on everyone’s credit cards

I’ve made sure to have enough liquidity to cover my margin to below $17,000 which would be lower than the drop we saw a few months back. I don’t think we’ll get there.

In fact, if you take a look at the image below you can see we’ve already broken above the 20 period EMA & consolidating. I won’t be surprised to see price hover in this area & retest the most recent lows but this short term momentum looks positive.

I’ve also scaled back into my TQQQ position with nearly 3% of the portfolio of the portfolio.

TQQQ is an index that tracks the Nasdaq but aims to give you 3x the returns.

Just like the futures, it can 3x your losses but the same reasons apply on why I’m happy to take the risk here too.

I’ve also kept some cash aside so I can keep repeating the above steps.

It’ll be a bit of a flow chart.

Red Day? > Yes > Money deployed into futures, TQQQ & stocks I like.

No red day? I’ll keep hold of the cash for now.

That’s all! See you same time tomorrow 👋 

P.S Hit reply & let me know what you thought of today’s newsletter. All feedback is welcomed ❤️