Weekly Stock Market Analysis: Expert Commentary and Strategic Picks - Nov 1

Waiting for Elections and Fed's Decision:

It is all about elections and the Federal Reserve. Markets are waiting for the outcome of 2024 elections between Kamala Harris and Donald Trump and once the outcome is known then the direction will be clearer. Whoever the winner is, the bulls on both sides are likely to push markets up and resume the rally to bring new highs to the S&P 500. The S&P 500 has mostly performed better following elections when separate parties gain control of the White House and Congress. There are good and bads on both sides such as taxes on capital gains, stock buybacks and corporate earnings on one side and high tariffs and deficit funding programs on the other side. The impact will not be fully known till the market fully evaluates prices in the magnitude and outcomes of these policies in future.

It all boils down to one thing, that markets hate uncertainty and become volatile during the uncertain times. Hence, once the results are known, the market will set its own path and most likely the rally will resume as no administration would like investors and the public to lose money in stocks in the long run as a significant portion of US household savings are diverted to the Stock Market.

On Thursday, the Federal Reserve is expected to further reduce its benchmark interest rate by another quarter point. Investors are always waiting for underlying messages from the subsequent Fed Chair’s speech and stay tuned for clues on its future actions, policy decisions and economic outlook.

Meanwhile, last week witnessed a pause as stock market was near its record high amid earnings and future capital expenditure plans from giants like Amazon, Meta, Microsoft, and Apple. Last Thursday was brutal as investors were spooked by the on-going AI related expenditures planned by big Techs. Overall, the week ended in red besides a stalled reversal attempt on Friday. The performance of major markets during the last week was as follows.

Index Friday (11/01) Weekly YTD 1 Year

S&P 500: +0.41% -1.37% +20.10% +35.18%

Dow Jones Industrial: +0.69% -0.15% +11.58% +26.38%

Nasdaq 100: +0.72% -1.57% +19.06% +36.61%

Nasdaq Composite: +0.80% -1.50% +21.51% +39.65%

Russell 2000: +0.56% +0.04% +10.06% +34.00%

It is to be noted that besides the broader sell-off, Small Caps (Russell 2000) were able to doge a red week and regained its 50-day moving average line on Friday. Russell was recently turned back from its historical highs and looks like it is waiting for the election results to test the previous highs again.

The performance of individual S&P 500 sectors was as follows:

Sector Weekly Performance

Communications, XLC: +1.71%

Financials, XLF: +0.02%

Discretionary, XLY: -0.36%

Healthcare, XLV: -0.57%

Materials, XLB: -0.88%

Industrial, XLI: -1.03%

Staples, XLP: -1.12%

Energy, XLE: -1.94%

Technology, XLK: -2.77%

Utilities, XLU: -2.80%

Real Estate, XLRE: -3.02%

Overall, the communications and financial sectors performed better during the last week. Communications was supported by Google which beat on its Cloud business and advertisement revenues. Google’s operating margin also topped the estimates causing a 3.39% weekly gain to its share price. Another important fact is that going back twenty years, Communications and Financial stocks have outperformed the S&P 500 during the fourth quarter of the year, so seasonality factors are also supporting these two sectors and related stocks like banks, Internet and entertainment.

Important Events next week:

Tuesday (11/5): US Presidential Election, S&P Global Services PMI, ISM Non-Manufacturing PMI, Non-Manufacturing Prices

Wednesday (11/6): 30 Years Bond Auction

Thursday (11/7): Initial Jobless Claims, Fed’s Interest Rate decision, FOMC Statement

Friday (11/08): Consumer Sentiment

Important Earnings this week:

This week is busy with a bunch of companies announcing their Q3 results:

Monday (11/04): Berkshire Hathaway (BRK), Vertex (VRTX), Planatir (PLTR), Constellation Energy (CEG)

Tuesday (11/05): Ferrari (Race)

Wednesday (11/06): AppLovin (APP), Arm Holdings (ARM), MercadoLibre (MELI)

Thursday (11/07): Arista Networks (ANET), Axon Enterprises (AXON), Expedia (EXPE), DataDog (DDOG), Cloudfare (NET). Vistra (VST), Trade Desk (TTD), Block (SQ), Barrick Gold (GOLD)

Actionable Stocks:

Long-Term Stocks:

Our long-term stocks are mostly in the Tech sector (except Costco). The last week was significant as several big tech companies reported their earnings for the third quarter. One common theme from Microsoft, Meta, Amazon, and Google earnings calls was that Big Techs will incur huge capital expenditure in the next year and the investors remained edgy about the return on this investment causing drops in shares of several big techs.

MSFT:

Microsoft reported good revenues and earnings, beating the Wall Street estimates but shares dropped by 6% on Thursday because the heavy capital expenditure on AI is planned for next year ($20 Billion USD). Although Microsoft is optimistic about its investment, investors were not confident about it and the immediate reaction was to push it down by 6%. Given Microsoft’s history, we think that this could be an opportunity to load up the shares for the long term with a tight stop loss below 384.

NVDA:

Nvidia also came under pressure with a broad market sell-off on Thursday. Another blow was SMCI news, who is the third largest customer of Nvidia (contributing 11% of its sales). SMCI auditor Earnest & Young declined to audit SMCI sighting procedural integrity gaps causing a huge drop in its share prices which trickled down to Nvidia as well.

Nevertheless, we maintain our long-term stance on Nvidia and believe that it provides another opportunity to add position after the US elections. It has already dethroned Apple as the most valuable company in S&P 500 and could maintain this position amid strong demand for its next generation AI chips.

AAPL:

Unlike Microsoft, Meta and Google, Apple is largely out of the AI race and its overall capex spending remains flat. It came under pressure after recent reports of weak demand for the new iPhone series, but we think it could be another opportunity to add positions with a stop loss around the 200-Day EMA line at 208. Apple remains our long-term favorite.

COST:

Costco is still below its 50-Day EMA line and the recent pullback is providing a suitable entry at current levels. It remains a long-term leader based on its operating model and consistent performance.

Medium- and Short-Term Picks:

META:

Investors reacted negatively to Meta Platforms' recent earnings report, despite the company exceeding Wall Street's expectations. Meta's stock fell over 4% after announcing a significant increase in capital expenditure (capex), which rose 36% year-over-year to $9.2 billion in the third quarter. The company projects its full-year capex for 2024 to be between $38 billion and $40 billion, reflecting a strategic push towards infrastructure and artificial intelligence investments.

We continue to watch Meta at its current levels and think it would stabilize after US elections at that point it could be a suitable entry at current levels.

AMZN:

For the last several months, we have been writing that Amazon is likely to test the 200 level which it did last week when it popped up after earnings. With the upcoming holidays season, we believe Amazon will retest the 200 level and could break out if a favorable holidays season is reported.

PLTR:

Watch out for a breakout on its earnings on November 4. We believe the current pullback will provide another chance for the anxious investors to get onboard. Suggest caution as any surprises could also break the trending pattern.

Interesting Stocks for Watchlist:

As stated earlier, we target companies which have strong fundamentals, continuous earnings growth and are expected to increase their earnings in future as well, so even if they drop with the broader market, chances of their rebound are stronger based on their relative strength to the rest of the market. Here are some stocks to consider:

RACE:

The exotic car manufacturer is reporting its third quarter results on Tuesday. We expect to see another 10-15% rise from the current prices in case of a good report and supercar maker’s future plans and forecasts.

AVGO:

Broadcom has pulled back to a good range for an entry targeting the 200 level. It has beaten S&P 500 most of the time in the fourth quarter and in the case of a post-election rally it is expected to repeat it again.

CMG:

CMG fought back after its recent earnings slide. It is still actionable at current levels while it consolidates with a tight stop loss around 52.65 levels.

VRT:

Vertiv is a digital infrastructure technology provider for data centers and communication networks and specializes in providing electrical power and cooling systems for the huge power demanding architecture. Watch for an entry around 100-104 range as the stock is pulling back in a cup with a handle pattern and has potential to come back to 124.

SMCI:

Several customers have inquired about an entry to this former winner. The stock is damaged after the auditor Ernst & Young quit over financial discrepancies. It lost 45% of its value during the last week and is not likely to come out of this mess soon. Stay away from this stock till it stabilizes.

TSM:

The Taiwanese maker of logic/mixed-signals circuits for fabless chip companies has pulled back to actionable levels. Historically, TSM has beaten S&P 500 during the months of Nov-January and is likely to move back and test its previous highs at 212.60. Watch for a post-election rally in this stock.

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