Snap, Crackle, Pop

Bonds

Snap
What’s becoming an all too familiar headline this year, another company had its worst day ever. This time Snapchat (SNAP) fell by 43%. The reason?

Earnings compression.

You’ve heard that phrase now several times. And irrational fear is taking down the other companies. Big tech giants like Amazon (AMZN), Alphabet (GOOGL), Apple (AAPL), and Meta (FB) fell earlier this week too. Snap is a fraction of the size of the others, so they shouldn’t be reacting the same way, but fear-based selling is now taking over.

This time the selling is coming from Snap projecting ad sales will decline. The other tech names also get money from running ads, so the theory is ad sales will decline across the board.

An interesting story that all of these companies have in common is their user base is still strong – they are either growing or still engaged. It’s not like people stopped using Google for web searches. But rather, it goes to show that they can claim whatever they want for a business model, but the truth is they need ad revenue more than users.

So, why tell you about something that already happened?

Crackle
I want to put it in context and tell you there’s more to the story and why some of these companies will be great buys. Advertising spending is actually increasing, but the news is that digital advertising is decreasing. But from what level? Remember, when the world shut down from the pandemic, digital advertising took over. There was no point in billboards or any other type of print advertising when everyone was at home.

For two years, digital advertising increased at parabolic rates. So while total advertising dollars are projected to increase, and the overall percentage of total dollars devoted to digital is projected to increase over time, the year-over-year change is decreasing. In other words, we’re returning to the normal increase we saw for years prior to the boom during the pandemic. Digital ads aren’t going away. And the Metaverse is around the corner and that will bring in all-new advertising streams.

The tech giants are simmering and cracking and will return to normal price action in time. Once things settle down a bit, you can pick up a piece of these tech giants at a discounted price, and hold them for years to come as they journey into the Metaverse and beyond.

Pop
Do you want to know some areas that could be popping higher today, tomorrow, and next week?

Today’s trade ideas are in the bonds …

I want to look at a couple of charts at different time frames and show you that people may finally be flowing back into bonds for safety. Bonds, like stocks, have been the victim of an immense amount of selling pressure lately.

Here’s a monthly chart of iShares 20+ Year Treasury Bond ETF (TLT)

bonds

The blue horizontal line is a multi-year support level and with only a couple of days left in May, the monthly chart is showing a Hammer candlestick formation.

The chart shows a price decline followed by a hammer pattern. This pattern has a long lower shadow, several times longer than the real body. The hammer might be signaling a possible price reversal to the upside.

The weekly chart shows the last 3 weeks of higher highs and higher closes.

Bonds

And if we can break the through last swing high on the daily chart (dashed blue horizontal line), we might see a reversal happening in the bonds.

Bonds

It’s not just TLT either.  Let’s now look at iShares iBoxx Investment Grade Corporate Bond ETF (LQD).  The daily chart shows a break out to the upside of a multi-month-long channel (purple line).  It also has the same weekly and monthly pattern as TLT. 

Bonds

Going long in bonds may be the best way to fight inflation in your portfolio in the short term.

Before I go, remember that we have the Personal Income and Outlays Report out tomorrow at 8:30a.  The consensus is that personal consumption expenditures (PCE) will rise .07% month-over-month, which is less than the steep climb the month before of 1.1%.  This could indicate inflation is slowing down.

We could also see the annual PCE Price Index fall from 6.6% to 6.3%, which would indicate inflation readings are starting to fall.  

If we can get some of these numbers going in the right direction, we could see the SP500 march up to $4100, the swing high from May 17th.

If you have any questions, comments, or anything we can help with, reach us at any time.

 

 

 

 

Jeff

Guest Writer, Filthy Rich, Dirt Poor
Editor, Wealthy Investor Society

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