Weekly Recap

This week, markets edged higher supported by positive earnings reports, a broadening rally, and some optimism stemming from Federal Reserve Chair Jerome Powell's comments at the semiannual economic testimony in front of the House Financial Services Committee.

Powell reiterated that central bankers are not yet prepared to cut interest rates. However, he hinted at potential rate cuts later in the year, without specifying the timing or magnitude.

Friday morning unemployment for February came out at 3.9%, higher than the 3.7% expected. This pushed markets higher to end the week in hopes rate cuts will now be sooner than expected with a weakening economy.

Three large cap earnings movers impacted markets this week. Retailers Target and Kroger each surged over 10% this week following strong earnings reports. Crowdstrike also experienced a significant upward move, opening 22% higher on Wednesday, though it relinquished about half those gains later in the day.

Overall, the markets continued to see new 52-week highs across various sectors. Chipmakers like Nvidia (NVDA) and Advanced Micro Devices (AMD), banks like JPMorgan Chase (JPM) and Citigroup (C), homebuilders like Lennar (LEN) and Toll Brothers (TOL), and even broad-based indices like the S&P 500 (SPY) and the Nasdaq 100 (QQQ) all reached new peaks.

The rally continued, but concerns began to surface regarding the market's rapid ascent and its current sustainability.

There's been a lot of chatter this week about the ongoing market rally and whether we're entering a bubble. There is no single data point or definition that definitively signals a bubble. It's more about sentiment and the underlying drivers propelling the market higher.

The meme stock frenzy and the rise of cryptocurrencies during the post-COVID era was a clear examples of a bubble. Back then, you couldn't escape conversations about Bitcoin or GameStop, whether you were on the street, at the store, at a party, or even at a family dinner. Everyone, from financial professionals to college kids, bartenders at local bars, and uber drivers, were talking about it. Robinhood accounts skyrocketed as people gambled on investments, eager to show off to their friends' their newfound wealth from 5x-10x returns in a few short months.

Today, some see similar parallels to those bubbles, with everything seemingly going up regardless of news or justification. NVDA has surged over 5x since its 2022 low, Bitcoin has reached new all-time highs, and random AI & tech stocks like SMCI have experienced parabolic rises. These factors contribute to the widespread "bubble" sentiment.

The hypothetical chart below, comparing NVDA's current run to Cisco's (CSCO) during the dot-com run and bust, is a popular example seen online and in the "Fintwit" community. However, I find it challenging to draw a direct comparison between the two given NVDA's consistent and growing growth trajectory and the worlds heavy reliance on the company's technology.

Currently, many financial professionals are enthusiastic about the market's performance and the AI boom, however, it's not resonating with everyday consumers to the same extent as previous bubbles. Many people might not even be aware that they could be missing out on potentially one of the best bull markets in history. For some, the struggle is real, focusing on making rent and battling inflation's effects over the past few years. The lack of widespread retail investor participation, the "average Joes," and the absence of a peak in optimism or greed suggest this isn't a bubble to me.

That said, I think it would be completely healthy for a pull back soon.

In my opinion, if it is not clear, this is not a bubble but rather the beginning of a multi-year rally driven by technology and AI. There will undoubtedly be corrections along the way, but the market and economic landscape are undergoing a Jurassic transformation.

Next week, I expect the market rally to potentially continue despite Friday's higher-than-expected unemployment rate. It's important to remember that unemployment data is a lagging indicator. This means it reflects past economic conditions, and Friday's report suggests the economy might be performing worse than previously anticipated. The higher unemployment number could indicate more job losses than expected, potentially leading to decreased consumer spending and increased economic hardship. The market often reacts to future expectations rather than current data, therefore, the rally might continue based on the belief that the Federal Reserve will delay raising interest rates in response to this weaker economic data.

The other key factor to watch next week is the inflation rate (CPI) data scheduled for release on Tuesday, March 12th. Inflation rose 3.1% year-over-year (YoY) in January and 0.3% month-over-month (MoM). Consensus estimates currently hover around the same range (above 3% YoY). Any report exceeding 3%-3.1% could trigger a market sell-off, especially in interest rate-sensitive sectors like utilities, REITs, and small caps. Conversely, a reading below 3% might lead to a market surge in hopes that inflation is beginning to decline.... Again.

Earnings To Watch:

• Monday: Oracle

• Wednesday: Lennar, Dollar Tree, UiPath, & Sentinel One

• Thursday: Adobe, Dick's, & Dollar General

The week kicks off with earnings from software giant Oracle. Their past three earnings reports have been a rollercoaster, resulting in a significant gap up, followed by two substantial gap downs in the most recent two quarters. While debt levels remain high, strong demand could still propel the stock higher.

Wednesday is the big day next week. Lennar's earnings will offer insights into the housing market, particularly for homebuilders facing a booming market due to a lack of supply. UiPath will be on my watchlist to gauge sales and profitability growth within the robust AI and robotics industry. Finally, Sentinel, the last of our "fab five" cybersecurity stocks, reports earnings. I wouldn't be surprised to see a pop to $30 for them on strong demand.

Thursday, my focus will primarily be on ADBE. They've enjoyed an incredible run lately, being one of the first companies to implement a genuine AI product within its tools and programs. The key question is: how much further can they go? Dick's Sporting Goods also presents an interesting case. After dropping from $150 to $100 between August and November 2023, the stock now sits at an all-time high of $183. I anticipate a potential pull back following this rapid climb leading into earnings.

Datadog (DDOG) - This stock recently joined my watchlist, and I've increasingly grown more enthusiastic about it. The tipping point came this week when TD Cowen issued a bullish note stating, "With high leverage to cloud growth, a proven multi-product platform, strong execution, and de-risked FY24 estimates, we believe DDOG is a must-own stock and remains our best idea, with a price target of $155." This fit right in to the average street price targets around the mid $150s. What I have realized in the cloud space, companies require two key elements: access and rights to vast amounts of data and a user-friendly platform. I believe DDOG is well on the way to establishing both. While DDOG's P/E valuation isn't the most attractive, it has pulled back from $140 and in my eyes offers a compelling buying opportunity for the long term at its current market cap of just $41 billion. Remember, cloud computing and data analytics represent the future of optimizing productivity, effectiveness, and ultimately, success.

Coinbase Global (COIN) - This stock is up 100% in the past month, likely correlating with the recent surge in Bitcoin's price. COIN has been a hectic ride since its IPO, and while I regret missing out on its low point in the $30s, I still struggle to fully embrace the cryptocurrency wave. That said, I'm skeptical about the sustainability of this multi-month rally without a significant pullback. Bitcoin, currently at $66k, could easily retrace to $55-60k, potentially dragging COIN down by 5-10% or more. Additionally, I'm not a fan of COIN's business model, which relies heavily on transaction fees. As we've seen with stock trading platforms, these fees may become obsolete in the future, forcing COIN to find alternative revenue streams. COIN could be a good short-term play for those skilled at timing the market, but many could end up getting caught in a downturn. Remember, the stock plummeted from the mid-$300s to the mid-$30s in 2022. When dealing with cryptocurrency, anything is possible, for better or worse.

Shopify (SHOP) - Finding a good growth company at a reasonable valuation has been challenging lately. However, I believe the recent sell-off in Shopify (SHOP) following its latest earnings release presents a compelling opportunity for investors. The stock has dropped 19% since its February high of $91.50, currently trading around $74 per share. Notably, SHOP remains one of the only true competitors to Amazon's e-commerce business, capturing over 10% market share – a level unmatched by any other competitor (except AMZN). Shopify empowers small businesses around the world rapidly grow and reach customers worldwide. The company boasts continued revenue/earnings growth at a high rate and demonstrates consistent innovation in its offerings and platform. I highly recommend exploring the SHOP app, which mirrors the user experience of Amazon, to discover the unique products offered by small businesses. With their B2B segment experiencing rapid growth (doubling its size in 2023), SHOP is well-positioned to maintain its significant market share and continue its upward trajectory. I am confident in Shopify's potential, particularly at its current price point, and even more so if it dips further.

* Disclaimer - It's important to highlight that, on occasion, I may have existing positions in the stocks I highlight in my newsletter. This disclosure aims to be transparent about potential conflicts of interest. Although I strive for unbiased analysis, my ownership of certain stocks may influence those that I highlight. Rest assured, my commitment to providing well-researched insights remains unchanged. 

"On a historical basis, small-cap stocks are trading at steep discounts to large-cap stocks. The small-cap-focused Russell 2000 Index is trading at about 14.6x times forward earnings, well below its 10-year average of 16.8x. What’s more, the valuation spread between the Russell 2000 and the large-cap-focused Russell 1000 Index is the widest it’s been since the tech bubble burst in the early 2000s.

Mean reversion suggests that relative valuations eventually return to their long-term average. Over the last 30 years, small caps have rarely been discounted as deeply as they are now, but when they were, they bounced back strongly.

For example, after the tech bubble burst in the early 2000s, the Russell 2000 outperformed the Russell 1000 four straight years, by an average of 10% per year. Similarly, after the 2008-09 global fnancial crisis, the Russell 2000 returned more than 97% in the 12 months from the March 2009 market bottom, surpassing the Russell 1000 by over 23%. With small caps currently trading at comparably low levels, an attractive entry point may exist for investors with a long time horizon." - Source 6

There are numerous ETFs and mutual funds offering exposure to small-cap stocks, and there's no single right or wrong answer. However, I'd like to share my current favorite way to gain exposure to small caps: the actively managed ETF XSMO, or Invesco S&P SmallCap Momentum ETF.

Check it out!

In Weekend favorites, I share my thoughts on events I'm attending, the new series I'm planning to marathon, the movie I'm dying to see, restaurant craving to taste, or the big game I won't miss. 

Two things to share for this weekend's favorites:

First, I had the chance to check out one of Tucson's newest restaurants, "Cold Beer & Cheese Burgers," this week. This sports bar chain has a few locations, one in Scottsdale, AZ, which I have been to before. The new Tucson location boasts a great atmosphere and a spacious venue with both indoor and outdoor seating. The location, however, Oracle & Ina, is definitely not ideal for many.

There are numerous TVs throughout the venue and happy hour offers excellent deals, including $4 pints and discounted appetizers, which I highly recommend. While the menu is extensive with various options, its hard not to naturally gravitate towards one of their many burger choices. In my humble opinion, the "Hangover Burger" (fried egg, bacon, and avocado) is the only way to do a burger. Tell me that does not sound delicious? On Tuesday nights, they host trivia night (top 3 win gift cards), which is a lot of fun. Questions range from celebrity knowledge and random facts to sports. My team placed second this week, so we'll definitely be back for redemption. As the great Ricky Bobby said, "If you ain't first, you're last."

Second, most of you know I'm a huge UFC fan. This weekend, the much-anticipated UFC 299 pay-per-view event finally takes place. Headlining the card is none other than Arizona's own, "Suga" Sean O'Malley, facing another favorite of mine, Chito Vera. Arguably one of the best and most competitive fight cards I've seen since I started following the sport in 2020, it promises excitement from start to finish. While UFC 299 is an amazing card, it's merely a build-up for the monumental UFC 300 pay-per-view taking place in April, which is expected to be even better.

Fight fans, lock and load! Saturday is going to be intense!

To read more of Jake's Analysis on Seeking Alpha where he shares his thoughts, opinions, stock ratings, and price targets on different stocks and ETFs, use the link below!