[Premium] Q2 Playbook (Part 4/4)

July 14, 2020

As we head into the second half of the calendar year 2020, we start from scratch with our Q2 playbook and outline our thoughts on every asset class and our plan to profit in the quarter ahead.

Part 1 of this playbook will cover our macro view, touching on Equities, Commodities, Currencies, and Rates.

Part 2 of this playbook will delve deeper into Indian Equities, going sector by sector to identify the trends that matter.

Part 3 of this playbook will outline the individual stocks we want to be selling within the context of today's environment.

Part 4 of this playbook will outline the individual stocks we want to be buying within the context of today's environment.

Update 07-13-2020 (Additional update on 07-16-2020 linked below)

Hey everyone --- Bruni here.

Given the current market environment, we're postponing the release of this part until at least the end of the week. The reason is that we may be at an inflection point that will materially affect the types of setups we want to be buying.

Let me explain.

Here's the Nasdaq 100, arguably the most important index in the world because it combines Mega/Large-Cap stocks, US stocks, Technology/Growth stocks all in one index. Today, prices made new all-time highs and reversed, engulfing the prior day's candle and forming a "bearish engulfing" pattern.

While not a "sell everything signal", it does represent a reason to get more cautious...specifically, if we see downside follow-through in the days ahead. And if the strongest market in the world is going to consolidate and/or begin correcting, then that's information we need to be aware of.

We're also watching US Financials. Financials, Industrials, and Energy have failed to participate in the rally to the same extent that Technology and stronger sectors have. In order for the rally in US stocks to extend, we'll need to see participation in these weaker sectors expand.

Here's the chart we're watching, with US Financials holdings above 22.50. That's the line in the sand.

And here are US Financials on a relative basis. Either this is a nasty failed move and bullish momentum divergence, or prices are about to collapse even further.

Outside of the US, we're seeing divergences with some markets like the German DAX attempting to break out...while others like the Nikkei 225 make lower highs.

In the event that Tech stocks do sell off and we fail to see rotation into Financials and other sectors to pick up the slack, then we'll likely see Global Equities weaken, and the risk management levels we outlined last week may be broken.

It's at that point that a more defensive posture will be necessary, so the long setups we'll be interested in will look a lot different.

If Equities do start to sell off and develop a sideways range, then we want to be primarily focused on the areas of relative strength like IT, Fast Moving Consumer Goods, Chemicals, etc.. Buying the strongest of the strongest.

BUT, if we do see rotation into the weaker areas in the US, then we'll be looking for more mean reversion opportunities in areas like Nifty Metals, Nifty Commodities, PSU Banks, etc. Much like many of the Small and Mid-Cap opportunities we took advantage of over the last month.

It's not that both of these setup types won't work during a rally, it's just that the weaker names will offer a higher beta way to play it (but will be the first to get crushed if the market falls).

That's what we're watching over the next few days to help determine what type of long setups we want to be initiating at current levels. JPMorgan Chase kicks off a bunch of bank earnings reports tomorrow morning, so that should help set the tone for the rest of the week and give us more information to work with.

In the meantime, you can find all of our open trade ideas here and let us know if you have any questions about any individual stocks we've covered (or those we haven't).