🍔Deny, Defend, Depose (+Stock Pick of the Week)

Something strange is happening in markets...

Welcome back to MktContext! This week, markets have continued their rally and are now at a pivotal point. We use market timing tools to understand what’s coming next.

In today’s post, we dive deep on the importance of Triple Bottom Line and examine the QQQ rally that occurred this week. We make a prediction that a pullback is overdue.

In the premium section, we also discuss a retail miracle, what the Fed knows, and a strange phenomenon happening in markets. We also have a winning stock pick in a hot sector that has recently woken up from its slumber!

Deny, Defend, Depose

If you haven’t heard, the CEO of UnitedHealthcare (the largest health insurer in the US) was assassinated in New York. The bullet casings from the crime scene had the words “Deny”, “Defend”, and “Depose” etched into them — a reference to a book that describes the tactics used by insurance companies to avoid paying claims. Insurers will delay and deny legitimate claims, aggressively defend lawsuits, and depose claimants in litigation. It is assumed that the killer suffered a loss due to a claim denial so he took his revenge.

The title of our post is not meant to be incendiary. But people are standing in solidarity with the gunman as so many have experienced claims denials at the hands of a health insurer. In fact, UnitedHealth has the highest rejection rate of all insurers, nearly twice the industry average. All in the name of shareholder profits. The public outcry drove the stock down 10%.

At 32%, United’s denial rate is twice that of the industry

This is a stark reminder that companies cannot maximize profits and executive salaries above all else. All companies, no matter what they sell, must be held accountable for the wellbeing of its customers and society at large. They must “do right” by people instead of solely enriching a select few. As investors, we believe in Triple Bottom Line and the 3P’s: People, Planet, Profits. This is not some greenwashing or feelgood thing; it’s about risk mitigation and digging deep to make sure your investments aren’t hiding negative externalities that will bite you later.

We are living in extreme times. Need I remind everyone that the (nearly successful) assassination attempt on Trump occurred a mere 6 months ago. These are symptoms of populism as history repeats itself. Society is battling with an acute wealth divide, cost of living is through the roof, and a lot of frustration is aimed at big business and executives. Then, when dollars are no longer evenly distributed, people take to the polls where they still have an equal voice. There is serious discontent going on that involves all of us, and it’s going to impact markets one way or another.

We do not condone murder, but it is unfortunate that lives will be lost in order for corporate change to be effected.

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Wrong call

Our call last week for a rotation out of mega cap tech was ill-timed. The Mag 7 are breaking out this week at the expense of small caps. We don’t get every call right (no one does… that’s what stop-losses are for!) but we still stand by this one. But if the trend continues, we may have to reverse our rotation trade into small caps and equal-weighted indices.

Mag 7 stocks breaking out of triangle

We think this latest Mag 7 run has been a flow-driven move fueled by options activity. Our put/call data shows that in the leadup to the election, investors hedged their biggest positions expecting a protracted negative event. Now, those protections are rolling off which is propelling the stocks upward. This is less sustainable than a fundamental or earnings-driven move.

QQQ was up a roaring 3.3% on the week, but it left gaps in its wake. We explained in this post why gaps are important to monitor because they often get filled on pullbacks. After nearly three weeks of strong upward momentum, let’s see if it goes back to fill those gaps.

Gap often get filled

Something strange in markets…

The rest of this article is for paid subscribers. Upgrade now to continue reading:

• Something strange in markets

• The Fed knows nothing

• A retail miracle

• Software still beating semis

• Flows and technicals

• STOCK PICK OF THE WEEK

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