We’re back baby!
Sure, not all the way back but back enough to feel like 5 low-volume sessions can reverse an entire month of selling, right? While low-volume rallies may provide bulls some short-term optimism, they generally lack the conviction and participation needed to drive a sustainable longer-term market advance:
- Lack of Conviction – Low trading volumes suggest there is not a lot of conviction behind the rally. Without broad participation, the rally may not be sustainable.
- Increased Volatility – With fewer trades occurring, stock prices can swing more wildly on low volume. This makes the market more susceptible to sharp reversals.
- Bear Market Rallies – In bear markets, low-volume rallies are common as pessimism prevails. These “dead cat bounces” often fail to gain traction.
- Technical Breakdowns – Volume provides legitimacy to chart patterns and technical indicators. With light volumes, these breakdowns are less reliable signals.
- Weak Institutional Support – Low volumes imply big institutional investors like mutual funds are staying on the sidelines. Lack of their buying support could limit the rally.
- Economic Doubts – Low participation may reflect doubts about economic strength. Investors may be skeptical the rally can continue absent positive fundamentals.
- Poor Liquidity – Thin trading makes it tougher to enter and exit positions. This reduces trader participation due to fears of being stuck in illiquid holdings.
That doesn’t mean we can’t still find bargains for our Members. Just yesterday morning, in our live Member Chat Room, we decided to add Ciena (CIEN) to our Long-Term Portfolio (LTP) as I said to our Members:
I’m liking Ciena (CIEN), who make optical networking equipment for the Telcos since all of them are including more fiber in their plans (we discussed the other day). CIEN reports tomorrow but $43.33 is $6.5Bn and they make $400M so 16x but 10% growth path makes that very reasonable (and no debts).
Between 5G and Cloud – they should be doing very well and might up their guidance. For the LTP, let’s go with:
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- Sell 10 CIEN 2025 $45 puts at $7 ($7,000)
- Buy 20 CIEN 2025 $40 calls at $10.70 ($21,400)
- Sell 20 CIEN 2025 $50 calls at $6.10 ($12,200)
That’s net $2,200 on the $20,000 spread with $17,800 (809%) upside potential at $50, which is not too far away. If they beat, we just wait for our 809% but, if they miss – we won’t take much damage and we can invest $5 more ($10,000) to roll to the $30 calls. Widening the spread to $20 ($40,000) will also open us up to be able to sell short calls, like 5 Oct $45s, which are now $2 ($1,000).
As we expected, CIEN beat estimates this morning and the highlights are:
- Revenue was $1.07 billion, up 23% year-over-year. Growth was driven by strong demand across all geographies.
- GAAP net income was $29.7 million or $0.20 per diluted share, compared to $10.5 million or $0.07 per diluted share a year ago.
- Adjusted (non-GAAP) net income was $89.1 million or $0.59 per diluted share, up from $49.0 million or $0.33 per diluted share a year ago.
- Operating margin was 7.3% on a GAAP basis, up from 3.1% a year ago. Adjusted operating margin was 12.0%, up from 8.5% a year ago.
- Gross margin was 42.0% GAAP and 42.7% adjusted, versus 39.3% GAAP and 40.0% adjusted a year ago. Margin expansion reflects favorable product and customer mix.
- Cash and investments were $1.28 billion. Generated $8.7 million in cash from operations and $426.5 million from financing activities.
- Revenue growth, margin expansion and balance sheet strength reflect Ciena’s strong competitive position, especially in optical networking. Market share gains expected to continue driven by elevated backlog and increased customer activity.
Note that we took a very conservative target of $50 yet, through the magic of Options, we are able to level our upside potential to an over 800% potential return on our cash outlay in less than 18 months – that’s pretty good and, this morning – we should be halfway there at $45. You don’t have to swing for the fences to hit a home run using our Option Strategies – let us teach you.
CIEN wasn’t on our Watch List (Members Only) our interest in CIEN came from a Member Chat discussion we had last week about whether AT&T (T), TMobile (TMUS) or Verizon (VZ) were the best investment and we noticed that all of them had a common strategy of building out fiber to complete their 5G roll-outs and CIEN, who specialize in optical networking, seemed to be in the right place at the right time – so we grabbed it!
We also grabbed GNRC in yesterday’s Morning Report and it was kind enough to give us an even better entry ($14.50) than we had planned on the short 2025 $100 puts as the stock dropped sharply before reversing after the morning silliness.
We have a lot of economic data this morning and it’s the last day of the month so crazy things can happen but I think we have a good enough handle on earnings at this point that we should be able to risk a few more picks – even ahead of tomorrow’s Non-Farm Payroll Report (8:30).
We have AVGO, DELL, LULU and VMW reporting this evening and I KNOW I like AVGO but too expensive ($892.28) to chase at this point (we just added QCOM instead – still a bargain at $113.27 and will pop if AVGO has a good report) – we’ll see about the rest once we have our reports…
Speaking of goosing the markets on the last day of the month, the Fed’s Raphael Bostic (the 2nd most doveish Fed Governor) said this morning that “policy is appropriately restrictive” and “We should be cautious and patient and let the restrictive policy continue to influence the economy, lest we risk tightening too much and inflicting unnecessary economic pain.” That’s exactly what the markets want to hear and that’s why he was the only Fed speaker scheduled this week (as we noted in Monday’s Report).
He also said “that does not mean I am for easing policy any time soon” – but no one will pay attention to that part while there are still windows to dress…
8:30 Update: Personal Income went up 0.2%, down from 0.3% last month but Personal Spending went up 0.8%, blasting higher from 0.5% last month, that has now also been revised up 40% to 0.7% – which makes all this economic reporting seem like a joke. That’s a strong indicator that the consumer is diving deeper and deeper into debt while the tide of price inflation keeps rising above them.
Nonetheless, PCE Prices claim to be flat at 0.2% and you know that’s BS and I know that’s BS but it gives the Government an excuse not to raise Social Security, Unemployment, Disability and Welfare Payments – even as homelessness and poverty grow to record levels.
Keep in mind that the annualized PCE Core Inflation is still 4% – MILES above the Fed’s 2% target, the 0.2% indicator is just the growth in prices since last month – pacing at 2.4% more on top of last year’s 5.4% total.
The more important question is when does the Consumer Finally run out of money/credit and start making those Recessionary choices? There are still $1.75Tn worth of Student Loans on hold since mid-2020. The average student loan payment starts out at $222 per month but escalates to $613/month over time. 43M people have student loans so $222 per month will suck $9.5Bn per month out of consumer spending – roughly 2% of all Consumer Spending, which is 60% of our economy so a 1.2% hit to GDP if we restart the loans (and half the people affected said they will be forced to default as their $150,000 college educations have not led to the kind of jobs that can pay back $60,000 average loans).
That is a KNOWN and ABSOLUTE crisis that is right in front of us. Then there’s the $80Bn hurricane (still in progress), which is only the first one of what is likely to be a long season of severe weather. All of this is being ignored by a once-again rising market and maybe it is all fake, Fake, FAKE window-dressing to end the month but, either way – please be careful out there!
