For the First Time Since 2021…
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Reddit (RDDT) gets a 70% “upvote”… How Jonathan Rose finds great stocks in any market… The Fed’s got another trick up its sleeve… This is the healthiest rally since 2021; but is that actually a good thing?… The “Great Broadening” is upon us, and this subclass of stocks is set to benefit…
By Michael Salvatore, Editor, TradeSmith DailyThink of every U.S. social media website that matters. Facebook, X (formerly known as Twitter), Snapchat, Pinterest, and Reddit probably crossed your mind.
How many of them would you guess have consistently beaten the S&P 500 since they went public?
If you guessed one, you’d be right…
That is, until last week.
Since each of their initial public offerings, Snap Inc. (SNAP), Pinterest (PINS), and X (TWTR, before it went private) have all failed to beat the S&P 500 over the long term. Meta Platforms (META) is the lone exception, with its behemoth advertising network and successful hardware segment driving revenue far past the competition.
(Granted, PINS and SNAP had a brief period of outperformance – but that was in 2021, where you had to try really hard to not make money buying any stock even adjacent to tech.)
But Reddit, on its first day of public trading on Thursday, rose as much as 70% – beating the S&P 500 handily on the week.
Of course, IPO-day excitement does not make a trend. Especially in a stock market that’s been starving for high-profile tech IPOs since the bubble burst in 2021.
Is RDDT a buy? It’s too early to tell, but a quick look at the income statement tells me “probably not right now.”
The company’s net operating income stands at a negative $140 million. And that’s with 267 million average weekly unique users that Reddit serves ads to – the current primary revenue driver. Interestingly, it expects to make about $66 million on new revenue efforts this year involving A.I.; it wants to license out its vast and growing trove of data on endless niche topics to train large language models.
But even if that happens as Reddit hopes, it only gets the company halfway to profitability.
In time, RDDT may join the one-strong club of successful social media company IPOs. But it’ll be a long journey to get there. From where we sit, it’s one for the watchlist and not much else.
There’s also not enough trading data for RDDT to fulfill most of TradeSmith’s screeners – so this is something we’ll keep checking in on.
❖ Let’s catch up with Jonathan Rose…
Have you been tuning in to Jonathan Rose’s free, value-packed daily trading livestreams?If not, click right here to automatically get on his list and watch the latest one – plus stay tuned for today’s 11 a.m. Eastern broadcast.
Here’s why you shouldn’t miss them:
- Every single day, Jonathan’s sharing a short-term trading opportunity based on unusually large option volume…
- He’s sharing how he finds these ideas using his own methods, developed over 25 years trading the markets
- And showing how you can find similar trades yourself
Chances are, he’ll be mentioning it again soon alongside his newest ideas.
And in Friday’s stream, available to everyone who’s signed up for them, he recapped all the trade recommendations from the first official week.
Again, you can go right here to automatically sign up get all this in a free 15-minute live video each trading day – and learn to become a better trader while you’re at it.
❖ The Fed’s got another trick up its sleeve…
Longtime Fed watchers know the committee has two levers it can pull.It has the interest rate lever, which saw liberal use in 2022 and 2023. That’s how it guides the price of credit in the economy.
Just as important, though, is the balance sheet lever. This is what lets the Fed buy or sell Treasurys and other assets on the open market with money that it effectively conjures out of thin air.
The higher the Fed’s balance sheet, the more money in the system. And since topping out at close to $9 trillion in early 2022, the Fed’s been reducing the balance sheet (and the money supply) to the tune of $60 billion in Treasurys and $35 billion in mortgage-backed securities per month – or about $1.1 trillion per year. (It did run up briefly during the Silicon Valley Bank crisis in early 2023, but quickly got back on track.)
It does this by simply letting the securities mature without reinvesting the proceeds. As the Fed “gets its money back,” it removes that money from the financial system. In this sense, the balance sheet is the cleanest look at the money supply we have.
Why is this important?
Part of the reason inflation took off with such a vengeance in 2022 was because of the sheer quantity of money that flooded the financial system during COVID. With rates slashed to zero, there was no other lever the Fed could pull to stimulate the economy.
And last week, the Fed said it would begin to slow the pace of shrinking its balance sheet – aka the money supply.
When this will start and precisely how wasn’t mentioned, but this is part of the reason why stocks caught such a bid during Jerome Powell’s press conference.
If the Fed is going to slow its money supply reduction before reaching its 2% inflation goal, that’s essentially another admission that it doesn’t expect to reach that goal anytime soon. The Fed would rather settle for higher inflation than risk slowing the economy or worse, thrusting it into recession.
The takeaway here is the same conclusion we came to Friday. The Fed itself is saying to expect inflation and rates to stay higher for longer… by enabling them to do just that.
The counter to higher inflation and interest rates that is to stay invested in great assets “come hell or high water.”
For a simple way to find great assets, I have to turn your attention to Ratings by TradeSmith. With Ratings, you get a quick glance at any given stock to see if it’s of high quality and rated well on our multi-metric system.
Our CEO Keith Kaplan developed this tool with the same mindset that trickles through all of TradeSmith’s software: to make it easier for everyday investors to keep up with the pros.
❖ Stocks are in rare form right now, but look out…
There’s no denying the strength of this stock market. We’re setting record high after record high with a strong bias to the upside.Investors are buying the dips, waning momentum be damned.
But poking into the “guts” of the market, we see just how rare the market’s form is – and how that’s actually a mixed signal.
Take a look at this chart, comparing the number of S&P 500 stocks at 52-week highs (blue) with the S&P 500 itself (orange):
Right now, about 115 of the S&P 500 stocks are at yearly highs. That’s more than at any time in almost three years.
And this is a rare condition. It’s been the case only a handful of times since 2017.
The number of stocks above their 200-day moving averages is also ticking up to the highest level since September 2021 – another sign that the soldiers are finally joining the generals in battle.
Is it a buy signal for large-cap stocks? Well, yes and no.
It’s a good thing to see so many more stocks participating in the trend. But as you’ll notice in the chart above, such cooperation is usually a short-lived phenomenon. Only in January 2018 did this condition last for more than a few days.
What we want to see is this signal last longer, and not sharply reverse down.
In the past when this metric waned – like in 2018, 2020, and 2022, corrections and bear markets have followed. If we start to see market health turn down as prices keep climbing, that’ll be a warning sign.
❖ InvestorPlace Senior Analyst and A.I. expert Luke Lango sees a “great broadening” ahead…
And if you ask him and his team, this will cause the highly concentrated gains in A.I. hardware and big tech of 2023 to spread out to smaller, lesser-known areas of the market.Understand, Luke isn’t saying that the A.I. trend is finished. Far from it. It’s just that we’re on to a second, even more exciting phase of A.I. stock gains.
The biggest wins to come won’t be in the picks and shovels – the semiconductor stocks that have dominated for the past year.
Instead, it’ll be in the places where A.I. software and utilities are making a big impact on businesses’ bottom lines.
He’s calling this the “Second Trillion-Dollar A.I. Trade.”
If you’ve been following along in TradeSmith Daily, you likely have an idea of what this is about…
But regardless, I encourage you to go here to learn more from Luke himself.
He has a fascinating plan to trade short-term catalysts in these companies’ share price, capturing quick double-digit gains over the course of weeks and days. And he’ll be discussing that strategy in a special webinar this Wednesday, March 27 at 8 p.m. Eastern.
And for the longer-term investors out there, he’ll also share one A.I. pick that he believes has the potential to multiply your money by 10x. Just go here to save your seat.
To your health and wealth,
Michael Salvatore
Editor, TradeSmith Daily