VIDEO: Don’t Chase Applied Materials into Earnings

The S&P 500 pushed to fresh record highs Tuesday as softer-than-expected July PPI data pushed the odds of the Fed standing pat in September to 65% on the CME FedWatch Tool, up from 59% a day earlier.

But as we discussed on Wednesday, rising complacency — a subdued VIX and stretching RSI levels — plus Thursday’s gains have us becoming incrementally even more cautious with the Portfolio. We’re watching Applied Materials (AMAT) earnings on Thursday night, where strong fundamentals face a primed market mood, with Chris explaining why we would not chase the shares into the print.

Plus, Netflix’s (NFLX) ad upfronts have us rethinking our Three rating.

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Transcript

Hey folks, Chris Versace here, Tuesday, August 13th. Another positive day in the market following the July PPI data, which came in somewhere between in line — depending on which metrics you’re looking at — or a little softer than expected. As I laid out in our opening comments this morning, it’s no surprise that the market responded positively to those prints. But it’s also leading the market to shift its expectations for a September rate hike.

The odds of that happening have fallen. The probability the market assigns to the Fed leaving interest rates unchanged at the September meeting has risen to around 65%, according to the CME FedWatch Tool. For context, that’s up from 59% following yesterday’s July CPI report, and about 25% a month ago.

That positive reaction — to the falling prospects of a September rate hike and the July PPI data — is pushing the S&P 500 into record territory. On the one hand, that’s a great thing: it’s moving the portfolio higher, and it’s moving your holdings higher. Certainly true. However, if you read our afternoon piece from yesterday, you’ll understand why I’m not just celebrating.

When I say we’re seeing the Fear and Greed Index move deeper into greed, the VIX — the volatility index — is still hovering around 14.5, flashing market complacency. And the upward move we’re seeing in the S&P 500 and Nasdaq Composite is pushing their RSI levels that much closer to a potential overbought condition.

Now, when we look at the S&P 500 earlier this year — yes, can it push into an overbought condition that lasts for a period of several days to a week, a week and a half, two weeks? Sure, it can. All we’re saying is that the factors that led us to become a little more cautious with the portfolio, which we outlined yesterday, are stepping up a bit more. And that has us becoming incrementally more cautious.

That doesn’t mean we’re going to do anything in the very near term, whether it’s adding new positions or raising cash levels. But we’re flagging this to you for two reasons. One, because it’s on our mind and we see it. Two, we want you to know that if the market becomes overbought based on RSI levels, if greed pushes into extreme greed, and if some of the other indicators we’ve talked about move in a similar fashion, we may want to start considering boosting our cash levels further.

We’ve done some of that earlier this week, but we might do more later. Remember, there are things lingering out there: the prospect of the recent move up in oil prices and its flow-through to inflation, Kevin Warsh’s Jackson Hole address, the overall duration of the U.S.-Iran conflict, and retailer earnings coming up. As I pointed out, we’re also heading into one of the seasonally slowest times of the year, with low volumes that can exaggerate market reactions. So we’re going to continue following all of this, and as we puzzle through it, we’ll communicate our thoughts with you, hopefully in a clear, concise fashion.

I’ll also note that we have quarterly results from Applied Materials tonight, and by all accounts, it should be a favorable report. The backdrop — tight chip capacity, rising chip demand, and favorable backlog pricing that we’ve discussed with you — combined with the demand patterns and backlogs from the likes of Lam Research and others, all point in the right direction. That’s a nice recipe for what should be a beat-and-raise quarter tonight from Applied Materials.

However — you probably knew there was a however — when we look at the market’s increasingly giddy mood and its reaction to earnings from Cisco and Cerebras today, based on their reports last night, there’s some concern that a beat-and-raise quarter tonight from Applied may not be enough to pop the stock higher, especially if it doesn’t hit the high-end, or “whisper,” numbers we touched on in our opening comments today.

If you haven’t read that opening note, please do — there’s a lot of information in there. We lay out the numbers the market is expecting for Applied, both for the quarter they’re reporting and the quarter they’ll be guiding to. And I’ll reiterate here what I wrote in that note: we would not recommend chasing AMAT shares into tonight’s earnings report, given the concerns I mentioned in the opening note and voiced again here.

We’ll obviously have a lot more to say about Applied Materials shares tomorrow, once we’ve digested the earnings report and, most importantly, the company’s earnings conference call.

Now I want to pivot quickly to Netflix. We’ve gotten some questions about what we’re waiting for and what we’re looking to see. Coming out of the company’s June-quarter results, we downgraded it to a 3 rating, looking for clarity on a few items. One was the advertising business, and the catalyst for that clarity was Netflix sharing learnings from its 2026 upfront presentations. Well, the company has done that. What it shared is that it has doubled its ad commitments. It also talked about strong demand, not only across its existing programming but also around live events. Alongside this, Netflix said it is expanding its pause-ad format — the ad shown when you hit pause — across its entire platform. This is all very positive, in my view. It suggests we should see another leg up in Netflix’s advertising revenue, not just in the back half of this year, but into 2027 as well.

That leads us to say: it’s time to start rethinking our 3 rating, potentially revisiting it to a 2, maybe even a 1. We have some work to do here, so I just want to put that out there — we are starting that work. We’ll have more comments before too long. I don’t expect them to be final today, because we have some things to work through, but in the coming days, let’s say.

And for folks who might be saying, “Hey Chris, Bill Ackman added Netflix shares to his portfolio” — we’ll simply say, fine with us.

With that, my friends, we’ve got a lot more coming your way today and tomorrow as we close out the week. So please keep checking your emails and alerts — we want to make sure you’re getting our latest thoughts. And if we make any moves with the portfolio, we want you right there with us. Thanks for watching.

At the time of publication, TheStreet Pro was long AMAT and NFLX.