VIDEO: Here’s Our Plan for This Oversold Portfolio Holding

In today’s Daily Rundown video, Chris Versace lays out what the portfolio will be focusing on this week, with the S&P 500 short-range oscillator not yet flashing oversold. As part of that, he explains why a Santa Claus rally could still emerge and runs through the few pieces of economic data we’ll be digging into later this week.

And while shares of Builders FirstSource BLDR are at our panic point, Chris explains why we’re going to wait for several data points before making our next move with the position.

He also reminds members that just because we reset market and portfolio performance metrics once we ring in the new year, the clock doesn’t run out on our investment thesis and thematics.

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Transcript

CHRIS VERSACE: Hey, folks, Chris Versace here. Monday, December 30, second to last trading day of the year. And so far, as you've probably seen, we've got a lot of questions about a potential Santa Claus rally. In Friday's rundown, we shared the market was not quite oversold, kind of trending that way. And when we look at the S&P short range oscillator today, it is indeed trending in that direction.

And based on what we see in the market activity today, we very well could see that oversold level be triggered. Probably the biggest catalyst that we're seeing on that is the move that we've seen in the 10-year Treasury yield. It's hovering right around 4.6%, up over the last few weeks and higher than the Fed funds rate, which is currently somewhere between 425 and 450 basis points.

Now, if the market becomes oversold-- and, again, this is looking rather likely-- we could see it snap back, potentially lifting it higher for the days of a Santa Claus rally. Remember, last five days of the year, first two days of the new year. So today, again, we have trading today, tomorrow. And if we cap on the next two first days of 2025, that means we need to pay attention at least through the end of the week to see if we do have a Santa Claus rally.

Now, we also have to remember that we do have a seasonally slow time of year. There are no Fed speakers. We don't have any market moving earnings reports coming this week. Trading volumes are light, especially this time around because of how the New Year's holiday falls Wednesday. But later this week, we will get some inflation-related data. I'm talking about the December manufacturing PMI report, both from S&P Global on Thursday and ISM on Friday.

And then early next week, we get the December services PMI, which will bring a lot more information about the economy and a lot more insight on inflation, especially in the services part of the economy. We know the Fed is watching that. We are watching that closely as well.

Later this week, we're also going to get the November construction spending data. You know that we're going to be paying close attention to that when it comes to our shares of United Rentals, Vulcan Materials, Builders FirstSource, and, to a lesser extent, waste management. And I want to take a second and just talk about Builders FirstSource. We're aware it is sitting right on top of our panic point. But at the same time, the shares are extremely oversold when we look at the RSI level.

At the same time, when we look at the technicals, particularly the MACD indicator, we are seeing signs that it could be turning up. And we saw this with some of our other holdings last week that were oversold, and that led us to pick up some more shares. The difference with Builders FirstSource, however, is that we want to see the next round of inflation data. Again, we'll get some of that later this week and then again early next week.

Why is it we're so fixated on this when it comes to Builders FirstSource? Well, if you remember this time last year, the market was very much ahead of itself when it came to the topic of rate cuts. Six, maybe seven for all of 2024, it saw. And as we move through the year, those expectations change.

Now, as we sit here today, we look at the CME Fedwatch tool. The market is expecting one rate cut in 2025. Now, we are going to want to follow the data. But here's the thing. If inflation does get back on track toward the Fed's 2% target, the market very well might have to readjust its expectations for rate cuts.

In other words, as we look at the data for December, January, February, March, and so on, if we see the numbers trending back towards 2% for the CPI, for the PPI, both on a core basis and for the core PCE, the market is likely to have to revisit the topic of potential rate cuts.

And that means it might have to reconsider that maybe there is maybe be more than one rate cut in 2025. So the bottom line with this is we are going to, at least in the near term, wait to see what the next round of inflation data has. And based on what we see, we'll make our next move with Builders FirstSource.

It also means that when we think about where the 10-year Treasury yield is, hovering around that 4.6% level, we are going to have to continue to pay close attention to the incoming data, both for the economy but also the inflation and what that could mean. Following the data, though, as you know, it is nothing new for us.

Remember, too, the next few days, likely to be seasonally lighter volumes, as I pointed out before. And it also means, however, that when we think about benchmarking the market, come the New Year's Eve holiday, with the market closed, it means that come Thursday when we start trading, those benchmark clocks are going to get reset to zero.

It'll happen for us, too. Happened for the S&P 500, the Dow Jones Industrial average, the NASDAQ composite, all of them. All those clocks, so to speak, reset to zero. But let's remember that the clock does not run out on our investment theses, the thematics that we use, the fundamentals, or even the technicals just because we're ending 2024 and entering 2025. So we will continue not only to follow the data. We'll continue to let the data talk to us, and we'll continue to stick to the work that allowed us to perform like we have so far in 2024.

Now, coming up, we're going to take a look at what we got right in 2024 and what we could have done better in 2024. So even though things are a little quiet today and then increasingly so tomorrow as folks get ready to ring in the new year, please be sure to check your emails, your alerts. We want to make sure you get our latest thoughts, and if we happen to make any moves with the portfolio, we want to make sure that you are right there with us. Thanks for watching.

At the time of publication, TheStreet Pro Portfolio was long BLDR.