VIDEO: Why Powell Could Upset a Market That Is Nearing Overbought Levels

In today’s Daily Rundown Video, Chris Versace discusses today's profit-taking action with Marvell MRVL and why we want to continue owning the shares in the portfolio.

He also reviews this morning’s economic data and why it could lead Fed Chair Powell to upset the market’s "apple cart" this afternoon.

He also explains why results in several discount retailers give us reason to remain bullish on these two retail-facing positions in the portfolio.

Transcript

CHRIS VERSACE: Hey, friends, Chris Versace here, Wednesday, December 4. And as you've probably noticed, the market is chugging higher and the portfolio along with it. Today, leading the pack for us is, without question, the shares of Marvell. The company last night delivered a beat and raise quarter benefiting from, you guessed it, strong AI demand and the ramp of its proprietary AI chipsets, something that we've been talking about as a real big catalyst for the shares and something that should bring some incremental margin opportunity in the coming quarters.

At the same time, we are starting to see the turn in the core non-AI, non-data center business. Yes, I am talking about carrier infrastructure and enterprise networking. The response to all of this led us to boost our price target to 130 from 105.

But because of such a strong move in the shares coming off this report, due in part to others increasing their price target just like we did, we saw a significant pop in Marvell shares, and that really led to them becoming an outsized position in the portfolio, around 4.8% of the portfolio's assets. As you know, we tend to watch the 4.5% level very closely. And when we see positions move above it, it tends to lead us to take some prudent portfolio action.

And we did that today. We did lock in a very big gain on this slice of Marvell shares, around 150% or so relative to our overall cost basis, a very nice win for the portfolio, a very nice win for members as well. We did also downgrade Marvell shares to a 2 rating. When you look at the distance, 115, 16, 117, depending on where the shares are right now, to our 130 price target, it's not enough for us to say we need to keep this as a 1 rating.

However, I will say that we do see good things ahead for Marvell. Remember, early stages of AI still. We will see further ramping of those proprietary AI chipsets with its partners that we've talked about and the turn in the other businesses. Now, we're going to continue to watch those developments unfold, and we will revisit our Marvell price target as needed.

The next big catalyst for us, we talked about it in the note. It's going to be the November revenue sales report from Taiwan Semiconductor, and we'll be watching that for a raft of other positions as well. But I want to switch gears now and just get us ready for Fed Chair Powell's appearance this afternoon. We know whenever the Fed Chair speaks, the market really listens closely.

We also want to get ready for the next iteration of the Fed Beige Book that will be out later this afternoon. In doing that, we really have to quickly revisit today's November ADP employment report and the November services PMI data from ISM. Why are we doing this? Well, when we think about the Fed Beige Book or monetary policy, the Fed heads that speak and, of course, Fed Chair Powell, we have to remember that the Fed is equally concerned with both parts of its dual mandate, maximum employment, stable prices. And on the stable price front, that means seeing inflation continue to move back toward its 2% target.

In the two reports that we got today, on the employment side, both showed a slower pace of job creation in the month of November. Now, was it something that is going to be alarming to the Fed? No, there was still a positive job creation, ADP, 146,000 jobs, the bulk of it on the service side. And if we look at the ISM services report for November, the employment number, not as robust, but still well in and above the expansion line of 50, so not anything to be overly concerned about.

However, when we take a look at the wage and inflation data found in both reports, we talked about it in the alerts, but just to quickly sum up, the November ADP employment report, year over year acceleration in wage gains for job stayers and a bigger pop for job changes changes, 7.2% up from 6.2% the last month. And inside the ISM services PMI for November, we looked at the prices paid, and in the alert we actually showed you a table of a trailing three-month moving average view. And you can clearly see it has been ticking higher, in other words, moving in the wrong direction. As we think about it, the comments on wages and inflation as we saw today, are more ticks to the December monetary policy pause column, if we want to think about it that way.

Now, here's the thing. The market has continued to move higher yesterday and today. S&P 500, however, and the NASDAQ composite are both now knocking on the door of being overbought. If we focus in on the Relative Strength Index levels, or the RSI levels, that's the classic technical analysis for when the market is overbought, if the readings are over 70, not there yet, but close.

And the concern that we have is if Powell's comments lean toward more toward a December pause than speak to the rate cut expectation that's in the mindset of the market when we look at the CME FedWatch tool, we could see some softness emerge in the market. Think of it this way. What we saw in the data this morning reaffirmed our view to take some very profitable chips off the table in Elastic and Dutch Bros yesterday, both of which deeply oversold-- excuse me, deeply overbought, given their RSI levels. And again today, with Marvell, which as we shared in the alert, those shares have also moved into overbought territory.

So we're going to want to be careful about this. Let's see what the Fed Chair has to say, if he says anything. And we'll also want to take another look at those Fed Beige comments as well.

Before we get to those, though, I do want to leave you with one other thought. You know we're in the midst of the holiday shopping season, and consumers, as we know, are being selective. They're looking for sales, promotional activity, deals, you name it.

That had us taking a real hard look at quarterly results last night, this morning, and we will after the close from the likes of Dollar General, Dollar Tree, and Five Below. And what we've seen so far kind of confirms our thinking that during the holiday shopping season, there are going to be winners, the likes of Amazon, Costco, and bullpen resident Walmart. There will be losers, like we're seeing with Target that sees negative comp sales for the current quarter, the most important quarter of the year.

And there will be companies that are kind of in between, some that are posting modest comp store sales gains compared to what we saw Costco, Walmart. That is where Dollar General, Dollar Tree, and Five Below are likely going to fall. The way I think about it is to the extent that they are showing comp sales that are weaker than those for Costco, it just tells us that Costco is the retailer that we want to have in the portfolio as we go through the holiday shopping season and into next year because, remember, throughout the coming year, we will see the ramp higher in the company's all-important membership fee revenue stream because of the layered impact of membership price increases across the membership base. So for a lot of reasons, we're going to continue to like Costco.

But again, we have a lot more coming this afternoon, Powell, the Fed Beige Book. Please be sure to check your emails, your alerts. We want to make sure you're getting our latest thoughts and insights and analysis. And if we have to make any moves with the portfolio, we want to make sure that you are right there with us.

Thanks for watching. Got a lot more coming this week. Stay tuned.

More Pro Portfolio:

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