Talking Equities is a weekly newsletter that provides information regarding equity analysis, investor spotlights, market conditions, and investing strategies. All information provided in Talking Equities should be considered an opinion and not a fact. All information should also be considered as strictly educational. While I would love to claim I have all the answers to cracking the stock market, I simply do not. Invest at your own discretion!

All other sectors that haven’t seen any love for the last two years

Happy Tuesday Investors,

A great migration is upon us and investing opportunities are about to start being offered all over the stock market like a Black Friday deal.

Over the past couple of weeks, many investors have begun moving their money from Big Tech (specifically the Mag 7) into recessionary stocks that have received little attention due to high interest rates over the last two years. This has caused large downswings in the tech sector which many were predicting was inevitable given the absurdity of the AI bubble.

In this week’s newsletter, we will discuss the many different theories as to why this great migration could be happening and what it means for your portfolio.

We will then go into how you can manage the risk of buying these companies through a “Trailing Stop-loss”, an investing strategy that provides insurance in case your position falls out from under itself.

After that, I dive into the fundamental and technical metrics I look at to determine if an investment is a good opportunity or not.

Buckle up, this week’s newsletter is a big one, but we’ve got a lot to cover given the current movement of money in the market. The time is now to be prepared so that we can make some money in the near future.

Let’s get into it.

A great pivot from tech to deflationary stocks is happening in the stock market, and investors are trying to figure out why. Over the last week, the Magnificent 7 has experienced a large influx of abandonment as many investors are allocating their money to industries that have seen little love over the last three years.

The S&P 500 decreased by 1.3% last week in comparison to the NASDAQ which decreased by 2.08%. With the Mag 7 accounting for a third of the entire S&P 500, it is clear that the NASDAQ was the main culprit in the S&P 500’s decrease. However, industries like industrials, healthcare, REITs, and utilities are finally starting to come to life and support their end of the bargain.

Although many have hypothesized a time like this would come soon enough, many investors are theorizing what the actual root cause of this great migration is.

Some of the current theories include…

1. Trump’s impact on the American economy if he were to become president

2. The possibility of an interest rate cut by the end of the year

3. The tech sector has hit its valuation limit and now investors are moving their money to less obvious opportunities

While these are all very valid points, I believe that the main culprit for this decrease is the second point on this list. It wasn’t until updated unemployment and CPI numbers were released that things really started to change in the stock market landscape. With unemployment increasing and consumer purchasing power increasing, obvious signs of our economy transitioning into deflation started making its debut.

The effects of deflation can have some serious implications on the U.S. as it cools down from the many months of inflation we have recently experienced. As companies begin to borrow less because of high interest rates, they will inevitably earn less. Because of this, they will be forced to drop prices to sell their product as well as perform layoffs to sustain their profit margin. This is then reflected in our economic metrics that we are now starting to see when unemployment increases and consumer purchasing power increases.

This period where companies begin to contract is known as deflation, and by analyzing the metrics above we can determine that our country is likely heading towards this. The hope is that when the U.S. meets a certain point in our economy that the Federal Reserve determines an optimal zone, then they will pull the interest rate levers and start to lower them again.

This could have an enormous impact on many of the industries that have seen little love in the last two years due to high interest rates. Sectors like real estate, healthcare, and insurance have all seen a dramatic increase in investment recently, likely due to the theory that they will experience higher earnings once interest rates fall.

These aren’t just small gains either, dramatic shifts are happening in these sectors that should not be written off. Below are a couple of examples of what I’m talking about.

• UnitedHealth Group (UNH) $488 on July 10 → $581 on July 18 (Healthcare Sector)

• DR Horton (DHI) $136 on July 10 → $178 on July 18
  (Real Estate Sector)

• Caterpillar Inc. (CAT) $321 on July 10 → $368 on July 18
  (Industrials)

All of these sectors have one thing in common, they are safe zones for investors who are trying to protect their portfolios from incoming recession or deflationary environments.

While the news of interest rate cuts may initially seem like great news for investors, the U.S. economy needs to go through a contractionary period to get to where we once were. Many high-quality equities will most likely hit their 52-week low, and when they do, it will be the perfect opportunity to make some money.

Have you ever wondered how you can develop a trading strategy that mitigates the risk of having a losing position? Many of the best investors say that the reason they are successful is because they understand how to mitigate risk, but how do you actually go about doing that?

The main response that you will find is diversification. The theory is that you should own a portfolio of stocks that exposes you to different industries so that you aren’t associated with the entire risk of one sector. While this is a great fundamental strategy, it’s not the only one.

Let me drop a humbling statistic on you. Given the randomness of the stock market, it is likely that an equity purchase you make will result in a loss 70% of the time. That means 30% of the time you will find a stock that will actually yield a profit.

Moreover, the most common reason that a retail investor like you or I lose money is because they get too emotionally involved in the movement of a stock they have invested in and decide to make a rash decision.

It happens to everyone. We make an investment based on good fundamental analysis, the stock falls out from under itself so we panic and sell, and then a couple of days later the stock shoots back up again. Or even worse, we make the right call and the stock goes up a couple hundred dollars and we sell too early because we think that it has hit its peak and then it rises another couple of hundred. (As you can probably tell I’m talking from experience, I bought a couple of shares of NVIDIA when it was at $200, sold at $400, and now the price is around $1200 before the stock split.)

Yet, many people still make emotional trades without any sort of insurance preventing them from losing all of the money they have bet on that position.

Before you throw in the towel and retire from your career as the next Jordan Belfort, I have good news. There’s a way to mitigate this risk and it doesn’t involve checking your stocks every 5 minutes.

It’s called a “trailing stop-loss” and it has become a foundational aspect of my trading strategy.

A trailing stop-loss is essentially a percentage that you determine that will consistently follow your position upwards, but if the stock ever falls out from under itself and touches that point, it will sell. For example, say you make a position in Meta at $450 and decide to make a trailing stop-loss of -10%. Let’s say the Meta position rises to $544 and then falls 10%. That means your trade would have exited at around $490. You profited $40 (if you only had one stock) and had the appropriate tools in place to prevent losing all of the money that you gained.

Let’s look back at that 70% loss and 30% gain statistic I mentioned earlier. If it is likely you will lose 70% of the time, and win 30% of the other, you better lose small during the 70% and win big during the 30%. That’s the best part about a trailing stop-loss. It gets you out soon enough so that you don’t lose all of your money, but it still allows all of the potential upside a stock might have if it increases. Translation, it allows you to win big and lose small.

So what is a good trailing stop percentage to set on your trades? The average whipsaw (a price movement that swings drastically downward and then drastically upwards) is about 6-8%. This means that you should probably have your trailing stop around 10% so that you aren’t exposed to possibly selling out at the wrong time due to whipsaw and then the price skyrockets.

Many people may argue that this trading strategy goes against the strategy of investing in the long run. After all, the main theory of investing in index funds is to not worry about the positive and negative downswings and to constantly invest no matter what.

While this is true, I would say that if you are looking to take a more hands-on approach in your portfolio and make trades that have the potential of making you large profits, it is essential that you include trailing stops in your portfolio. I will not sell a position that I have unless it hits my trailing stop. It has completely removed my emotion from the equation and allows me to sleep soundly knowing that even if everything falls out from under itself tomorrow, I am still prepared for a downturn in the market.

With new opportunities beginning to show themselves all around the stock market, it is even more important to know what to look for so that you can make great investment decisions. In this section of the newsletter, we will dive into a few of the core metrics that I look at to validate if an investment is a good opportunity or not.

I am a firm believer that a hybrid trading strategy (one that uses both fundamental and technical indicators) is essential in order to make more accurate investment decisions. It is not required for an investor to use all fundamental and technical indicators (although the more you understand the better decisions you can make), but it is typically good practice to choose a couple that give you a good understanding of the company’s standing and stick to those for most investments you make.

Fundamental Analysis

Fundamental analysis is mainly comprised of gathering information that provides insight into the operations of the company. Some indicators within fundamental analysis can be used to assess metrics like the company’s revenue, expenses, debt, liquidity, free cash flow, and more.

The first metric that I use is something called a P/E ratio (price-to-earnings) ratio. This is what is known as a comparable multiple or a comp. Comps are used regularly throughout the investing community to compare the operations of one company to another company that may provide similar services within the same sector. For example, one might compare the P/E ratio of Target and Walmart because they both operate within the consumer staples industry and sell similar products to their target audience.

The P/E ratio can be calculated by taking the company’s share price and dividing that by the company’s EPS or earnings per share. The reason why this is such a great metric is because it tells investors if the company is trading at a good price given its valuation and quarterly earnings. If the P/E ratio of the company you are analyzing is lower than its competitor’s P/E ratio, then that is a good indicator that the stock still has a lot of room for growth.

For example, Target’s current P/E ratio is 16.6 while Walmart’s P/E ratio is 29.6. This is a pretty big difference and shows that Target’s stock price is probably undervalued. However, that doesn’t mean I would immediately start buying as many shares of Target as I possibly can. There are a lot of other things that I would need to consider before making my final decision. One of those considerations is the company’s EPS.

The EPS can be used to determine if a company has been meeting its estimated earnings goals every quarter and how consistent those earnings have been. Below is an example of a Target’s current EPS.

What this graph above tells me is that Target was performing well in the first three quarters and that it was exceeding expectations. In Q1 2025 however, it seems that their earnings have slowed and they missed their estimated earnings mark. Now this doesn’t mean that the stock will instantly plummet. I’ve seen companies report missed earnings and skyrocket. What it does show however is that the company may be experiencing some operational deficiency which is causing it to earn less. When I see something like this, the first place that I turn to is their earnings call.

The earnings call can be found on any public company’s website, typically under a section called “Investor Relations”. An earnings call is released every time a company releases its quarterly earnings and it describes all of the financial metrics and operational direction of the company. Typically, in a situation like Target’s, the company will address the reason as to why they may be experiencing lower earnings than usual.

By listening to Target’s earnings call, you would find that Target has been experiencing major operational inefficiencies because of the effect inflation has had on its food and household essentials offerings. Consumers have begun to pull back on their spending to save money, which has directly impacted Target’s earnings. This might make you think twice before accumulating your own stockpile of Target’s stock.

One of the last main concepts that I like to consider is not necessarily a metric, but a theory. All of my investment decisions are made based on the idea that the company will likely perform well given the current economic landscape. I use the metrics I include above under “Market Movement” to determine if a company will operate well given the economic metrics that have recently been released.

For example, in today’s economy, there is a very likely chance that the U.S. will receive an interest rate cut by the end of the year. This could mean that companies that benefit from low interest rates will experience more revenue since there haven’t been favorable rates in the last two years. Companies that fit this criteria may be great investment opportunities if their other fundamental and technical indicators provide the same insight.

These are just some of the fundamental indicators that I use to find investment opportunities. They are not exhaustive, and I highly recommend learning about other metrics as well because they can provide further insight into the company’s operations.

Technical Analysis

There has been much discussion over the last couple of decades within the investing community about whether technical analysis has any validation or if it is the crazy uncle of investing that believes in conspiracies.

Technical analysis involves using charts that are comprised of previous data to project what a stock will likely do in the future. The main argument against this type of analysis is that if the stock market is completely random and cannot be predicted, then how can technical analysis be useful?

While this is a valid argument, it is a direct testament to why investors should adopt a hybrid investing strategy that uses both fundamentals and technicals. Relying too heavily on one side can be detrimental to your portfolio and will certainly lead you to many headaches. Although technicals cannot predict what a stock will do every time, they can provide clues as to what consumers may be thinking about the stock and the direction that it could be heading.

The first technical indicator that I use is the Moving Average or MA. The MA can be used to determine whether a stock may be moving in an upward or downward trend. This is important for investors who are trying to invest with the trend because it can give signs as to when the stock price will be turning in the investor’s desired direction.

I have met investors who use the MA religiously and have built entire firms around the concept of trend investing. The idea is that they make most of their money when there is a clear indication that the stock is trending upwards. They don’t necessarily worry about purchasing at low points or high points, they make all of their money in between.

The second technical indicator that I use is the MACD or Moving Average Convergence Divergence. This momentum indicator provides insight into how quickly a stock’s price is increasing and in what direction. I use the MACD to determine when investors may be looking to rally behind a company, which will inevitably drive up the stock’s price.

At the bottom of the image below you will see a separate chart from the price movement chart, that is the MACD. The green bars indicate how quickly the price is moving in an upward direction and the red bars indicate the reciprocal. The orange lines that you see crossing over each other are moving averages that help indicate what direction the MACD may be heading.

These are both of the main technical indicators that I stick to when making investment decisions. I was always taught that you don’t need to use every technical indicator to understand the direction of the stock, just pick one or two that work best for you and always stick to those.

By using the fundamental and technical indicators above, you can begin to develop an investing strategy that is consistent and removes human emotion from the equation. I live by these metrics and if they are not fulfilled I will not take a position in a company. With so much money moving around in the market today, you are now equipped to carry out the analysis needed to find great companies and profitable investments.