Let's Talk PCE, Dell, and Costco

Before we get started, I want to ask an important question…

“Is the AI bubble bursting?”

That’s the question I curiously typed into the newest version of ChatGPT early this morning.

We’re going to talk about what ChatGPT replied with and how its reply confirms a growing trend that I am seeing in the market on Monday. It’s some good research you won’t want to miss.

But for now, let’s look at what’s driving stocks.

Inflation Appears to Be in Check

This morning’s release of the Personal Consumption Expenditures (PCE) price index fell right in line with what economists were expecting.

I could go through the numbers, but you already know what they are from going to the store or the gas station. The growth in inflation has slowed, but prices are still creeping higher.

There was a number that stood out in the report: Core PCE was slightly higher than expected, but that’s not going to derail anything.

Sure, a gallon of milk is back down to $2.99 here in Cincinnati, but the prices of the eggs I buy are still higher than they were before we started this painful surge in prices. We don’t need to go deeper. That’s what’s happening with inflation now. Some things are still moving higher (insurance, rent, and energy), while others are going lower (some food, some travel).

There’s another part of the report that people aren’t talking about this morning. That’s the actual consumption and spending from consumers.

Personal income for the last month increased by 0.3%, which is what economists expected.

Personal spending came in at 0.2%, which was less than what economists were looking for.

To summarize, our wages are catching up with the two-year inflation swell, but we’re now spending less. That’s not a good sign. A trend of slowing spending historically leads to recessions, and you already know that the economy is teetering between a soft landing and a recession.

In summary, this morning’s PCE report did nothing to move the needle on when the Fed lowers rates.

That means that the market is left to trade on prices. I always tell you that “prices don’t lie.” Let’s look at the one chart I’ll be watching today and next week.

The Nasdaq 100 just saw an increase in buying as investors are looking for a “safe harbor.”

You heard me right. It used to be that investors would flock to utility stocks and companies like Procter & Gamble when they felt confused by the market, but now we feel safer with the high-volatility tech names.

Given this, I’m watching the Nasdaq 100 chart very closely for the next week.

Here’s the chart.

qqq stock chart

The Nasdaq 100 is likely to move quickly to its $440 price. That price represents the area where we saw a long consolidation in March as well as the ETF’s critical 50-day moving average. A break of that price will target a 9% decline to $405 in relatively short order.

Keep in mind that the additional headwinds of June’s seasonality and the headlines that we’re likely to see from the political world will add to stocks’ volatility.

Let’s Talk About Last Night’s Earnings for a Minute

Dell Technologies provided their quarterly earnings last night. The company reported earnings per share (EPS) results that met expectations on better-than-expected revenue results.

Shares are trading down nearly 20% this morning.

The reason? Dell (DELL)’s outlook. But I’m going to argue that their outlook isn’t really the reason.

Dell’s management indicated that next quarter’s EPS results are likely to be lower than what the market expects. At the same time, they see revenue higher for the next quarter and fiscal year 2025.

That makes complete sense. Dell is spending money to ramp up their production of AI servers to meet growing demand for AI infrastructure. Those expenditures will be short-term and affect the company’s profitability next quarter (EPS).

Bottom line: that outlook isn’t what is causing Dell to drop 20% today. Instead, it’s the “sell the news” crowd taking profits from Dell’s recent rally.

Over the last month, we’ve seen Dell break out and rally more than 40% as investors anticipated a stellar earnings report from the company. The stock getting great comments from Jensen Huang, Nvidia (NVDA)’s CEO, didn’t hurt.

That anticipation led to a 40% “buy the rumor” rally right up to the days ahead of Dell’s earnings.

This “sell the news” pullback should be short-lived and find support at $130. That’s where I consider opening or adding to existing positions, with Dell’s price target above $200.

dell stock chart

Costco Beats Earnings but…

Costco (COST) shares are trading lower this morning after the company beat their earnings targets. Like Dell, Costco shares are trading lower this morning.

There are two reasons for the stock’s drop.

First, like Dell, Costco stock saw a rally in the weeks leading up to its earnings report last night. While not as large as Dell, the 6% rally represents nothing more than a “buy the rumor” move as traders were trying to front-run the company’s earnings.

Those short-term traders are now taking their profits and moving on to their next target.

The second thing bringing Costco shares down? They didn’t raise their membership prices.

This was literally the first thing that I looked for as the management comments were trickling in.

At the end of the day, Costco’s new CFO confirmed that the price of their hot dogs and memberships would remain the same.

Many analysts were expecting the company to take the low-hanging fruit of moving membership prices higher since that’s money that goes straight to the company’s bottom line. They haven’t increased those fees since 2017. But instead, the new CFO decided to wait.

Reflecting on the move, this may be genius.

We’ve already talked about consumers spending less today. At some point, that spending slowdown will start to trickle through Costco’s doors. But when that does happen, the company can play the membership “chip” to throw revenue to the bottom line, offsetting slower revenue from sales.

Costco remains a consistent performer and a consumer favorite.

That, along with the stock’s chart, suggests that the $790 level is a fair level to add the stock to a portfolio with a target price of $900 well before the end of the year.

cost stock chart

I’ll be back in just a little while with the second installment of this week’s “Fast Profits” with a look at a bearish trade idea in the consumer discretionary sector.

In case you missed yesterday’s bullish idea, you can click here to view it.

About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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