Short

LVMUY -- short

Updated

I am looking for a short entry to LVMUY based on the double top pattern.

Louis Vuitton Moët Hennessy (LVMH) presents with two conflicting chart patterns, which are drawn using LonesomeTheBlue's excellent HPP indicator at the default settings. Based on the statistics provided by that same indicator the Anti-Gartley is the slightly more compelling one with an 80% win rate (4/5) and a profit factor of 23.44, while the double top has a 71% win rate (5/7) and a profit factor of 12.48. So, why then do I want to go short?

For three reasons:

Per LVMH's last quarterly earnings release, the company derives 34% of its revenue from Asia ex-Japan. The bulk of that presumably from China. Given the widely reported problems within the Chinese economy, I believe that many Chinese consumers will choose to avoid spending on the conspicuous luxury products that LVMH is famous for.
LVMH has a very close correlation (81%, over the trailing 2 years) with FEZ, the SPDR Euro Stoxx 50 ETF. This ETF has outperformed the US market in 2022 and through mid-July, 2023, but has since started to lose traction.
I expect that the dollar strength of the recent weeks will continue, unless tomorrow's speech by chairman Powell offers clear indications that the Fed hiking cycle is concluded. This dollar strength is ultimately bearish for US listed equities. This point also hints at one reason I might choose not to activate the trade. If the reaction to the Jackson Hole speech tomorrow is very bullish, I may reassess.

For the purpose of this idea, my price target will be the level suggested by LonesomeTheBlue's HPP indicator, i.e. 154.32. Stop loss will be around 180, roughly corresponding to the 23.6% retracement level of the run from September 27, 2022, to April 21, 2023.

Trade active

Powell speech was hum-drum. No clear end to the hiking cycle. No serious concern about the stresses that are emerging in the US and global economy. It's on.

Note

This idea got close to getting invalidated, but it's working now. The stock put in a new multi-month low, as the dollar is strengthening again. Today Chinese real estate developer Country Garden postponed by one day a creditors' vote on an "extend and pretend" measure on a domestic bond, since apparently some bond holders were unwilling to accept the restructuring proposal. Unless that proposal gets done, it's hard to imagine that Country Garden will pay the interest on its offshore bond, which is already delayed, and which will reach the end of its grace period next week. Real estate represents 25% of the Chinese economy, and it's not just the investor class that is losing money, Construction workers have gone unpaid, and there's clearly a lot of rage brewing. I expect that the CCP will soon be forced to mobilize the central government's resources to end the crisis, but there will probably be more pain to come for the affluent class.

To cut the long story short: I believe the market for 10k hand bags and $500 champagne bottles in China is going to suffer. And I don't see it take off anywhere else, either. Staying short.

Note

The beating of China-centric luxury retailer LVMH continues, That said, The stock has now reached the March low. Country Garden has been able to get a reprieve from its domestic creditors, and has made the past-due interest payment on its USD bonds, narrowly avoiding default.

A bounce is quite possible here. Taking partial profits is a prudent move.

Trade closed: target reached

Technically today's low is 3¢ above my target, but close enough. I am closing this out.

matthias

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