2024: Election Cycle in the Year of the Dragon

Position Update: Potatoes, Coffee, Burgers, and Teddy Bears.

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2024 is more than likely to be a wild one if the first two weeks of January hasn’t dropped the crumbs already.

The last Year of the Dragon in 2012 followed a period of recovery from the global financial crisis of 2008 – and also the year when Obama secured his second term. We have an election year that could wildly swing the market. Here’s what I’ve observed through my own trading and historical data points:

Since World War II, the S&P 500 has gained all 14 times in the year that a president has sought re-election, regardless of who wins, with an average total return of 15.5%. That compared to the index's average annual return of 12.8% in the same period.¹

Couple this with the Fed likely to cut rates in H1 of ‘24 and slow down the balance sheet reduction, this combined macro juncture is likely to increase liquidity into the market for the election year. I’ve been told in the past from other prolific traders that going long during Q2 has been a decent bet in such reelection year.

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As an options trader in an election cycle, I’m more inclined to engage in swing trading on a shorter timeframe, typically between 1 to 3 months, as opposed to the 6 to 8 months holding period. My focus lies primarily on technicals, corporate events, and macro trends. Moreover, I have a tendency to start raising cash in the mid-January to sit on the side, observe, and possibly identify weak sectors to short based on seasonality. In either case, Q1 will likely be choppy, rewarding mainly those who can take profits quickly without becoming overly enamored in a position or a company.

"Treat the stock exchange like a cold shower (quick in, quick out)."

— A traditional Rothschild family maxim.

Position Update for January ‘24

Lamb Weston ($LW): The “Rolls-Royce” of French Fries

Lamb Weston is the leading supplier of frozen potato, sweet potato, appetizer and vegetable products to restaurants and retailers around the world. Did I also mention that it’s the 5th largest position in Duquesne Family Office?

CapIQ: Duquesne Family Office 13F data

Druckenmiller’s position in his portfolio is reassuring, but what initially caught my attention was my research into its commercial customers. If you've ever wondered who supplies McDonald’s classic fries, you guessed it. Troy Grimes, Director at Lamb Weston, noted that “[it] can dig anywhere from a thousand to twenty-four hundred tons of potatoes per day…and the majority of these will go into McDonald’s Fries”.²

A trade in LW is a bet on a high-volume, margin-expansion business within the QSR segment, operating in the potato-farm processing oligopoly. Besides, foodservice and retail are large revenue drivers. This is just a high-level overview of the company, and I'll provide a more comprehensive write-up on its fundamentals and business at a later time (hint: it’s stellar). It, however, met my overall criteria to go long after its Q2 earnings call.

There was an initial surge after the earnings call on January 4, reaching a peak at $111.88. However, large institutions sold into the strength and volume at the open after its top and bottom line beat announcement in the pre-market. Similar reactions occurred in the last few earnings. With 89.20% of outstanding shares owned by institutions, it’s plausible that some funds might be looking to take profit and rotate out of their positions. Nothing alarming in my opinion.

I opened $110 OTM calls expiring on April 19, 2024, with the expectation that Q3 earnings on April 4 will deliver based on its FY guidance. Technically, the chart is also exhibiting a Golden Cross and MFI divergence in the short term. The ex-date is on February 1, with the expectation of a small run-up to it. This is a short-term trade with a price target between $112 and $115 in the coming weeks.

Starbucks ($SBUX): Horrid sentiment, nullified premium trade

This ubiquitous coffee chain requires a separate post that unpacks its thorny PR issues around the brand sentiment. I’ll do it soon. I opened a small March OTM call position on December 6, 2023 with the thesis that corporate’s talk with the union will occur sometime in January, a period also covering its Q1 earnings on February 2.

I’ve been adding slowly on the thesis that the Q4 ER gap is unlikely to be completely filled but the higher than expected CPI and PPI prints last week caused it to do so otherwise. More than the RSI, because Money Flow Index incorporates volume into its metrics, I tend to put a bit of weight to its divergence from the stock price movements. More here. Though I have paperloss on the trade since increasing my stake for the past two weeks, my bet is that the trade is early.

McDonald’s ($MCD): McGoldenCross

McDonald’s OTM call trade from October through December yielded exceptional results, though it would be remiss to assert that it didn’t cause heartburn at various points in the trade due to Vega collapsing. For the week of January 8, I took majority of the profits on my last tranche of OTM calls expiring on January 19. It made the Golden Cross, SMA 50/200 day crossover, a few days ago. Thus, $299.99 could be another test before Q4 earnings on February 5 – unless the market sees this area as a Head-and-Shoulder formation in the coming weeks.

Build-A-Bear Workshop ($BBW): A Bullish Long Term but in Purgatory

$BBW Multiples via Capital IQ

My last post on BBW discussed Build-a-Bear’s Q3 earnings results and the “softness” the management had pointed out. The stock retreated over the past several weeks, but I would argue that the multiples are now aligning with my favorite “Cigar Butt” territory, i.e., a GARP trade.

In my view, it is currently heading towards the time-tested support area between $21 and $22 before a trend change. On another note, I was disappointed that BBW did not participate in the 2024 ICR Conference, as they have done in the past during the first week of January. They often announced FY Guidance at the event, but unfortunately, not this year. I do not take this as a good sign and plan on taking a loss on this trade for the January ‘24 OTM calls expiring this week. This is the inherent risk of trading options based on corporate events – but also do believe that Build-a-Bear offers a gratifying trade in the long run if one can endure volatility. I’m stepping away for now.

2024 will reward those who can be tactical and nimble.

All in all, no one can foresee how the market will behave during this year’s election cycle, especially with the Fed likely to loosen its policies and geopolitical risks once again plaguing the supply chain. All we can do is make educated guesses, skewing the probabilities toward our speculation while minimizing losses through position sizing. Regardless, it will be a fun year of trading.

Disclaimer: I have long options positions in the aforementioned companies, and this post does not constitute financial advice.

1. CFRA chief investment strategist Sam Stovall via Reuters

2. https://www.mcdonalds.com/us/en-us/about-our-food/meet-our-suppliers/100-circle-farms.html