September 11 - 15, 2023

Tactical Signal 9

Equities faced a downturn in momentum last week, primarily driven by significant declines in Apple and NVIDIA stocks, both registering nearly a 6% drop, thereby exerting notable influence on the S&P index. Fundamentals remain watchfully mixed but positive as economic reports were better than expected. Sowell’s tactical models watchfully remain in full position (100%).

During the past week, the equity markets, which had previously seen robust growth, particularly in technology-led growth stocks, experienced a downturn. Notably, companies like Apple and NVIDIA played a role in the S&P 500 index's decline of -1.26%. Additionally, long-term bond yields expanded, with the 20-year yield reaching 4.52% and the 30-year yield at 4.33%, causing the Bloomberg US Aggregate to decrease by -0.30%, bringing the year-to-date gain to 0.59%.

The second-quarter earnings season has essentially concluded, with approximately 80% of companies surpassing earnings estimates. Earnings outperformed the same period in 2022, but all eyes are now on interest rates. The next Federal Open Market Committee (FOMC) meeting is scheduled for September 19-20, and market attention is closely focused on this week's Consumer Price Index (CPI) and Producer Price Index (PPI) reports, which will influence the Fed's decision on potential rate hikes. Last week saw a decline in Factory Orders by -2.1% and Wholesale Inventories declining by -0.20%. The market's probability of an imminent rate hike remains low unless there are surprises in the upcoming CPI reports.

As previously discussed, there is a notable shift in central policy and narrative, with a more hardline Fed likely to implement more frequent rate hikes than the market had anticipated thus far. As a result, investors should brace for increased volatility in the lead-up to the next three FOMC meetings scheduled for the remainder of the year.

"High wall-big gate is the right position for Biden. Only by assuring Americans that we have a high enough wall to control illegal immigration — or its equivalent in terms of border controls and repatriation measures — can we maintain a public consensus for a big gate… Alas, brains are distributed evenly around the world. The great advantage America has had, though, is that while we were just roughly four percent of the global population, through immigration and our open universities, we attracted a far higher percentage than any other country of high-energy, high-aspiring lower-skilled workers and high IQ risk-takers who start new companies, notes Craig Mundie, Microsoft's former chief research and strategy officer. Steve Jobs's biological father came here from Syria to be a student, and the result was Apple. Sergey Brin's family moved here from Russia, and the result was Google."

— Opinion Columnist Thomas Friedman, We Need a High Wall with a Big Gate on the Southern Border, Apr. 13, 2021.

Doubling Down on Growth: Duolingo's Success Story

Duolingo Owl Memes

Duolingo (DUOL), a mobile language learning platform, has once again surpassed its earning estimation in Q2 2023, maintaining its impressive growth trajectory for another quarter. For Q2 2023, Duolingo reported significant enhancements in its active user numbers, EBITDA, and free cashflows, marking another milestone towards a steady, fast-growing company since going public in 2021.

The remarkable growth of Duolingo can be attributed to its ability to ride the wave of emerging trends. Amidst the COVID-19 pandemic, Duolingo seized the opportunity to position itself as a leading language education provider accessible from the comfort of one's home. While traditional educational institutions are struggling to adapt to the new reality of online learning, and while the pandemic made it challenging for foreign applicants to attend the traditional on-site language tests like TOEFL, Duolingo swiftly captured the market share with at-home language learning apps as well as certified language tests, generating a great growth in active users and subscribers. Besides, in the era marked by viral internet culture, Duolingo exhibited another remarkable trend awareness by incorporating meme pictures into its marketing strategy. The iconic "Duolingo Owl" character, often portrayed as a relentless language learning taskmaster, became a cultural phenomenon and was embraced by Duolingo into its marketing strategy, which helped in attracting new users and enhancing user retention.

As a result, Duolingo has realized a 62% growth in daily active users and a 50% growth in monthly active users in Q2 2023 compared to the prior-year quarter. Such increases in base user numbers and paid subscribers contributed to Duolingo's robust financial performance, evident in metrics such as net income and cash flows.

In Duolingo's shareholder letters of Q1 2023 and Q2 2023, Luis, the CEO and co-founder of Duolingo, emphasized their commitment to utilizing machine learning and AI to make Duolingo more personalized and engaging. The integration of AI not only suggests cost reduction but also aims to deliver a more engaging user experience to attract further subscribers. Additionally, they have expressed interest in expanding their online learning tools beyond language education, as they saw more demand in other online pre-school education like mathematics and science. As of mid-2023, Duolingo has raised its full-year guidance, signaling the initial achievement in its forward-thinking growth strategy and conveying its intent to sustain this positive trajectory. DUOL's stock has shown notable growth this fiscal year, increasing by 106% up to 8/31/2023.

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Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.


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