What The Ffff.....ibonacci Has Happened To Tech Stocks?
This isn't our first rodeo. Nor will it be our last. Read on!
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But Seriously Folks…
Look, just for a moment let’s take this Great Stock Market Game seriously. Because - with a nod here to fellow Substacker Not Boring - although the pieces in the game are just little letters and numbers that go red or green, the output of how you play the game can either buy you houses, or have a couple guys in a panel van come to your last remaining house to take away the TV.
Most people playing the game at the present time are a little stunned at the severity of what they think is a bear market. At least, that’s the sentiment that bubbles to the surface online and at whatever remains of the office watercooler chat ritual. But in truth that tells you more about who is voicing the sentiment than the veracity of the sentiment itself.
Big Money institutions aren’t sweating it right now. Joe P. Retail is sweating it right now.
Old-line hedge funds aren’t sweating it either. But new-name gonzo-levered funds are.
Like that.
Which tells you exactly what your own limbic response should be to the current situation. (Hint: always play like Big Money. Never play like Joe P. Retail.)
Allow us to explain.
Markets, by which we mean the major indices - your S&P500s, Nasdaqs, Russell 2000s and whatnot - move in somewhat predictable cyclical patterns - predictable that is over a very long time period, measured in years. Up some, down some, up some, down some. And so on.
Over decades, always up, because markets in some sense represent the sum total economic output of human endeavor, and since there are more humans on the planet with each new decade that passes, and since something in human DNA is expansionary and growth-oriented (you ever see anyone hoping to achieve less next year? Outside of your old stoner buddies’ rehab group?), economic output up, markets up. As long as you zoom out far enough.
If you look through the correct lens at market movements and if you conceive of the drivers of market pricing in the right way, you can discern the patterns and understand the reason for the patterns. The reason is simply sentiment. Do the majority of market participants feel bullish over a certain time period, or bearish? This is the key driver of market movements - the rest is just an array of inputs into that sentiment. Actual news and expected news about rates, war, economic output, famine, pandemics, weather, lean hog production, whatever. Just inputs into the chemical analog-to-analog converter known as the wetware. Unlike $TXN’s finest, the signal processing in your brain is mainly mush. It struggles to discern signal from noise, is incapable of generating a steady, predictable sine wave output and just lurches from frequency to frequency hoping for a better outcome than yesterday. And algorithms are no better, because guess what writes the algorithm? A different part of the same mush.
Fortunately, the mush in question is low-grade and unoriginal. And this means that the degree to which the mush gets miserable and then gets happy can be measured. And you can measure these swings in sentiment using tools derived from the Golden Ratio upon which the mush builds little blocks of happy. You like the proportions of that building? Prolly built according to the Golden Ratio. Flowers? Golden Ratio. Snowflakes? Golden Ratio. And so on. See? Predictable. 1.618:1. All you need to know to unlock the mysteries of the market.
If you can learn to use the Fibonacci tools now available to you for free courtesy of the most value-destructive force ever set loose by capitalists upon other capitalists - aka. the Internet - then you can see that we aren’t in a bear market right now. We’re just in a modest pullback for markets, an entirely predictable pullback in fact.
Not to shout about it too much, pride coming before a fall and all, but we did predict more or less this pullback to more or less this depth at more or less the right time, in our Growth Investor Pro service back in November.
We can say that happened because we are investing genius types, but that’s not true. It was because we know what is signal and what is noise. Noise is CNBC, Twitter, earnings reports, other people’s opinions, one’s own internal narrative about what is happening and why. Reds and greens on the screen. Price alerts. All noise. Fun sometimes for sure - who doesn’t love a little stonk-hate-tennis? - but it’s fun, not work. Work is signal.
And, signal? Signal is the larger-degree market movement as measured by Fibonacci retracements and extensions.
Let’s take QQQ, because in a moment we’re going to move this note along from blah blah blah to three tech stock ideas that we think can prosper and take the big ol crowd of mush out there by surprise in the coming months. Also because this newsletter is called Cestrian Tech Select, so QQQ it should be.
Here’s how QQQ has moved in recent years. (You can open an easier-to-read full page chart by clicking this link).
From the lows in December 2018 - when the market was screaming at the Fed to not tighten and the Fed was determined to tighten, until the screaming got too loud and the J-Po decided he didn’t need to tighten so much after all because economics - to the pre Covid crisis highs - that’s a larger-degree Wave 1. +$95/share.
Wave 2, brutal downdraft in the Covid crisis. Bottoms at an absolutely textbook 0.786 retracement of that Wave 1 up. -$75/share.
Wave 3, if you know your Fibs, you would say, well, I just had a W1 up and a W2 down that bottomed at the 786, so, probably, I see a Wave 3 coming. And I know that Wave 3s can terminate at the 100% extension of W1 (that would be $258 here), or the 1.618 extension ($318) or, sometimes, the 2.618 extension ($413) or beyond. Rare to get beyond but does happen. And if you knew your Fibs you would have been saying, as we were in our chatrooms at the time, well, QQQ keeps hitting its head on that 2.618 extension level and can’t turn it into support, so there’s a good chance we turn down now.
And if we turn down that’s a Wave 4; probably a shallow wave 4 because the last down-move, Wave 2, was brutal. So, minimum correction down to the 0.236 retracement of Wave 3 - that means $350 - or maybe to the 0.382 level at $315.
We said QQQ would bottom around $350 and so far it looks like we were a little bullish there - the bottom so far has been $334, in January, and if you were to ask us we would say the QQQ needs to test that level again before it can move up. But a 5% variance in the bottom doesn’t invalidate our logic, at least in our own minds (oops. Noise creeping in. You see?).
We think the next big move for $QQQ is, up. To new all time highs. In a Wave 5 starting soon that takes the QQQ to at least $409 and probably some way higher.
We think that Big Money Institutions are expecting this and have been positioning for it. We think that old-line hedge funds have done so too. We think that the smarter new funds have done so. But we don’t think that Joe P. Retail has done so. We think Joe P. Retail thinks tech is going to bomb and value is going to take off. But, hey Joe - that already happened. Now in our view is a time to be harvesting profits in value names and rolling those gains into heavily beaten up rock stars amongst high beta tech names. Why? Because signal. Signal is telling us. Not little voices in our heads. Signal, right there on that chart above.
So - next up. Three tech stocks which have been badly beaten up, humiliated in front of their peers and in their own minds, which are just huddling in the corner right now to protect themselves against further blows rained down upon them by the baying mob. Stocks with superb underlying fundamentals and charts which are poised, coiled, to rip once Big Money steps out of the shadows and executes the Next Great Rug Pull of 2022, moving QQQ up and hauling these three bedraggled creatures with them.
Here goes.