As everybody knows, this whole market rally is doomed. The real economy is crack’d, asset prices are all jacked up on Fedamphetamines and thank-your-choice-of-God-you’re-still-alive endorphins, inflation is coming, or if not then deflation, and anyway one of those -flations is going to smackdown real estate and stock prices, Delta variant is running amok, infections are on the rise and all in all RUN FOR THE HILLS IT’S ALL GOING TO H*LL IN A H*NDBASKET. Right?
Well, maybe. Definitely if you read your Economics 101, we’re all doomed. For a generation or more. Because not only do you have to deal with all the above, but we will all be toiling to pay the welfare bills of those struck down by long Covid, and having to do their jobs too, because they sure will be too sick to do the work themselves. Productivity down, GDP growth down, inflation, or deflation, or stagflation or another kind of flation that nobody has invented yet. Doom!
The thing is, if Economics 101 ever was any use for predicting asset prices - anyone ever use CAPM, really??? - it probably isn’t right now, because the underlying conditions are so divorced from the 20th century backdrop in which conventional Keynesian and monetarist frameworks were formed that neither paradigm offers much explanatory power if you ask us, still less any kind of sensible policy guidance and frankly almost zero power to predict asset prices.
Born and raised fundamentalists, true believers in the dream of the Enlightenment, we find ourselves more and more turning to stock charts to light the way ahead. In a nihilistic world where there is no dominant guiding ideology, be it political or economic, where there is no consensus about how to value $x of revenue or earnings or cashflow, well, what better way to value and predict stock movements than that most postmodern of tools, the chart. Where feelings can move a stock as easily as a rational earnings reaction.
(We’ll let you into a secret. ‘Twas always thus. Rational stock analysis by any method is just an ex post facto tool to make one feel in control of the world. It’s a Renaissance garden for the modern age.)
If you read our stuff you know we have a fondness for Elliott Wave analysis. It’s easy to get all high falutin about Elliott Waves but that’s not really necessary. The basic principle is that humans get happy in 5 steps up, and sad in three steps down. Unless they are depressed, in which case they get sad in five steps down and happy in three steps up. Easy.
Apparently as an act of magick, but in fact as an act of everybody following the same spell recipes ergo creating a self-fulfilling prophesy, Elliott Waves tend to respect Fibonacci limits. Meaning that the limits of each wave tend to occur at specific Fibonacci levels. And that means that the predictive power of this stuff can be pretty good. Not every time, else it would indeed be alchemy, but more times than you would think. Sitting here at Cestrian Towers, where we mainly while away the present End Of Days drawing lines and coloring in charts, we are taken aback at how often the combination of Elliott Waves and Fib levels are on the money.
And here’s a pattern that keeps recurring as we go over the tech names we cover. It looks very much to us that the crazy-up ride that cloud names had in 2020 - specifically from March '20 to Feb '21 - might be merely Wave 1 of those Five Happy Waves. And, since Feb '21 - May '21 saw these same names mainly hammered into submission before rebounding sharply in June to achieve in some cases new all-time highs - that looks like the brief Wave 2 hangover followed by the start of the Big Ol Happy Wave, Wave 3.
This pattern can be seen at Zscaler, at Crowdstrike and others.
Here’s Zscaler ($ZS).