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Where Next For Markets, Part Two (Cestrian Stocks Bulletin #108)

Cestrian Stocks Bulletin
Where Next For Markets, Part Two (Cestrian Stocks Bulletin #108)
By Cestrian Capital Research, Inc • Issue #108 • View online
What to do at MaxQ?

DISCLAIMER: This note is intended for US recipients only and in particular is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note’s date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.
Maybe ... Stocks Won't Only Go Up?
Yesterday we contemplated the Big Kahuna, $SPY. You can read that note here. Today, we turn to its spicier cousin, $QQQ.
Now, about the dumbest thing you could do with money since around 2009 is to go short the Nasdaq. On account of, one, stonks being on fire generally in the twelve years since the end of the end of the world (the last end of the world, not the current end of the world), and, two, Big Tech burning like magnesium. Try throwing water on a magnesium fire and the outcome is much like throwing money at a short QQQ position in recent years. Spectacular, but not in a good way.
But, lookit. Stonks don’t only go up, Portnoy notwithstanding, and after a good long Wave 3, those up-moves tend to run out of steam somewhat. Yes, even Big Tech’s moves.
Here’s the QQQ chart as we see it (you can open a full page version here).
Source: TradingView, Cestrian Analysis
Source: TradingView, Cestrian Analysis
The Story Of The Qs
Wave 1 up from the Taper Tantrum of December 2018 (J-Po tried to raise rates lol) to right before the Covid crisis; a move of some +$95/share.
Wave 2, a brutal 0.786 retracement (the same metric as SPY by the way … yet more spookiness around Fibonaccis) within just a couple months, bottoming at around $165/share in March 2020.
Then when the whole of DC came on TV and said, don’t worry folks we are all underwriting the market, no expense spared, not surprisingly the market shot up, putting in a major Wave 3 move up. SPY put in around a 1.618 extension of its pre-Covid Wave 1 before hitting resistance; QQQ put in a 2.618 extension which for a major index like this is quite a thing to behold. You can see from the chart that the index hasn’t quite mustered the strength to hit that 2.618 extension and indeed its failure to do so thus far is what says to us that we could see some weakness in the near term.
If QQQ can move up above that $411 level and turn it into support, yikes, everybody get out of Tim and Larry and Satya’s way because, Wen Moon? Moon soon. Buy a big ol chunk of $TQQQ and go play socially distanced golf.
If it can’t? We think a Wave 4 down may be upon us. And as we said yesterday regarding SPY, a brutal Wave 2 can mean a shallow Wave 4, which is what we think will happen here if indeed we’re in a down move. A correction back to the 0.236 retracement of the Wave 3 up would put QQQ at around $350-355/share which whilst is simply the level the instrument held around the end of September, would nonetheless cause general declarations of panic and selling of leased Lambos. (Amongst Johnny B. Retail and friends, that is. We can expect Big Money to just yawn, wait, and then load up when those late model Aventadors were hitting the listings. Then contemplate whether to have spinach or chard salad for lunch.)
If we do see that Wave 4 down, we think it gets followed by a final (in this cycle) Wave 5 up, to make new highs of more than $410. Call it $430-450 if you like, in our experience lately we are seeing big bold Wave 3s get followed by relatively timid Wave 5s, so, let’s keep ourselves safe by assuming something similar can happen in QQQ.
So, what to do if you want to make money from the Nasdaq right now? Well, the obvious choices are:
  1. Decide that a little year-end weakness is just low volume related, some Omicron worry gotten out of hand, paper hands stuff. Buy QQQ or TQQQ and wait for normal service to resume ie. up, and bigly; or,
  2. Take fright at what QQQ350 would look like in Q1, and short QQQ in some way (short the QQQ itself, buy QQQ puts, buy $SQQQ, many ways to cut this), hoping to gain on the way down.
Having stared at this chart a lot, we can’t get excited about either approach in staff personal accounts. In recent weeks QQQ hasn’t been able to get out of its own way in that $379-404 range you see in November and December. Until it pushes up above that $411 level or decisively rejects it, we don’t feel much like playing this game. We said the same about SPY yesterday. When the big dogs are deciding which way to run, best let them think a little longer, then run with them in the direction they decided to take.
We think that a good way to play this is just to be long a bunch of smaller tech names. Nothing scary or illiquid or unproven, just not so much the top table Nvidias, Microsofts, Apples and so on. Not so much the major components of the QQQ. Instead, a bunch of higher-growth Woodstock type picks which are proper companies, growing, usually cash generative (but EPS negative which puts the old-timers off buying them until it’s too late), usually wide and deep moats … and which have sold off hard in recent weeks as money has moved out of them and into the big tech names that make up the foundations of QQQ. Go hunting for some deep retracements in these names and consider buying them. If you prefer to stick with ETFs, $ARKK is looking suitably beat up and notably, was rather green today on a red day for the QQQ.
In recent weeks, individual growth stocks and growthier ETFs have suffered whilst the QQQ has just marched ahead. Whilst QQQ is working out whether it wants to conquer the Eiger - 3.618, anyone? - or skulk off for a while back to that 0.236 where it can lick its wounds - we think that maybe these single stock names can see some money flow out of the majors and into their own stocks. Examples are manifold but include Cloudflare (NET), Fastly (FSLY), ZScaler (ZS), Twilio (TWLO) and others.
So, this is how we’re playing it in staff accounts. We cut about half our holdings in these new cloud generation names during November, sensing a correction was due; it was, and we dodged a couple bullets. We then moved back to being fairly fully invested but focused on a smaller number of stocks that we felt confident in, buying back in at materially lower prices than where we sold that half. We’ve darted in and out of TQQQ a couple times and banked gains. And now, we make like Big Money and wait. See what happens. We think this can work, that we can see a pickup in these names to generate some gains for us and we don’t have to do something too scary like go short the Nasdaq or load up on levered-long-Nasdaq etc.
As always we post all this stuff as it happens - actually before it happens, Minority Report style, in our Growth Investor Pro service.
Final Chance To Get A Bunch Of Stuff Very Cheap
Alternatively we also post selected ideas in our Cestrian Tech Select service on Substack. But be aware! When 2021 ends, so does our Famous Fibonacci Sale wherein you can buy a year’s subscription to Cestrian Tech Select for the barely-there sum of $85 instead of $399. That’s a 78.6% reduction by the way. And if you want to grab this retracement bargain before it disappears, you can click here.
Cestrian Capital Research, Inc - 30 December 2021.
DISCLOSURE - Cestrian Capital Research, Inc staff personal accounts hold long positions in, inter alia, NVDA, NET, FSLY, MSFT, ZS, TWLO, ARKW, and modest short hedges (puts) in SPY.
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