The thing about human psychology is, just when you start to think that X is forever, it turns out that X is not forever. Be it a political regime, a run of form in sport, or the direction of travel of stocks, when it seems like it’s a one way street, that’s the time to be a reversal is looking most likely. Hence in the end, autocrats get renditioned, dominant sports franchises humiliated, and stonks may … stop going up one day. Waitaminute. WHAT??
Since 2009, to quote that veritable Buffett 2.0 Dave Portnoy, stonks have indeed only gone up. You may not like how Portnoy rolls, you may not share his taste in pizza, but you can’t say he didn’t call it. Up. Only up. Patented Portnoy investment strategy: “Get some letters. Jumble them up. Make a ticker. Buy ticker. Wait. Stock up!” And you know all the reasons why stonks have been only-up since 2009, or, if you don’t know, here are some of the reasons
Now, at some point, this only-up market will peter out and there will be a market correction. If you think the timing of corrections is totally random, we beg to differ. If you think it’s a function of inflation, we don’t agree. If you think it’s to do with rates of change in GDP growth, we think not. We think psychology drives prices, and we think you can measure and forecast the link between psychology and prices, a little bit. Just a little bit. Enough to keep yourself a little safer out there than just randomly walking down Wall St.
Here at Cestrian we were born fundamentalists. No not that kind. The Enlightenment kind. Numbers. We love numbers. Revenue, cashflow, working capital, deferred revenue and, wait for it, << shudders >> remaining performance obligation. Ooh, that’s the good stuff. All you need to know about a company, right there.
But when contemplating stocks you do need to know, of course, that the relationship between the company and its stock is fleeting in nature. Not even the names are the same. $TSLA, a little bit like Tesla, but not very much like it.
Right now the fundamental performance of most growth companies is very good, but their stocks decided to nosedive this week regardless. So the question is - are we done here? Did we top out already? Is it time to buy the canned water and head to the shack in the hills, to feast off of our gains for a while, before patiently and hungrily eking out the remnants as the bear move stretches inexorably on, all whilst waiting for the next move up?
Well, maybe, but we think not. We think the Nasdaq is just taking a breather after a big ol run up a big ol hill. And we think this is just your regular kind of selloff, the kind that then goes back up again. Here’s why.
The best tool we have found to measure the psychology of market participants is the Elliott Wave method which itself turns on the Fibonacci sequence. There are literally libraries full of detail on the latter, and shelves on the former. If you are a student of these things already then we congratulate you. If not, the basic principle is this:
Waves: the notion here is that in an up-market, prices move up in a 5-step sequence. Up, down, up, down, up. Three steps forward and two steps back. And in a down-market, the reverse. Down, up, down, up, down. In other words, whichever the direction of the trend, a 5-wave move is a whole cycle and within that cycle, three waves will be with the trend and two against. OK. Easy. You’ve seen this before but with different labels. It looks a little like the technology adoption curve. HDTV for instance, Initial wave of innovator enthusiasm, then, failing to capture general market attention, dashed against the rocks of despair. Then a move up as early-adopter normal folks take up the technology. A cooling off as saturation approaches. Then a new generation of screen technology and a final wave up until most everyone owns an HDTV set of some kind. There you go - Elliott Wave 101.
Fibonacci levels: this is a bit trickier but any good charting website or app will do this bit for you for free. The Fibonacci sequence is a series of numbers based on constants found in nature which also appear in trading systems. Be that because of neuron structure or just because everyone uses the same chart patterns, we know not. But you can see that time and time again, to the extent where it truly becomes funny, stocks trade to Fibonacci levels during those up- and down-waves. To make this stuff useful you can get very very deep into a Fiborabbithole, or, you can just learn the typical up- and down moves. Or in the lingo, extensions and retracements.
Thus armed with your tools, you can then start to work out whether the big one just hit. Whether Mr Powell is about to doom us all to poverty not seen since the end of the Roman Empire. Or whether we’re just all taking a breather before Thanksgiving.
In our stocks subscription service, Growth Investor Pro, we alerted members that we were selling a bunch of stuff last week to lighten up our securities load in staff personal accounts. Not any kind of wholesale run to the hills, just a goodly amount of profit-taking and loss absorption. Stocks and derivatives we thought were likely to stop moving up soon, so, take profits, and those we had expected to move up and didn’t, so, absorb the losses.