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Yikes! Did The Big One Hit Already? (Cestrian Stocks Bulletin #93)

Cestrian Stocks Bulletin
Yikes! Did The Big One Hit Already? (Cestrian Stocks Bulletin #93)
By Cestrian Capital Research, Inc • Issue #93 • View online

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.
Is It All Over? Did Stonks Stop Going Up???
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.
Jogging to the door. Not running for the hills.
Jogging to the door. Not running for the hills.
We did this because we were feeling a little risk averse, and we were feeling a little risk averse because of this:
Not as complicated as it looks
Not as complicated as it looks
That’s a chart of the Nasdaq, or at least, its close cousin QQQ. We’re in a bull market, so, in a 5-wave sequence, 1, 3, and 5 are going to be up; 2 and 4, down.
QQQ started a Wave 1 up at year end 2018 when the tussle between (a) the last vestiges of Fed orthodoxy and (b) hedge funds ended with a decisive victory for Connecticut’s finest. Phew! Free money to keep those funds 10x levered was still gushing from the fire hose! Buy!
Wave 1 peaked right before the initial Covid crisis. QQQ moved up from around $141/share to around $234/share - a +92/share gain. It then put in what we all think of as a terrible crisis plunge due to the Impending Doome That Had Been Visited Upon Us but actually that was just a fairly normal Wave 2 down, a “0.786 retracement”, in other words, gave up over 75% of those Wave 1 gains. On March 23 2020 the Wave 2 hit bottom.
March 26 2020 we called “Buy” in our Growth Investor Pro service. As in, Portnoy-Buy. Like, Buy Everything. No really - we did. When you join the service you can still read the post. Worked pretty good. Because that was the start of a Wave 3 up, and this one has so far ran a little past something called the 1.618 extension of Wave 1. All that means is, take the “Golden Ratio” - no nothing to do with McDonalds - of 1.618 and multiply it by the +92/share we saw in Wave 1, that gets you +149, add that to the level struck at the top of Wave 1, which was $234/share, so, the “1.618 extension of Wave 1” is 234+149 = $383/share. When we saw that level passed we said to subscribers - before the open Monday - be careful out there.
And then came the drop.
So, good, we sold a bunch of stuff already, and good, we called the drop. But what now? Is it the End of Days?
Well, probably not. For two reasons.
Firstly, wave 3s can run longer. Reaching the 2.618 extension of Wave 1 isn’t uncommon before a Wave 4 down. The 2.618 extension of the Dec-18 to Feb-21 Wave 1 in the QQQ is around $475/share, so we may yet see the QQQ reach those levels before a real correction hits.
Secondly, even if the current wave 3 has peaked, what comes next is a Wave 4 down. Before a Wave 5 up, and Wave 5s make new highs. So if this move down keeps moving down, all it is likely to do is “retrace” to a standard level. Such levels vary but include the 0.236 retracement, the 0.382 and so on. You can work out what this means - giving up 24% of the last Wave 3 up, or 38%, etc. Before then setting off on a Wave 5 up to reach new highs.
So our best guess is that no, the Big One has not hit us yet. Just a regular ol selloff before those stonks start going up once more.
Put Your Feet Up
So, even if stock charts looked difficult to you ten minutes ago, you can see that this stuff is easy once you decode the lingo. Genetic sequencing or rocket science it is not.
If you want to make life easy for yourself, we can do all this chart stuff for you and flag what we think are useful buy and sell points in the stocks we cover - it’s a feature of our Growth Investor Pro service that has helped us call the bottom of the Covid lows, to hold firm through the Q1 and Q2 2021 tech selloffs, riding up to new highs in mid November and then to take profits last week the better to redeploy cash in the coming move up.
We never, ever call it perfectly, but we do pretty good. Check all the subscriber reviews on our website, here.
Then choose your profile
(1) I Have Too Much Money And Want To Share It Around
Here’s how to sign up for Growth Investor Pro expensively - go to the checkout page, here, and check out. $159/mo or $1599/yr.
(2) I Like My Money Too Much To Share It
Or, if you can spare like thirty seconds, here’s how to check out cheaply. Email your Seeking Alpha username (not your password, not your payment details, just your username) to us at [email protected] and we’ll send you a coupon for 50% off your first year’s membership. Meaning year one costs you only $799, equivalent to $67/month.
Read the reviews, decide if it’s worth a couple trips to Starbucks every month. And if you think it is? Email us that username, we’ll get you the coupon, you’re off to the races in time for what we think will be a nice Wave 5 up!
Cestrian Capital Research, Inc - 24 November 2021
DISCLOSURE - Cestrian Capital Research, Inc staff personal accounts hold long positions in, inter alia, $TSLA and $TQQQ.
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