We shot right out of the gate in 2023 on hopes of peaking inflation, China reopening and defensive positioning at the beginning of the year. The market ended February by giving back some of those gains. We have grown more bearish as time has progressed and remain rather cautious until we get better confirmation of a new bull cycle starting. This has been prompted by technical indicators that point to lower market index levels as the Fed’s fight against “supercore inflation” has proved difficult. In this article we outline some of the technical and macro analysis that has us cautious.
SPX
The major US markets continue to trace the complex corrective pattern we outlined weeks ago in our premium service. What this pattern calls for is a final 5 wave drop to new lows. For SPX, the downward targets are 3295, 3150, 2940. If we get confirmation of this pattern playing out, we will look to remove our hedges and commence buying around these key price targets.
From an Elliott wave perspective, the structure of the bounce from the October 13th low warrants caution. Anytime we see a 3 wave bounce, the odds favor this pattern being a correction within the larger trend, which is down. The above chart is clearly 3 waves up.
This trend is supported by other important markets I’m following. Typically, for a major bull market reversal to occur these markets have to participate. Instead, they seem to be confirming the bearish setup.
The Banks have been very strong since the October low. However, the structure of XLF off the low is also an overlapping 3 wave structure. Note how this 3 wave bounce has retraced the majority of the 2022 drop. Also, note the weakening momentum as price moves higher. This pattern may have one more high in it, but it is clearly a B wave/bear pennant until proven otherwise.
Transports
The Transportation sector is also flashing similar warnings.
Canada
The Canadian TSX is an important market to track for US equities. More times than not, it leads the US. When these markets diverge, it is a big warning of an imminent trend change. This is not what we are seeing. Note the bear pennant forming. This triangle pattern is common with B waves, which the TSX appears to be tracing.
Taking these markets into consideration and looking back at the S&P 500. If we zoom in on the bounce off the October lows, the S&P 500 appears to have an incomplete uptrend. The 3 wave bounce is marked by an A wave up, B wave down, and C wave up, which completes the 3 wave pattern. The C wave always plays out in a 5 wave pattern, and it appears that we only have 4 waves in place. This suggests that we will see a final run towards a double top, or 4225 SPX in the coming weeks, but this is not guaranteed.
The above blue count has been my base case scenario for several weeks. In fact, we removed some of our hedge and have gone net long (25%) in an attempt to capture some of this potential move. This move needs to manifest this week, or it is in danger of not playing out.
If it does not, I will have to consider the red count as the new base case scenario. In this scenario, SPX already topped and is almost done with the 1st wave down in the final move towards the 3000 SPX level. If we push towards 3905 before breaking out over 4040, then this will become the base case scenario and will we look to fully hedge on the 2nd wave retrace. In both cases, we should see a larger bounce before the wheels fall off.
What are the Commodity futures telling us?
As technology investors, the Fed’s actions have raised the cost of capital for firms and impacted the valuation for technology companies. Hence, I believe it’s important to monitor those markets that are shaping the Fed’s inflation outlook for clues so that we can properly position. The most important to monitor is food and energy, both of which are suggesting higher prices into the near future.
Wheat
Wheat prices look to be completing the 5th wave in this large correction. It is trending down into major support with a cluster of cycles coming into play between Feb 28-Mar 3. Once we see a bottom, a large degree bounce should follow. This means food prices are likely going up.
Energy
Gasoline looks very similar to oil prices below. This very much looks like a consolidation before the next move higher. The next major cycle is in late April (this is a very big time frame to monitor). I doubt that we consolidate above the 1×2 line for that long. Look for energy prices to move higher in 2023, which will only put pressure on inflation.
Macro Analysis
Recent data growth has opened the door to the prospect of a “soft landing” or “no landing.” We discussed what a soft landing looks like last week – manufacturing contracts while services does not contract too much more. This last happened in 2014-2016, and most famously in the mid-90s. The idea of no landing means that we just continue to expand from here, avoiding a recession all together.
We would be onboard with this rosy outlook if it wasn’t for one key data point – inflation. All prior soft landings going back to the 80s had one factor in common – a supportive liquidity cycle. With inflation under control, the FED was able to allow the continuation of a supportive liquidity cycle (2014-2016), or start up a new liquidity (mid-1990s).
With talking heads focusing on stronger than expected growth metrics in the economy, they fail to acknowledge what this means for inflation. In short, inflation may have peaked, but the real battle will be getting it from 6.4% to 2%.
If you pay attention to what the FED is saying, they are now tracking something they are calling “Super Core” Inflation. This metric excludes food and energy, like regular core inflation, but goes one step further to exclude all other goods as well as shelter. Because the US GDP is ~85% tied to services, this gives the FED a look into how their policies are affecting the largest segment of the US economy.
In January, the Super Core prices rose at a 7.4% annualized rate. This is the fastest increase for any month since 2021. These prices are up 4.6%, which is just off its peak at 5%.
It is alarming how little effect the current aggressive rate campaign by the FED is having on services. While manufacturing remains in an on-going contraction, services continues to expand, proving that the economy is much more resilient than expected. This also means the FED will likely have to hike higher and for longer than the equity markets are pricing in.
So, the only questions an investor needs to ask – is it more likely or less likely that the FED will start up a new liquidity cycle soon, based on the overly resilient services segment of the economy? Will starting a new liquidity cycle hurt or help their primary goal to get inflation back to 2%?
The consolidation pattern in DJI broke to the downside, as it suggests a continuation of selling before a low takes hold. I’ve stated before, and will repeat, as long as the DJI holds its October low, no matter what else happens, it will set up a great buying opportunity. This still holds. However, for me to reverse course, the Dow needs to reclaim its December high.
I’m adding XLF to the mix. Like the Dow, it needs to reclaim its February high.
Bonds
I’ll also want to see TLT take out its December high.
It point out these markets because if we are entering a new bull market, all of these markets will confirm it in unison.
Conclusion
Given the macro backdrop, Winners and Losers will emerge within the technology sector. From a fundamental stock perspective, the team has been focusing on companies exposed to secular rather cyclical growth with strong competitive moats. However, given the warnings and uncertainty within the macro backdrop, we prefer to be cautious right now, as we believe that the market will provide us with better entry points. Regarding our 3 stock portfolio of NVDA, AMD, NFLX, we will go into detail about these positions next week.
The world today was engineered to be ephemeral and noisy. This is a terrible combination for an investor.
On Twitter alone, there are 456,000 messages sent every minute. On Facebook, there are 510,000 comments posted every minute and 293,000 status updates. Outside of social media, there are 16 million text messages sent every minute and 156 million emails.
For an investor, the antidote to noise is quality stock analysis. Due diligence requires dozens of hours per equity, and it takes hundreds of hours every year to produce a free newsletter with quality analysis. I/O Fund strives to offer some of the team’s best analysis for free, and we believe the consistency and depth of what we provide for free is hard to replicate.
We offer this in the most challenging sector for investors, which is hands-down the tech sector. The tech sector is unusually challenging because it involves many different verticals – consumer, media, cloud, artificial intelligence, electric vehicles, and more. It’s also the highest risk and highest reward sector in the market. Due to sudden price movements in both directions, the stakes are high. Perhaps we are biased, but quality analysis particularly in the tech sector can be hard to come by.
Below are highlights from our free newsletter during the grueling year that was 2022. Due to the broad market being in the driver’s seat, our first few highlights review the free broad market analysis we published followed by a few strong fundamental calls.
For more information on our premium services, please click here.
Top Broad Market Highlights from I/O Fund’s Free Newsletter
The August to September Pullback:
Portfolio Manager, Knox Ridley, warned our free readers in August in the article, “Levels to Monitor in the Coming Pullback,” that the broad market failed to make a new low despite bad news and that a pullback was on the horizon. He also detailed why weakness in the bond market was coinciding with the pullback he was forecasting.
The analysis stated, “In last week’s broad market webinar, we warned our readers that a pullback was imminent. We also laid out what levels need to hold in order to confirm a new uptrend is forming. We also showed that the bond market is simply not buying what the equity market is, and that the USD pushing to new highs along with equities. These markets are simply not aligned with the current uptrend in equities, and until they are, we will remain cautious.”we warned our readers that a pullback was imminent. We also laid out what levels need to hold in order to confirm a new uptrend is forming. We also showed that the bond market is simply not buying what the equity market is, and that the USD pushing to new highs along with equities. These markets are simply not aligned with the current uptrend in equities, and until they are, we will remain cautious.”
Despite a level of exuberance in the markets following a bear market rally that formed in July, our analysis clearly stated now was not the time to buy – rather it was better to wait for the coming pullback: “These markets are warning investors that are paying attention to not get too excited, yet. No matter what scenario plays out, we do believe there will be a better opportunity to get aggressive on the long side.”
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Perhaps most importantly, to help with risk management, the analysis provided a long-term prediction for investors. The analysis stated: “No matter what scenario plays out, we expect around a ~10% pullback in the coming weeks, which should be followed by one more large push above SPX 4400 before the next leg lower begins.”
Carefully Timing the October Bottom:
Knox followed up with another article, “The Pullback is in Effect – Broad Market Levels – 08/26/2022”, to reiterate to our free newsletter readers that the pullback we have been warning about is in effect. The analysis provided two long term bullish scenarios. In the bullish scenario, we advised investors to buy on the second wave retrace, sometime in October.sometime in October.
Knox provided a macro update in September and discussed the key economic data points in the article “Broad Market Update: The FED versus Inflation.” The analysis points out how the FED team of experts completely missed the warning signs of data from The NAHB Index, The Case-Shiller Home Price Index, The Bloomberg Commodity Index, Crude Oil, and M2 Money Supply, pointing that inflation was a concern in 2021.
The analysis stated, “Despite the numerous market indicators pointing towards growing inflation pressures in September of 2021, the FOMC ignored the signs, and instead continue to press their loose monetary policies. They ultimately waited a year after inflation showed up to begin addressing it, putting them much farther behind the curve than investors are used to.” The aggressive increase in interest rates led to the worst stock market on record in nearly 50 years.
The analysis pointed out the similarities seen during 2021 and we hedged most of September last year to protect the portfolio from the downside risk with real-time alerts sent to members. Knox also provides regular macro updates to our premium members.
He stated: “I do believe many stocks and some markets have bottomed, and those are the ones that tend to lead going into the next uptrend […] In conclusion, we are seeing the types of extreme sentiment readings as well as divergences that mark a reversal. We are also seeing the market shrug off horrible inflation data. Since the PPI and CPI numbers came in hotter than expected, the market is up 6.5%. The last time we saw these patterns was in mid-June, just before the market moved up 18% in less than 2 months.”
Since then, we have seen a 3-month plus bounce where some stocks in our portfolio are up over 100% since we bought them around those lows. The I/O Fund portfolio manager put cash to work based on the analysis he provided at the free level. He also used more advanced analysis that he provides to our premium subscribers to help guide entries.
For example, after raising cash in mid-late August, on October 13th, we went on a buying spree within the first hour of the market open, while removing half of our hedge. We followed this up with various buys between October 14th, 18th, 21st, November 4th, 7th and 9th.
Every trade the I/O Fund makes is done through real-time trade alerts. Learn More.Every trade the I/O Fund makes is done through real-time trade alerts. Learn More.Learn More.
In detailing the October low, the I/O Fund free newsletter stressed the importance of tracking divergences.
The analysis pointed out, “We are seeing [divergences] now across bellwether stocks, varying sectors, and global markets. Many risk assets as well as global markets did not follow the S&P 500 (SPY) to new lows last week. Instead, they are signaling that a new push higher is likely to follow.”
This was partly determined by the fact transportation stocks, high beta, and small caps have been leading the markets since 2021, and when the S&P 500 made a new low, these markets made a new high. This was unique analysis that informed a critical turning point in the tough market of 2022.
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There’s more — the above article was followed up with more evidence in the article – “The Bear Market Rally has Much Further to Go.” when Knox stressed that the market was ignoring the fact that small caps, financials, and industrials are in notable uptrends. Even within tech, there was new leadership developing and these new leaders tend to be stocks that outperform in new uptrends.
Knox talks about patterns of major indices like the Canadian S&P/TSX Composite Index, the Japanese Nikkei 225 Index, and the Australian S&P/ASX 200 Index. The Canadian Index has a history of leading the S&P 500 Index. He stated that if all the major global markets are moving in the same direction, you are in a very powerful trend. Knox also points to some of the key levels that he monitored to confirm an uptrend for the S&P 500 Index. He said three markets, namely the Canadian Index, the Japanese Index, and the Australian Index need one more move to go higher. This pattern is very bullish for equities.
Below is a chart that shows the I/O Fund’s accurate broad market calls, particularly the prediction of a market drop in August and the bottoming in October. These calls were used alongside an automated hedge signal developed by Vincent Duchaine of The Wealth Umbrella, who is an A.I. and Machine Learning engineer.
Bitcoin:
We announced that we were buyers of Bitcoin around $16,000 and gave in-depth analysis on why a major low was likely from these levels in the article, “Bitcoin is Going to Rally Again – Here’s What You Need to Know.”
Per the article, “We are seeing more and more institutional investors, economies and businesses adopting Bitcoin. Though we are in the 4th bear cycle in Bitcoins history, the prior 3 cycles suggest where we are is a rare buying opportunity. There is ample evidence to support the $15,500 level is either a major either a major lovelow or very close to a major low. Both the technical and on-chain analysis support this.”
Bitcoin is up 36% since the article was published in December, and is just shy of the initial price target discussed in the article of $25,600. Here is what was stated: “our multifaceted analysis into Bitcoin is supporting the likelihood of a larger trend reversal. This is not confirmed from our end until we see price make that last high in the coming weeks towards the $25,600 region.”
As of now, it appears to be setting up for one more push before we see a deeper pullback. Knox updates our premium members in real-time on Bitcoin and all other portfolio positions the I/O Fund owns.
Source: YCharts
Top Fundamentals Highlights from I/O Fund’s Free Newsletter
Nvidia Stock:
The I/O Fund has an unusually strong track record on Nvidia. In fact, Beth Kindig began covering Nvidia’s product strength on artificial intelligence nearly five years agonearly five years ago. Considering it’s the best performing mega cap stock in the tech sector since the team initiated coverage – beating all FAANGs on returns — we think this is an important accomplishment.
In 2022, Beth Kindig encouraged her followers to stay long on Nvidia in August during an interview with Charles Payne on Fox Business News. Nvidia had pre-announced a Q2 2022 revenue miss of $2.5 billion due to gaming and crypto mining related weakness and the stock was tanking. The revenue miss caused the stock to sell off (8%) in one day on already weak price action of (40%) YTD.
Many pundits were questioning if Nvidia could overcome the gaming segment weakness, given Ethereum’s Merge to Proof of Stake would permanently reduce demand for gaming GPUs.
Charles Payne asked Beth Kindig if she still plans to hold the stock given the crypto mining surprise. Her answer was fairly simple: “It’s a tough day for Nvidia investors but in the long run it’s not going to matter. We hold the stock for its lead in artificial intelligence. Anything outside of that thesis is not important to us. To be contrarian, data center is going to be up 61%, so for AI investors such as myself, we are right on track.” AI investors such as myself, we are right on track.”
At the time of writing, the stock is up 39% since the interview compared to the negative (6%) for the Nasdaq-100 Index. However, most importantly, this conviction coupled with Knox Ridley’s broad market analysis caused the I/O Fund to enter Nvidia on the very day the stock bottomed for a price of $108 with a real-time alert sent to Premium customers. Below is the I/O Fund trading history on Nvidia which shows why it’s important to have conviction in tech stocks.
The Gaming Bottom:
Many thought it would take Nvidia a long time to recover from gaming, however, our analysis in September stated the company was “Ready to Rumble” and would stage a quick comeback. The free analysis stated: “Nvidia’s GeForce RTX 40 Series is perfectly timed” Nvidia’s GeForce RTX 40 Series is perfectly timed” and that the “timing of these releases is no coincidence as it’s a rapid two months following the crypto/gaming revenue miss. Suffice to say, Nvidia’s management team is prepared to rumble —- putting its very best release in gaming and its most powerful AI chip to-date up against the crypto mining selloff.”
This was important because it helped the team time the Nvidia entry at bottom, and it was this exact analysis the team depended to feel confident that the crypto mining sell-off would not take as long to absorb as many critics had forecast. Fast forward, and the most recent earnings report in February of 2023 confirmed that gaming had bottomed and was up 16% sequentially, which is what Beth’s analysis had called for a few months prior.
Notably, all of this analysis was provided for free in the I/O Fund newsletter.
Netflix:
Netflix is another hidden gem that Beth wrote about for her free newsletter readers in June. She highlighted that the market was focusing on the loss of subscribers for the stock selloff, which was a mistake, and that it was more important to look at Netflix’s plan to monetize the 100 million viewers who are sharing passwords.
Beth said, “I would argue the day that Netflix’s stock price dropped 35% was consequently one of the most important days in the company’s history in terms of its chances for a boost in revenue and a renewed uptrend. Patience, though, will be required, as Netflix has work to do (minimum one to two years for full global roll-out). Yet the path to adding more subscribers is finally clear for Netflix and will pay off long-term especially during times of inflation or muted consumer confidence as it drives down household costs across fragmented subscriptions.”
The company’s decision to start an ad-supported tier was a key highlight in the article that would drive the share price higher. “We think Netflix could set a new record on ad-supported ARPU due to its premium content and captive audience.”
The stock was down YTD 71% at the time the article was written in June for free newsletter subscribers. The stock is currently up 70% since the article was published.
Source: YCharts
While reviewing the financials of the company, Beth also noted to her readers to keep an eye on improving free cash flow as management was expecting $1 billion free cash flow in 2022 and
“substantial” free cash flow in 2023.
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In a premium note to I/O Fund subscribers, the team stated said the free cash flow for 2023 would likely be in the $2 to $3 billion range. Months later, the company beat its guidance by reporting a $1.6 billion free cash flow in 2022 and also provided a strong guide of a $3 billion free cash flow in 2023. This also contributed to Netflix’s strong price action of the 2022 low.
Cloud:
During the podcast Barron’s Live, Beth highlighted to her readers that cloud valuations were still trading higher than they did prior to Covid. She also pointed out that the Enterprise sector could be the next shoe to drop after the consumer sector due to budget constraints.
About two months later, this exact scenario was echoed in cloud earnings. In December, our free analysis highlighted that cloud growth rates were slowing very quickly. On average, analysts expected the top cloud companies to only grow 5% sequentially QoQ compared to 17% QoQ last year. The analysis was quite clear this was a red flag because Q4 is typically quite strong for cloud, and that this deceleration likely foreshadowed more slowing growth for 2023 once annual budgets were set in January.
Below is a chart that the I/O Fund published to premium members, however, there was coverage on the free side that pointed toward the same conclusion.
Using this analysis, the I/O Fund prudently decided to reduce the firm’s exposure to cloud. The Q1 guides would later report one of the slowest growth rates in the Cloud segment in the past decade.
Conclusion:
Last year marked the biggest destruction of wealth on record, and the tech sector was not immune to this. However, by dedicating to due diligence, the I/O Fund team was able to mitigate some of those losses with a few strong calls – not only in tech stocks – but also strong calls on where the broad market might go next.
Certainly, there were many lessons learned last year and this write-up is not intended to forego the puts and takes that all investors experienced in 2022. Rather, it’s a spotlight on how the I/O Fund strives to provide quality analysis to the community for free.
In addition, this write-up helps illustrate how the team operates behind the paywall. The team is proficient at not only product and fundamentals, but most importantly during a bear market, the team is capable of making accurate calls on what the broad market might do next. To raise the bar, the team partnered with The Wealth Umbrella on an automated hedge signal for their Premium Members. The hedge combined with buying a few high-allocation stocks near or at the lows last year is how the I/O Fund was able to mitigate losses in 2022.
Note: For a Limited Time, I/O Fund is offering a $99/year Premium Newsletter plan that provides one actionable stock tip per month and analysis from a top performing, audited team. Click here for more detailsNote: For a Limited Time, I/O Fund is offering a $99/year Premium Newsletter plan that provides one actionable stock tip per month and analysis from a top performing, audited team. Click here for more detailsClick here for more details
The I/O Fund is a publishing company. The analysis, strategies, reports, activity and all other features of our service is provided for informational and educational purposes only, and should not be construed as personalized investment advice. Hedging is an advanced method of trading stocks, sudden losses can occur, and hedging should only be pursued under the supervision of your personal financial advisor.
