The average inflation-adjusted returns we are taught to expect in the equity market per year is around 7%. However, if you remove the period from 1984-2007, that return comes in just under 5%. According to, Christopher Cole of ArtemisCapital Management, the period between 1984-2007 was the result of anomalies converging that will likely not occur over the next decade.
During that period, baby boomers supported the economy at peak spending, which carried over into the 90s. We also saw the rise of globalization, which boosted inflation. Furthermore, the Fed Fund Rate was at a record 20%, which gave the Federal Reserve an extraordinary amount of room to support asset prices. All of these factors created an economic environment that led to strong markets.
Today, the Fed Fund Rate is under 2% during an expansion, baby boomers (who make up a large portion of the population) are hitting retirement. These factors, coupled with an over-levered population and a global trend that’s moving away from globalization are concerning for future growth. Cole argues that we should expect the next decade to trend closer to the 5% average than what has been considered “the norm.”
Regardless of what you believe the average annual return will be over the next decade, one thing is undeniable – the S&P 500 is acting significantly outside of the norm, returning an anomalous 29% in 2019, and this year, assuming the current trajectory, we are on pace to return an annualized 38%.
There are many forces coming together to support a strong year in equities, which are happening with many alarm bells, as well. In fact, Paul Tudor Jones, who famously shorted the 1987 top because he noticed similarities in that market’s structure compared to the 1929 run-up, recently claimed that this market feels a lot like 1999. The structure of the current market and the final part of 1998 are similar, which if holds, would lead to a sideways consolidation before we see the next leg higher.
In fact, we are beginning to see a decoupling of high beta tech stocks from the rest of the market just like we did in the late 90s. One of my favorite risk-on metrics just broke out of a multi-year trading pattern.
The USD/JPY measures the value of the dollar compared to the Japanese Yen. These are two of the biggest currencies in the world, and are both held in global portfolios. The coronavirus scare, as well as abysmal economic numbers in Japan, likely led to this breakout.
Regardless, when we see a rise in the dollar vs the Yen, it historically correlates to a rise in equities. More money is flowing into the U.S., which is good for stocks and bonds. If the breakout holds, it should be a tailwind for stock prices, and a further support for growing asset prices in 2020.
Additional Themes for 2020
Two of my favorite places to invest for 2020, on top of Cloud and Connected TV ads, are semiconductors and small caps. Semiconductors had a strong 2019, and the structure supports a strong 2020.
Semiconductors
It’s worth noting that in the late 90’s environment, semiconductors showed spectacular returns, and we are seeing the same today. The structure of the semiconductor index is supporting this theme, as well.
The above chart shows two large first wave setups, commonly known as a 1-2, i-ii setup, which also shows up as a cup & handle pattern. They imply that we are at a large 3rdwave, which is exactly what we are seeing.
Regarding where we are in the structure, the internals are showing divergences, which we are starting to see in our semiconductor picks – NVDA, AMD, MU (report to come), QCOM (as we get closer to 5G), etc. We are likely in the early stages of the smaller degree wave 4, which should take us lower. However, as long as SMH, the broad market semiconductor ETF, holds the major support around $123, I’ll look to add to these positions in the coming days/weeks.
Small Caps
In December, we provided a more extensive report on the small cap setup. We then followed this up with many TA reports on our small cap choices. These price movements are still in play today.
In brief, small caps historically outperform in bull markets, and they underperform in drawdowns.
As you can see, each leg-up in the current bull market showed noticeable outperformance between small caps and large cap stocks. Today, Small caps are underperforming, which we typically do not see in a bull market. If we avoid a recession in 2020, then small caps will have a lot of room to run in order to take back their leadership role.
So far, our small cap positions have performed very well in 2020. Telaria is up about 55% YTD (exceeding Shopify), WIFI is up about 32% YTD, and INSG is up 25% YTD. Not only are these companies positioned to take advantage of current tech trends, but they should benefit from the small cap thesis, as discussed.
In conclusion, the trend is up, and as long as it is up, I plan to stay invested. As exciting as this market has been, it’s important to realize that what typically follows a great party is an even bigger hangover. It’s important to understand the type of volatility commonly known as reversion to the mean, which is why I brought up the debate around the average annual return being 5% or 7%. Neither of these numbers come close to what we are seeing today, which implies a sharp mean reversion in our future.
So, stay invested, and remember to have stops in place and/or be long volatility in some form as a hedge. The time to buy insurance is before a flood, not during, which is why a portion of our holdings are in gold/silver and some long-dated puts on companies that are most likely to be affected by a pullback.
Nvidia (NVDA)
There is simply nothing bearish about the above chart. Nvidia’s price is making all-time highs, while both the MACD and MACD Histogram are making new highs. Also, the Accumulation/Distribution indicator is making new highs, suggesting that this move is supported by healthy volume, and smart money is buying it.
For those that have followed our analysis on Nvidia, we suggested two excellent buying zones – one was in November of 2018and the other was based on the breakout scenario we outlined in our recent analysis in Septemberof 2019.
As of now, Nvidia’s trend is parabolic before stalling out at all time highs. This is a company we want to own for the long haul, and it also fits with what we are seeing in Semis this year. Any correction should be bought and we plan to investigate if Friday is a correction or not.
The RSI is very overbought and will need to reset for the next leg higher. Also, the 3rdwave up is a textbook Elliott Wave move – the 3rdwave topped out at the 168.2% extension and the 5thwave topped out at the 200% extension. Nvidia’s price has turned and closed just above the prior high from October of 2018, which is around $292.
If it closes below $292, expect a Nvidia to first close the gap and find support around the $270-$272 region. If that level doesn’t hold, I placed some likely supports within the yellow target box on the chart.
However, it’s worth noting the 55-day EMA around $250 right now, which will move directly into the target region. The current uptrend has pulled back to this zone four times and held. It has been very strong support for the uptrend. If Nvidia breaks down to this level, it should be considered a buying opportunity as well. I will update you as we progress.
On positions that I expect to own for many years, if my cost basis is a level that we will likely never see again, I tend to hold that position as long as the fundamental story stays the same. We currently have a cost basis around $150 in Nvidia consisting of many shares we bought in the $140 region, and then added again when we broke $200.
I find it doubtful that we will see $140 again with Nvidia; however, $200 is not out of the question, especially if we encounter a recession. Thus, the portion I’m holding at $200 is being held with a stop just under $220, while the $140 cost basis is held without stops.
Zoom (ZM)
For those that have been following us on ZM, you should have a nice position in the current uptrend. The thesis that I outlined around the first bottom in the low $60s seems to be playing out, which is that we could be in the early stages of a strong wave 3 that will take us to new highs.
For those that are wondering what a 3rdwave feels like, this is it. A powerful move that is met with strong momentum and heavy volume. This is exactly what we are seeing with Zoom. Both the MACD and the Accumulation/Distribution indicator are making new highs with price, which is exactly what we want to see.
Today, Zoom broke out to new highs before getting sold below the heavy resistance region that I outlined in red on the chart. The MACD Histogram, which is measurement of internal momentum is diverging from price, suggesting a pullback is underway, which would be healthy for setting up the next leg up. Zoom is due for a pullback, which would be the 4thwave correction within the larger degree 3rdwave we have been riding.
Based on the exuberance in the market and in ZM, I’m not expecting a deep pullback. But, as long as the $75.75 region holds, the current count on the chart is valid, and I’m targeting the $155 region for the completion of the larger degree wave-3. Keep in mind, there are 5 waves in total, so it should be a good a year for Zoom.
Zoom is a buy, and should be bought on any breakout or dip while above $75.75.
Dynatrace (DT)
Dynatrace (DT) is a position we think will have good returns in 2020, and the current valuations are attractive when compared to its better-known counterpart, DataDog (DDOG).
Dynatrace is due for a larger degree wave 2 pullback, which is outlined by the red numbers on the chart. Now that the 23.6% retrace level is broken, which is the red price zone between $34.50-$34.15 on the chart, I’m considering the larger degree wave-2 to be in effect.
Also, notice how price has reacted to the 55-day EMA (blue) throughout the uptrend. This level has been strong support, and with a close below this level today, suggests that more downside is ahead.
So far, we up a little over 14%. I will look to add as DT approaches the upper level of my target box, or if DT can take back the red zone above $34.50. My current stop is just under $27.
Shopify (SHOP)
Shopify (SHOP) is one of our favorite cloud stocks for 2020. It’s a stock you want to own for the remainder of the bull market and should be bought on any dip. However, the strength of the uptrend has me looking to shallow dips around key moving averages, until price breaks through key supports. Right now, that support is $395. As long as this price holds, expect the uptrend to be intact.
It’s worth noting, since late 2019, SHOP has held the 20-day EMA (green), which is impressive. Below this level, the 55-day EMA has been additional support for Shopify historically as it makes new legs up. I’ll look to these levels for entries on any pullbacks.
The internals are strong, but suggesting weakening momentum. The volume is increasing with price; however, we saw a lot of volume fade the highs, suggesting institutional money is taking profits. Also, the RSI is overbought and needs to reset for a new leg up, suggesting a pullback, or at minimum a sideways consolidation is in order.
The MACD and MACD Histogram are supporting the uptrend. However, they are starting to roll over, suggesting temporary weakness. Shopify is a buy on any weakness. My current stop is just under the $395 region to protect our gains.
Alteryx (AYX)
Alteryx (AYX), like Zoom, had a deep wave-2 retrace, and is well within its wave 3 to new highs. Volume is increasing with price while the MACD supports a healthy uptrend. The Accumulation/Distribution index is increasing with price, suggesting smart money is buying into the move up. However, it’s worth noting that this index has not made it to new highs with price, suggesting that we could see a temporary pullback before breaking out.
Like Shopify, the 20-day EMA and 55-day EMA are key levels. Notice the reaction to the breakout. It couldn’t hold, and now the pressure has pushed AYX below the 20-day EMA. The next level of support will be the 55-day EMA, which is where I’ll look to add to my position. As long as the $122 region holds, I’ll stay long and buy the dip. Below $122 and I’ll stop out, protecting my gains.
Chainlink (LINK)
I’ve posted quite a bit on Chainlink in the forum as well as on several market update blogs. The little-known blockchain play has been on a tear recently. We began covering LINK at $2, initiated our first position around $1.77, stopped out around $2.45, and then re-initiated again at $1.80. The position is currently up 140% – more than Tesla YTD.
As Beth has pointed out in the PDF, this is not your typical alt-coin or crypto. Rather it is an investment in an important trend called smart contracts. You’ll want to pay attention to this and set any prejudices against crypto aside as we are not a site that covers crypto. We cover tech trends and this one will be parabolic. As Beth pointed out in the PDF, there are reports that Google and Oracle are both invested in Chainlink (page 8). We are in the early days for LINK and it’s something we plan to follow closely with technical analysis to navigate the volatility.
Bitcoin (BTC)
Since our last update, Bitcoin (BTC) has retraced into its lower degree wave-2 pullback. As we write this, BTC is within the upper target region. The $8600-$8500 region will be strong support to watch, and a good target zone to add to any existing position, if we get there.
This region coincides with the 38.2% retrace level and also the Volume Weighted Moving Average, anchored at the all-time high. As long as BTC holds the $7,000 region the current count will remain intact, and I will be looking past all-time highs in the coming months. Keep in mind, the $7,000 region is around 25% below current levels. The risk/reward setup at current levels, with proper position sizing, is an attractive trade.
I wouldn’t get too greedy with Bitcoin, considering the uptrend we see in front of us. If you like this asset, then consider layering in now.
For anyone on the fence about bitcoin, read Beth’s write-ups of why it’s important to the technological advancement of both centralized and decentralized blockchain. She has these write-ups on the free blog here, hereand hereand also on the premium site.
Telaria (TLRA)
In keeping with our small cap theme, we’ve been covering Boingo (WIFI) extensively over the last month. It’s currently confirming a breakout and is considered a buy along with our other small cap play, Inseego (INSG). Telaria (TLRA), our third small cap position, since we first recommended it, is up nearly 100%.
The uptrend is healthy in that the volume is confirming the price increase, and the internal momentum is strengthening with the price increase. Telaria has recently broken out of a strong resistance zone around $13, which we outlined in prior reports. It is considered a buy at current prices.
We are raising our stops to $9.50 to protect our gains. If we do get stopped out, we will look for re-entry due to our desire to hold TLRA for the long haul.
Qualcomm (QCOM)
If we look closer at the structure, QCOM is due for a pullback, and in fact the internals are suggesting this to be the case.
We can see the MACD and the MACD Histogram showing a negative divergencepattern. In other words, as the price increases the internal momentum is decreasing. We typically see this pattern before a pullback and should act as a warning.
Furthermore, the Accumulation/Distribution indicator is decreasing as the price in is increasing. This indicator measures two things: is volume supporting the price and what is the smart money doing. The assumption is that “smart” money buys at the final hours, while “dumb” money buys on news at the open. There is some credence to this sentiment indicator and it’s been an effective leading indicator. What it’s showing us here is 2 things: (1) volume is making lower lows while price is making higher highs; (2) the volume in the final hours is fading these prices, suggesting that smart money – i.e., institutional money is selling at current prices.
A pullback is reasonable; however, in this market, I wouldn’t expect too deep of a pullback. I added shares around $87 and will look to add more in the low $80s or when QCOM breaks out of its multi-decade cup & handle pattern above $100.
Regarding the cup and handle, Qulacomm (QCOM) is currently just under an important price zone: $98-$100 region. A close above this region would confirm a twenty-year cup & handle pattern, which we pointed out both on the forum and on Twitter. For those that may have missed this, the chart below says it all. A close above the $98-$100 price resistance in this pattern would be a bullish confirmation, and one that I would buy into.