It’s my prediction, that no matter what the broader market does, that tech will no longer be seen as a cyclical high-growth play – and rather, as more secular. The market is not ready to accept this yet but I believe they will be proven wrong as tech no longer needs a strong economy to push forward. Some tech companies will continue to report strong earnings, even when safe value stocks do not. I am not sure how the market will react exactly to positive tech earnings, as liquidity tends to trump earnings. But, in the last two major pullbacks, of the dot-com bust and the 2008 loan crisis, technology was not in a position of strength. Many of the internet companies were superfluous. They did not solve a pain, and global economies were not built on them. By 2008, the tech hype cycle had not begun, and in fact, mobile had its start six months prior with the iPhone launch.
You can basically say, at this point, that the most technologically advanced country is the most powerful country. That became more of a reality with cloud computing.
With tech, I’ve stated in previous market updates, that I follow trailing stops. This is a personal decision as the losses on tech growth (even great companies) can happen swiftly. I used Nvidia as an example of why a trailing stop is a great idea – you can always get back in once the stock stabilizes.
Today, nothing happened to the stocks we’ve covered in the PDFs that would be cause for alarm. If you’re new to Roku, then the pullback was alarming, but we had stated many times to not buy at its peak because this stock has a predictable pattern of dropping 50% off competitor announcements (these announcements are immaterial – Comcast -are you kidding me? And Apple is not a competitor as Roku is free ad-supported; not a subscription service. I’ll write some thoughts in the forum on this).
Of the industry verticals across tech, I want to emphasize that connected TV advertising will be a safe haven in the short-term. Brands are allocating budgets to CTV ads and that’s not going to change anytime soon. Roku, Trade Desk and a small cap Telaria was discussed on the forum. My goal is to dig up a few more options here for you to consider. As you know, Roku is my favorite and it’s due to product-market fit – but by all means, choose the CTV ad products/companies that you think fits your portfolio the best. I don’t think you can go wrong.
Cloud stocks will continue to report growth, as well. If I were to rank them, I continue to believe Zoom is the most insulated from a global slowdown. They solve a real problem and they do it cheaper and easier than the competitors. With that said, Workday, Slack and MongoDB should also remain insulated.
I do hedge and have short positions and puts. I do well with these and so do many of my readers. I hear from subscribers frequently on the Uber and Lyft analysis as I’ve always had high conviction here.
I have medium to high conviction on semis being in a similar place. I’m personally a fan of making money on the way down, and if this market is going to be volatile, I don’t see the semiconductors being an exception. We already saw that with Micron dropping 11% in one day. We had covered this via technical analysis, as well.
Snap should have had another announcement on Audience Network by now. I am confident institutions were expecting this announcement, as well. This one needs to be looked again, as it’s been six months and no further word on this.
Below, we have a technical update for you to help guide entries and exits. There was some good discussion on the forum about technical analysis being especially helpful on knowing when to exit to protect gains. We may not control the market, but we can at least use probabilities to manage risk and formulate a game plan.
Technical Analysis
by Knox Ridley
Aerial View
What we are looking at is the weekly chart in the S&P 500 going back to 2012. As some of you know, the RSI measures the internal momentum/strength of the price trend.
When the RSI oscillates above 50 and into oversold levels around 70, this is a healthy uptrend. An example of this is the RSI uptrend from 2014 to 2015, which is highlighted in green arrows.
On the flip side, when the momentum and strength is failing, it can warn us of a trend change. You can see this between 2015-2016. This is a similar pattern to what we are seeing today. The RSI is failing to break through the downtrend resistance. I’ve marked this with red arrows where it is making lower lows while the price is making higher highs and is now approaching the 50-day moving average, which is highlighted in orange.
Close Up View
The market has been trading in an expanding wedge for the last couple of years, which is outlined in the expanding black trend lines. The price has tested the upper trend channel multiple times, and each time has failed to break out.
The important levels that I am watching are the 2725 region. If we break that region, marking a lower low in the 2019 corrections, that will be a major warning. We have one last level to test, which will be 2600. If we break 2600, then we will likely test new December lows. By this level, my stops would have been hit and I’ll wait for things to stabilize.
Past Expanding Wedge Pattern (1990)
The last time we saw an expanding wedge pattern play out on a similar time frame was in late 1990. The yellow section highlighted indicates a 20% drawdown in less than 3 months. So, these moves can be swift once the pressure builds.
Conclusion
When you factor in that the Manufacturing Index reported its first contraction since 2009, coupled with weakening global production, it’s obvious why sentiment is at heightened fear levels. Pundits will claim that manufacturing doesn’t matter in America; that the consumer is all that matters. However, manufacturing mattered in 2008 as it did in 2011 and it matters today.
The reverse side of the argument is that bull markets don’t usually end in a whimper. There have been some theories that October will be painful with the year ending with new highs. For me, the 2725 level and 2600 level are the levels when we will be heading towards a bear market. As of now, I am leaning into caution while holding high conviction tech names with tight stops.
Tech Sector
Like the S&P 500, the tech sector has broken the uptrend started from the 2018 December lows. Tech led the charge up, so will likely lead any charge down. The next support level will be the 50-day moving average, which is highlighted in orange. This is not a good sign and an indication that more downside is likely ahead.
Rotation is underway
The Fifty index tracks and rebalances for the stocks with the most momentum in the market. Technology and Consumer Discretionary takes up over 50% of the total allocation. Notice the rotation out of momentum and into the safe, defensive staples names.
As many of you know, we’ve been discussing the shift in cloud stocks. According to SentimenTrader.com, September 9th marked the biggest one-day shift in momentum since 2009. On this day, value outperformed the best performing stocks YTD – mainly tech momentum stocks. You can read our blogs here and here on similar topics.
Workday – If we break $163.75, we will likely find support around the $141-140 region. This region coincides with the 38.2% retrace and the 168% extension. These are significant Fibonacci levels that will act as strong support. I will look to be a buyer around this region regardless of broad market sentiment. If we break this level, the 50% retrace around $123 will be the next support region.
Roku – We’ve updated you recently on Roku in a separate technical analysis.
Snap – Suggested stop at $14.
Work –A safe stop is at $20. If we close at or below $20, something else is playing out.
Zoom – ZM held support around $80-$78, which was the ideal target for a base. However, it has broken this support and currently broke through the 61.8% retrace level around $74.80. Below the 78.6% retrace and we are dealing with something other than a pause in a major uptrend. Stop at $67.75
Chainlink – So far, Link has followed our game plan perfectly. It broke down below the $2 line, and traded down to the $1.70 and $1.50 range, which was dead center in the middle of our target box. Hopefully you layered in some buys at this range. We are currently back above $2. Link below $2 is a buy.
Bitcoin – Bitcoin has been trading within my target range for the last week – between the low $8,000s and high $7,000s. So far, the price action hasn’t confirmed a bottom. Bitcoin below $8,500 is a buy.