Please reference the forum for Knox’s updates and charts to supplement the spreadsheet and also the blog we wrote yesterday to supplement the spreadsheet.
We increased the rank for cloud infrastructure and data center companies while also raising cloud infrastructure monitoring. For now, we adtech is ranked lower as there are too many unknowns as to when demand will return. These are great companies so we will continually monitor as we go along.
Please note: April Spreadsheet coming tomorrow! Please note: April Spreadsheet coming tomorrow!
Nobody knows how the pandemic will play out. Many of our readers have said on the forum that “finding the bottom” is not the goal, and we couldn’t agree more.
If you were to press me for an answer, my belief is that a recovery in Q3 is being very optimistic. I know that some banks and institutions have forecast this. In my perspective, the demand in tech is unknown – will buyers resume at previous levels? The employment situation in tech is certainly not immune either. A few more cracks appeared this week with a report of 4,000 layoffs in the startup sector. Startups are big consumers of cloud software, so it has a domino effect.
Our approach is to make educated decisions based on product knowledge/competitive positioning (my analysis) and probabilities (Knox’s technical analysis). We do not have strong bear or bull opinions. I personally get fatigued with the “buy buy buy my portfolio” analysts and the “world is ending” analysts. That’s part of why Knox is so instrumental. He presents the index numbers and the stock movements, uses a methodology to manage risk and remove emotions, and we go from there.
When looking at the month ahead, our company’s portfolio has this general plan:
Buy at the high end of the targets for data center stocks: cloud at the infrastructure level and cloud at the platform level should do well. One of the reasons I focused on cloud for the premium site during the sell-off is that it’s insulated from trade wars and recessions. My article at the time said, “My prediction is this may be one of the last cycles when tech is considered less safe than value stocks. As the market will find out (the hard way), cloud software is actually very safe. It is insulated from trade wars and overseas manufacturing issues. It reduces costs for enterprises, which is ideal for a recession. Lastly, cloud software is at the beginning of a rapid growth cycle compared to its counterparts in tech — such as mobile, e-commerce and advertising — which are reaching saturation, are finding themselves in the crosshairs of anti-trust and are susceptible to consumer spending changes.”
On that note, I think a solid cloud coronavirus portfolio would include: Nvidia, AMD, Microsoft, Alibaba, Datadog, and Dynatrace. I plan to add Okta this month. I’m not a fan of Intel myself as their innovation lags, but I would listen to an argument here. You could make an argument for Amazon too, as the e-commerce, grocery and data center are all strong segments right now.
We covered LAM recently, which is more on the memory side. I’m looking for cash-cow havens that position well for a renewed trend and can also weather the year ahead. LAM has impressive levels of cash. There is some crossover with the data center but mainly powers mobile and electronics. That last part could be stalled but I’d like to get into the stock during this year’s respite from the semiconductor rally.
Buy at the mid-low end of the targets for ad-tech: This may take through next quarter (Q2) to see the full effects. I’ll be listening closely on the earnings calls. This is Pinterest, Roku, The Trade Desk, Snap, Twitter, Google, Facebook, Rubicon/Telaria. Here is some follow up information in addition the premium blog post I wrote recently:
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To recap, ad-tech companies could have a positive earnings surprise but it’s not probable they will get through the three long months of Q2 unscathed. Patience here is going to pay off. Usage going up well over double digits and revenue being flat to down is not something to get hasty with.
Disney is a great example of a big brand having to furlough workers. You can imagine what this did to Disney’s ad spend, and we know Roku was a favored ad platform for Disney. Basically, whatever we see for Q1, we can expect this impact to double or triple in Q2.
You’ll see some conviction downgrades across ad-tech for April.
Buy at the mid-low end of the targets for consumer related stocks. Apple, of course, falls into the consumer category. On another note, Inseego was on CNBC this past week on seeing an increase in demand for hotspots. This boost could be a one-time event.
Buy at the high end of the target for enterprise stocks with excellent cost-benefit ratios: Alteryx is very expensive, so it’ll be interesting to see if they can maintain the $4500 product cost as we (potentially) face more layoffs in tech.As stated, I plan to look closer at Okta as identity access management is likely doing well in the current environment. They’ve got the special sauce with the product, and in times of stress, companies will go with the brand name that works well rather than undercut with cheaper competitors. Identity management could go under the data center category, as well.
Cloud work-from-home: As you know, I like Slack. The market will likely question Slack bc the company is bottom heavy with it’s freemium model; meaning paid accounts aren’t offsetting the free accounts. “Will the product monetize?” — this is what financial institutions are unsure of. I am not as worried about this. It’s common to gain as much traction as possible and give up gains in the beginning stages. Monetizing is easier than building a product that works well and can scale.
Docusign should have some staying power too this year. Really great product for legal, real estate, and finance industries who are now working from home. These industries don’t typically work from home so a true growth opportunity and perhaps a change or reinforcement around documents for digital management. We will be covering Docusign soon and officially adding this company to our coverage and portfolio.
Regarding Zoom Video, don’t get confused about this company as the press starts to lump it into a Coronavirus fad. The company has a rare combination of strong financials and perfect product-market fit. I also covered the security issues on the forum – not concerned with this and actually quite common (and easily fixable).
Please subscribe to any chat rooms on the forum where you’d like more information. forum where you’d like more information.
Regarding Knox’s targets, he is holding fast on the ranges, and will update if he sees a need to raise them. Also, if the market is signaling a potential turn, and our stocks have not hit the respective targets, we will update you in a blog post.
Our goal is utilize this opportunity to setup great long-term positions. However, due to the uncertainty in the global economy, we will lean towards being cautious. What this translates to, is that we feel the 2300-2750 region in the S&P 500 carries too much risk. If a vaccine hits the market tomorrow, we will get back in with more confirmation of an upward trend. Please keep in mind, if we do re-enter a bull market, our projections of where that will take us will make up for being a little late. If we continue to see the ripple effects of closed businesses and (mind-blowing) unemployment, then we will look below 2300.
Last week, I wrote about how algorithms led to the fastest bear market in history. I explained that what’s driving the speed and severity of the bear market is the escalation of algorithmic trading, which is more prevalent than it was during the Great Recession in 2008.
March 2020 holds the record for how quickly stock prices dropped into a bear market — only 16 days after the S&P 500 Index hit its last closing high Feb. 19. The second-fastest bear market was the notorious 1929 crash that set off the Great Depression, followed by the elevator drop of 1987’s Black Monday.
Americans invested in stocks through 401(k)s and other retirement accounts may be unaware that they are part of a small minority of investors who are in it for the long run. Guy De Blonay, a fund manager at Jupiter Asset Management, said 80% of the stock market was controlled by machines during the selloff in 2018’s fourth quarter. In 2017, analysts at J.P. Morgan said “fundamental discretionary traders” accounted for only 10% of stock trading volume.
The “flash crash” on May 6, 2010, caused the Dow Jones Industrial Average DJIA, -4.44% to drop 998.5 points (about 9%) within minutes, only to recover a large part of the decline later in the day.
According to the Commodity Futures Trading Commission (CFTC), high-frequency trading “did not cause the Flash Crash, but contributed to it by demanding immediacy ahead of other market participants.”
Flash moves of nearly 1,000 points in either direction are now the new normal, with 14 occurring in the past 30 days. Four of those intraday moves were more than 9%. Trading curbs, known as circuit breakers, were hit four times this month.
Furthermore, according to Wells Fargo, robots will replace 200,000 banking jobs over the next 10 years. And Citigroup C, has formed a lab to cross-train traders and developers for machine learning and artificial intelligence.
Perhaps we will get a coronavirus vaccine or antiviral tomorrow, and business will go on as usual. Or, the opposite could happen, and things will get worse. One thing is certain: Until there is regulation, the machines will profit either way.
We’ve laid out our broader market thesis over the past few weeks and are now turning our attention to individual target entries. Identifying broader market levels first was an important step as the market is reacting to these levels. We noticed that Goldman Sachs published something similar today.
If the market breaks 2340, we will likely see the market trade down in the 2100 region. This is the primary target that we diligently identified over the past few weeks.
We mentioned that Knox follows an analyst who uses the same discipline and is calling for 1800. However, at some point, we have to be satisfied and not time the bottom. This is a personal choice.
Our positions will be 70% built in the target entries we are publishing this week. We will keep 30% on hand to either allocate at another leg lower or when we see a renewed uptrend.
Please note: We do expect there to be corrective bounce(s), which is the fourth of five waves in this C-wave down. The momentum indicators are at unusually low levels. They will need to reset for the next leg lower. What this means is some investors might get bullish too early from seeing some green on the indexes. Until the VIX settles below 20 and we see normal days (i.e. 100 bps to 500 bps), it’s unlikely that a bottom is in place.
Target Entries:
The market is moving fast and we want to get information out to you as quickly as possible. We will be updating target entries for (3) stocks per day from our Top Stocks list in column J of the spreadsheet.
Please check the Top Stocks list for daily updates on our target entries. Today we updated target entries (column J) for Roku, The Trade Desk and Slack.
Here are some bullet points about these target entries:
Column J will not change as it’s based on the broader market thesis that we have worked diligently towards building over 2-3 weeks.
Our game plan is outlined in Column K to help provide additional information into the technicals we are monitoring for entry.
Knox will be posting charts and additional TA on the forum for anyone who has questions or wants more TA information.
We will do a summary of the target entries this weekend.
We don’t want to overwhelm your inbox with blog updates while also getting the information out asap – therefore, please check for daily updates on the spreadsheet.
Top Stocks List:
We will be updating this monthly around the first of the month. Our convictions on the fundamentals have not changed. The only stock we foresee adding right now is AMD. We are evaluating other semiconductors and will update you accordingly. Docusign (on our watch list) is also a potential. Notably, Beth is not ready to initiate on Micron as the memory market is looking sluggish this year. Those earnings are coming up soon. If this changes after earnings, we will let you know.
Looking at the current bull market that began in March 2009, we can map out the path using Elliott Wave Theory, and guess a likely trajectory for the remainder of the move up.
To provide context, Elliott Wave Theory, in essence, claims that the market moves in 5-waves up, then 3-waves down. There is a rigorous number of rules as well as math involved to justify a count, but the fundamental idea is the 5-3 structures.
Each 5-wave move is part of a larger degree 5-wave move, and it also has smaller degree 5-wave moves within it. It’s fractal, which is very important, and something we witness on the hourly chart as well as a monthly chart.
The chart is a close up of the prior chart that is focusing on the bull market that started in March of 2009. In the larger context, we are looking at a close up of the final 5th wave in red, and within this wave we have several degrees of waves, which constitute this move.
On a smaller degree, the blue count is meant to express the 5-wave move that started in March of 2009. Within that blue count, you have the green count, and then below that in the red count.
The Current Correction
Regarding this correction, I consider this to be a buying opportunity, as long as we hold 2950.
Zooming in even closer, we can see the structure of the current correction within its bigger context. The 3rd wave of the red count topped out exactly at the 161.8% extension, which is a text book 3rd wave. That being said, we can expect the current 4th wave to target the usual range, which is around the 123.6% and 78.6% extensions between 3220 – 3070.
I am personally buying in this pullback in the 3220-3070 range with some funds reserved if we hit the 2950 level.
Below 2950, and we could be in for a much larger correction. Each of our individual positions have relatively tight stops that coincide with this level of SPX. Of course, my high conviction investments purchased with low cost basis will not be sold (BABA, MSFT, ROKU, NVDA, etc). This only applies to stocks that I’m still trying to find a breakout on (ZM, AYX, DDOG, etc). I will re-enter anything I stop out of to make back those incremental losses when the trend resumes.
As of now, the more likely scenario is the 3220-3070 range. I’ll update you if this changes.
This article was originally published on Forbes on Jan 16, 2020, 03:22pm ESTForbes on Jan 16, 2020, 03:22pm EST
Despite record highs in the market, the consensus forecast is for an earnings recession with the aggregate S&P 500 expected to fall 2.6% in the fourth quarter. This will mark the fourth consecutive quarter of year-over-year net income declines. When taking into consideration buybacks, which help to reduce companies’ shares, the S&P 500 could post 0.6% EPS growth in all of 2019 compared to 2018’s 23% increase in EPS.
Although sentiment is bordering on euphoria in the market, there are pitfalls to watch out for and winning tech verticals to lean into.
As the analyst who early-on called the top-performing stock last year (Roku) following its IPO, plus many other accurate calls such as Uber’s IPO flop, Zoom’s successful IPO, and Microsoft’s Pentagon win, here are my top 8 predictions for successful tech investing in 2020:
1. 5G is a business to business growth story; the consumer story is overblown
Investors who believe 5G will drive a “supercycle” for Apple are not taking into consideration that 5G is a replacement cycle for 4G. The consumer opportunity will not be as significant as previous generations, such as when 4G delivered mobile broadband with smartphones being the primary beneficiary.
Apple’s revenue declined 2% year-over-year and is nearly stagnant in forward estimates at 4% growth from fiscal 2018 for fiscal 2020. To put it simply, investors are paying 105% more for each dollar of Apple’s earnings as the fundamentals are flat with a decline of 7% in net income. Some of this hype is being driven by the highly speculative 5G release in September of 2020.
To determine the 5G story of the year, the following has to be taken into consideration:
China is ahead of the United States; the 5G story of the year will be more geographically diversified than Apple, who has conflicting reports from shipments in China. There are reports that iPhone shipments were up 18% in December, yet conflicting reports that iPhone shipments decreased by 35% in November. Regardless of how these monthly reports play out, Apple is number five in the top 5G market globally and one month’s worth of sales is unlikely to change this.
5G semiconductors can sell 50% more-dollar chip content per device versus the previous 4G generation, meanwhile, handsets are in all-out price war. In other words, the profits will be more substantial at the chip level than the handset level while average sales price (ASP) continues to erode.
There are many areas where 5G will create major gains for investors. See #2 below.
2. Diversified 5G Small Caps and 5G Suppliers will be 2020 Winners
5G is unique from previous wireless generations due to the required change in infrastructure. While previous generations delivered increased speeds and robust internet, 5G proposes a more advanced technology stack. A brief overview of infrastructure changes include:
Massive Multiple Input and Multiple Output (MIMO) – more antennas will be needed.
5G frequencies cannot penetrate glass and are up to 100 times worse at penetrating walls than 4G. Indoor 5G cellular is a major concern at this time.
Small cell sites are needed to avoid the interruptions and latency that base stations alone can cause.
Carriers have various strategies with low-band, mid-band and mmWave.
Microdata centers and the edge cloud will open up hundreds of thousands or even millions of data centers globally.
Orthogonal frequency domain multiplexing (ODFM) will need to condense channels into mmWave range.
5G allows for virtualization, which allows traffic to be software-defined and centrally located. This greatly reduces the need for power and cooling costs.
The best 5G stocks will come from companies that solve real issues related to 5G infrastructure and performance, or who supply a broad swath of the ecosystem. Triple-digit (and maybe quadruple-digit) returns in 5G will come from scarcely-known names.
3. Ad companies will quietly outperform:
As I write this, the Consumer Electronics Show is taking place in Las Vegas with futuristic promises, such as electric air taxis from Uber and Hyundai, rollable OLED screens from LG, and autonomous security drones from Sunflower Labs.
I’ve been to tech gadget shows for over a decade and have concluded that making real money in tech is often much more boring. Ad conferences may not make headlines but they will make you money and 2020 will be another “slow-and-steady-wins-the-race” year for ad revenue.
My prediction is ad companies will continue to quietly outperform their futuristic tech peers. There are 7 billion people on this planet, or 14 billion eyeballs, and companies are flush with cash to reach them.
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According to Magna, media net advertising revenue will grow 4.1 percent in 2019 and 6.2 percent in 2020, partly due to political ads and the Olympics.
The outcome for the usual suspects of Facebook and Google is anyone’s guess, while stock market darlings, The Trade Desk and Roku, see plenty of volatility. I recommend looking far and wide as there are many companies driven by ad revenue on the public markets that target audiences while being privacy compliant.
4. Cloud companies will continue to report strong growth
The market became more prudent with valuations last year, and cloud software took the brunt of the rotation. Before the correction, cloud software was the leader in the market – and for good reason, as cloud spending is currently outpacing IT spending by 400%. According to Gartner, global IT spending will grow 3.7% in 2020 with enterprise software growing 10.9% and software-as-a-service growing 16.5%.
With cloud spending outpacing IT spending by 400%, it’ll be important to know and predict the winners. The market’s widespread categorical pullback on cloud software, coupled with forward earnings projections, places cloud software winners in an enviable position going into 2020. Keep in mind, this performance is simultaneously occurring during an earnings recession across most other industries.
The trick will be to choose wisely as there is an overabundance of cloud software companies on the market and many are unproven across various fundamentals. Silencing the noise and determining where the real long-term growth and profits will be in this burgeoning category is key.
5. Semis will not be able to sustain current valuations
Less than fifty percent of semiconductor companies will return to growth next year, or twelve out of thirty, up from three out of thirty in 2019. Most of the sales growth expected next year will be regaining lost ground to return to 2017 levels — before the U.S. trade conflict with China. Meanwhile, because of flat earnings, these stocks are incredibly expensive.
AMD is a growth stock with a forward price-to-earnings (P/E) ratio of 45, a current P/E ratio of 257 and EV to EBIT of 201. The company is posting low-single-digit revenue growth year-over-year and 18% revenue growth quarter-over-quarter. In October, AMD had a 12-month price target of $32.94 based on a 25% expected sales increase in 2020. The company has blown past this target based on 4% growth this year, and is trading near $50 per share.
6. Some AI and ML investments will continue to bleed, but will steal all the glory in the coming years
Artificial intelligence and machine learning investments will go through a period of flat growth over the next few years as the transition costs and capital expenditures exceed the output gains.
Over the next year and perhaps into 2021, investors will be able to pick up AI stocks cheap relative to the forward 5-7 year growth potential.
7. Look for the market miscalculating the competition. Netflix is a prime example.
Netflix is one example of how financial analysts overestimate the competition. Netflix is the top streaming service by a wide margin, claiming 87% of OTT households in the United States. In Western Europe, Netflix has a penetration of 70-87% in English-speaking countries and 55-64% in non-English speaking countries.
According to Digital TV Research, the OTT market is set to grow from $68 billion in 2018 to $159 billion in 2024. Combine this growth with Netflix’s current market share, and you have an unshakeable first mover. The speculation on competitors may become marginally true. Disney could do well. But, to think Netflix will be ruined, despite being in the lead on all accounts and posting $1.5 billion in yearly profits, is a rather sensational conclusion.
8. Balance sheets will matter again
Remember balance sheets? That’s where you can find the debt a company is holding. Don’t tell Tesla investors but balance sheets will eventually matter again and Tesla’s $13.3 billion in long-term debt isn’t going anywhere fast with negative operating margins. Don’t tell Uber investors either as this company’s $5 billion in debt won’t exactly evaporate with $1.3 billion in quarterly operating losses and $4 billion in annual operating losses. It’s this combination of high debt and a lack of profitability (by any reasonable margin) that causes trouble when sentiment turns.
As we have referenced in the past, we are not a research site that attempts to predict the market. We think that’s a nearly impossible task. We simply keep an eye on various, opposing scenarios while providing stock tips we think are relevant in the current environment.
Bull Count
The level I’ve been watching is the S&P 500 at 3200. The market powered through this and has overtaken 3300. This means the bull market could take us up to 3800-4000 region. This is based on basic Elliott Wave analysis where the 5th wave, more times than not, reaches the length of the 1st wave, or an extension of that wave, which we see time and time again.
My rational for such a position is based on the global loose monetary policy seen by central banks. Not only are dozens of central banks cutting rates, but the Federal Reserve publicly said the goal is to keep the expansion alive, and they are using tools used to re-stimulate an economy from a recessionary position. In other words, they are going all-in on keeping the expansion going.
Also, it’s worth noting that an accommodative Fed has historically been great for MOMO stocks. As long as inflation stays muted according to the CPI, and central banks stay accommodative, I will stay long tech with rising stops to match rising gains.
Another point of encouragement is that a record level of cash is still on the sidelines, waiting to come back in. Furthermore, one trading platform shows 69% of clients are short the S&P 500 today. As these shorts cover their losses, it will force more buying, which will force more covers. Massive levels of shorts can propel a market, and this pattern will continue until the shorts give up, which can be propelled forward if cash on the sidelines moves in because of FOMO.
So, long term, I am bullish and slow-tilting my portfolio towards a more aggressive stance. However, in the medium term – i.e., a few weeks to a month out – I am expecting a local top to take us back at minimum 3%-5%, at which point I’ll look to allocate more of my cash. Tech has led this market and I believe it will continue to lead throughout the expansion.
Flashing Bear Signals
I’m going to expand on this more next week, but the current market environment is not without some flashing signals. It’s important to understand the backdrop in which we are investing and also where we are in the current market cycle.
In a nutshell, these are:
The yield on the 2-year treasury and on the 10-year treasury have inverted. The inversion occurred in August of 2019 and the average time period before a recession following an inverted yield curve is 18.5 months.
According to the ISM, manufacturing peaked and has been in a steady decline since late 2019. Once again, this trend has preceded every recession, and about 31 months after the cycle peak, on average, a recession follows. So far, the ISM peaked in summer of 2018.
The Conference Board Leading Economic Index (LEI) is at the zero line. This is at its lowest level in over a decade. To be clear, it has not crossed yet, so it’s worth watching. I’ll expand more on this next week.
After several years of zero percent interest rates, corporate debt is at historic and unsustainable levels totaling over $10 trillion total, or 47% of our national GDP. Fifty percent of investment grade debt is in the BBB ratings.
I’ll go more in-depth next week on those signals. The way that I protect my gains is to have trailing stops between 10-30%. If I hit my stop on a stock that I like, I will re-enter once the price has stabilized. A recent example is when I exited Zoom at $68 and got back in at $62. This is a small-scale exit, whereas Nvidia’s crypto bust was a larger-scale exit. My gains were protected and I simply re-entered once the price stabilized again. This is the only way I’ve found that I can stay in the market when there is a lot of noise towards the end of a market cycle.
Technical Analysis:
By Knox Ridley
Alteryx (AYX)
After about a 40% drawdown, Alteryx has dragged along the bottom of the long-term trend channel, which is highlighted by the blue dotted lines. The move up appears to be overlapping, and therefore corrective in nature, with the final C-wave unfolding in a 5-wave pattern, which I’m targeting the 127.2% extension around $133. I’m treating this as a corrective move, and holding off on adding to my current position until:
(1) we break $133 with heavy volume, at which point I’ll hold this position with a very tight stop until we clear new highs. If this happens, we will be in the heart of a 3rd wave, and the bottom for wave-2 will be in.
(2) AYX stalls in the coming days/weeks, and retests the $100 level. If this support doesn’t hold, I’ll look to pick up more shares as we approach the C-wave target box that I outlined in the chart above.
Roku (ROKU)
I’ve been patiently waiting to pick up more Roku sub-$100, and the set-up is in place for this to happen. Roku has tested the $127 support level 3 times, and each time it has corrected from $127 with less momentum and lower highs.
It’s currently trading just under the Volume Weighted Moving Average, which I anchored at the all-time high (in red). This average factors in volume from a critical moment. This week, the bears are in control. Furthermore, the price is below the 55-day exponential average, which is a great measurement of the overall trend.
Also, look at the internals (MACD, RSI). They have both broken their respective trendlines and are heading lower. I take this as a warning.
But, most importantly, the final C-wave set up is intact. Corrective waves (second waves and 4th waves) unfold in 2 moves (A down, B up, C down). There are several rules patterns that we see over and over. One of the most notable is that the C wave will almost always unfold in an impulsive, 5-wave structure, which on lower time frames will have its own smaller degree 5-wave structure.
We have a 1-2, (i)-(ii), i-ii setup right at the $127 support. If $127 is broken, we will be in the 3rd wave lower. Based on basic Elliot Wave, I’m expecting this move to terminate around $100-$95, at which point, I’ll look to add to my long-term position. Just to be clear, I’m still expecting Roku to reach $200 by 2021.
However, it’s worth noting that Roku has held the $127 support, and though the signals are suggesting that it could head lower, Roku has a tendency to move fast against bears. On a long-term basis, $127 is not a bad price to pay for this stock, based on what we are projecting for 2020.
Also, if Roku can break out on heavy volume in a 5-wave move up from $127 upwards, while the internal indicators break their downtrend (look at the green arrows), I’ll scrap this bearish set-up, and look to go long from higher levels.
Qualcomm (QCOM)
QCOM is approaching a cluster of resistance. The red box highlights a strong concentration of significant Fibonacci prices. Rarely do you see a concentration like this. QCOM will either break through on heavy volume, which would be an indication to go long, or it will break down from current levels. If we break down, I’ll be looking to add to my position in the green target box between $80 and $62.
Alibaba (BABA)
Since Alibaba broke out, we have clearly been in a 3rd wave uptrend. For anyone curious what a 3rd wave feels like, this is it – an uninterrupted bull train, where the price stays above the 10 and 20-day EMA. I’ve put my targets in the chart above as well as significant resistance zones as we continue upwards. We should have pullbacks along the way.
Twilio (TWLO)
Twilio has shot straight through the 200-day SMA and found resistance at the 61.8% retrace level around $123. If Twilio can break this region, I will likely begin layering into Twilio. I will want to see it break through the $135 region for a final confirmation that the 2nd wave is over. However, a move up like we’ve seen in Twilio, breaking the 61.8% retrace is worth noting.
Zoom (ZM)
So far, Zoom is playing out as planned. After topping out in its first wave, it retraced nearly the entirety of that move in a very deep second wave. Since then, it’s provided us with a 1-2 setup, and is now powering up towards its AVWAPS. We picked up shares in the low $60s with a stop at all-time lows. As long as this level holds, I’m expecting new highs this year for ZM. If it can power through the above AVWAP in blue, that will be a strong showing of strength, at which point I’ll add more to my position.
This past week, I wrote about how Silicon Valley is losing some of its entrepreneurial spirit as venture capitalists shifted their attention to later stage deals with higher valuations. In the analysis, I pointed out that 2019 was the most lucrative year for exits in more than a decade, with $200 billion in exits generated from venture-backed IPOs.
For context, I went back to the golden years of Silicon Valley – 2006 to 2014. During this period, venture capital that was invested in deals below $5 million grew by 290%.
However, things changed in 2015, when early stage deals from below $1 million to under $100 million began to decline at a rate of 20% to 36% per year. Early stage software companies suffered most from the reallocation during this period, while early stage deals declined from 388 in 2018 to around 279 in 2019.
So how did this happen?
I identified two culprits behind the trend – Silicon Valley’s declining entrepreneurial culture and the increasing attractiveness of late stage investments.
Startup pitches and dynamic innovation have been replaced by a relatively closed circle of investors who are only targeting high valuations. In fact, we are seeing an aggregate all-time high for 180 private companies with $1 billion-plus valuations, and they have undermined the attractiveness of seed and Series A round companies.
Moreover, the IPO window is shifting from a range of six to eight years to ten to twelve years, which drove several startups to go public at valuations of over $10 billion this year. Consequently, this has made late stage investments more attractive due to their longer duration and higher valuations. The downside is that it has suppressed early stage investments (defined as deals below $5 million), which only further hampered Silicon Valley’s entrepreneurial culture.
Exciting early stage entrepreneurial stories have become rarer over the past few years, and many of the start-up tech events that I go to have either a noticeable lull or have moved overseas. The sad reality is that Silicon Valley’s entrepreneurial culture has faded, and entrepreneurs have a better chance at attracting capital from strangers on Kickstarter than from Silicon Valley angels and VCs.
It has been a difficult quarter for many top momentum stocks like Slack (WORK), Veeva Systems (VEEV), Alteryx (AYX) and Zoom Communications (ZM). The companies have continued to execute well but their stock prices have declined. These companies reported better-than-expected third quarter earnings, impressive growth, and boosted their forward guidance.
In an analysis in MarketWatch this week, I reviewed why Momentum stocks are down and I look beyond the assumption it’s due to a “value rotation.” Instead, as I point out, there is a lot of volume that suggests institutional selling directly after earnings reports. This volume in momentum stocks exceeds what we saw during the Q4 sell-off.
Overview of Momentum Stocks Following Q3 Earnings:
Many YTD gains have been erased as investors rush to value stocks. Indeed, value stocks, as gauged by the iShares S&P 500 Value ETF (IVE) have started to outperform momentum stocks as gauged by the iShares Edge MSCI USA Momentum ETF (MTUM). While it is true that some investors have moved to value stocks like Caterpillar (CAT) and Target (TGT), the real concern is that many investors are rotating to cash.
In January this year, WSJ reported that investors were increasing their cash holdings at the fastest pace in a decade. In July this year, CNBC reported that the wealthy were moving to cash. Just recently, a report by DataTrek showed that this trend was continuing. The report found that there was $3.4 trillion in US money market fund in October 2. This was 14% higher than in January this year.
Narratives Driving the Momentum Market
A common narrative is that the best momentum stocks and companies are overvalued. When you look at price-to-sales and price-to-earnings, it is true they are at record highs. However, as I had pointed out in a separate analysis on MarketWatch, cloud software has also been reporting record high revenue growth. There is not a divergence between valuations and revenue that you typically see in bubbles; they’ve been aligned.
Most certainly, if the market decides to reward profitability over growth, we will see lower price-to-sales across cloud software.
Another narrative is that these companies will be affected by the soft spending on IT. In reality, IT spending in the United States and internationally has been increasing as evidenced by the increasing sales reported by AWS, Azure, and other IT-related companies (although percentages have declined due to the law of large numbers). A report by Gartner has said that IT spending will rebound by 3.7%, driven by increased spending in enterprise software spending. IDC has also forecasted that IT spending will continue to increase.
Alteryx: Momentum Stock
Many momentum companies have continued to see impressive growth. A good example of this is Alteryx (AYX), a company that offers data science solutions to companies. The company’s stock has declined by more than 21% in the past three months. Yet, Alteryx is a rare company. It is a fast-growing company, a market-leader, and one often has positive EPS.
In the most recent quarter, the company’s revenue grew by 90%. Net income grew to $16 million. The company also boosted its forward-guidance. It now expects to make between $389 million to $392 million this year. This is an annual growth rate of between 53% to 55%, but on the other hand, AYX management tends to be conservative.
In the above chart, the large volume spikes coupled with noticeable price movements suggests institutional positioning. We see sell-off volume (red spikes) is much higher over the last two months than during the Q4 selloff.
Alteryx’s shares were down in the days after the strong earnings report.
Roku
Roku (ROKU) is another company that saw some irrational sell-off. Revenue of $360 million rose by more than 50% and the company raised its outlook for the year. It expects its revenue to grow to about $1.106 billion, or 46% YoY. This is impressive growth for a company that has a strong runway for growth as I wrote before. Although Roku recovered, there was still high volume after the earnings report.
The above chart also shows large volume, suggesting institutional positions. We see the sell-off volume is much higher than during the Q4 selloff.
Zoom Video (ZM) is another example. The company’s stock tanked and is now trading 30% below its all-time high. You would think that ZM had a very bad quarter. In reality, the company reported that revenue grew by 96% to $146 million. The company’s clients with at least 10 employees grew by 76%. Also, the company increased its Q3 guidance to between $155 million and $156 million.
I also covered Veeva in the MarketWatch analysis. Veeva Systems’ operating margins have expanded from 17% in 2016 to 27% in the most recent quarter. Veeva beat on earnings with 55 cents per share compared to estimates of 48 cents per share. Company full year guidance also exceeded analyst estimates. Veeva is also strong on cash flow, increasing from $40 million in 2014 to almost $400 million in the most recent quarter. The company has $1.4 billion in cash reserves and no debt. Despite this, Veeva’s stock price has dropped 12% from its 3-month high of $168.42 and was immediately down 3% after earnings in late August.
Pinterest, too, had a minimal miss and lost $3 billion in market cap.
While these momentum stocks have been hammered, investors have cheered slow-growing companies like Apple (AAPL) and Intel (INTC) due to buybacks. Apple’s stock price has risen by 25% in the past three months and is now near its all-time high. The company had revenue growth of negative 2% year-over-year.
Way Forward for Momentum Stocks
In a previous analysis on MarketWatch, I had cautioned investors to know their winnersknow their winners as the market clearly did not have a method for differentiating beyond traditional valuation metrics. The safest way to trade tech stocks is to align investments with an overall macro technology trend in addition to fundamental analysis (the macro trend will prevail), and to have an exit strategy, such as a trailing stop, for risk management.
We’ve seen some stocks quickly recover, such as Roku, and others that haven’t rebounded, such as Veeva and Alteryx. Even the more solid recoveries suggest they are boosted by momentum and swing traders as they remain between support and resistance, as well as retail investors, as implied by lower volume.
The true test will be the upcoming cloud-software earnings reports to determine if the pattern will continue.
Unlike most tech stocks, Microsoft’s stock price has over 30 years of trading action to analyze. With more data to analyze, I tend to lean heavier on Elliott Wave theory to predict Microsoft’s future. stock price because of the many layers of wave patterns that will naturally unfold over time.
This is a guest post provided by Technical Analyst, Knox Ridley
This article will lean exclusively on Technical Analysis as we start from a monthly chart and zoom into a daily chart to reach the conclusion that Microsoft’s stock price may have some upside left in the trend, but a sharp decline is in the near future, followed by a multi-year renewed uptrend.
Multi-Decade Picture of Microsoft’s Stock Price (monthly charts)
The red extensions are based off the length of Wave I, and then placed at the base of Wave II. The extensions are thus measurements of Wave 1 combined with the internal Fibonacci Ratios (outlined on the right of the chart).
Above is the monthly chart on Microsoft’s stock price going back to its IPO. We have a massive 5-wave pattern unfolding that perfectly aligns with Fibonacci ratios. The exact ratios we use on a daily chart are thus present on a monthly chart, and if you follow the ratio lines in red, you can easily see how the price reacts to these specific levels. It’s because of this that I lean on Elliott Wave as an estimation for the overall direction of Microsoft’s stock price, especially when we can analyze so many layers, and especially considering we are on the final leg of a 30 year 5-wave cycle.
The red extensions are based off the red cycle count that started at MICROSOFT’s IPO. The Fibonacci circles are based off the 3rd wave high and the 4th Wave low.
Not only can we use Fibonacci ratios to estimate support and resistance zones, but we can also use the same ratios to gauge the timing of an uptrend. I only use this technique on large trends, but as you can see above, Microsoft’s stock price tends to warp, bend and react to these levels, as well. In some instances, they act as strong resistance and support.
From my estimation, the price is coming to an inflection point between time and price. The price is moving closer to the 400% resistance circle in black, and is currently hovering between the red 350% and 338.2% price levels in red.
I’m expecting Microsoft’s stock price to make a distinct move within the coming weeks as we approach this inflection point. Either the price will turn down in a corrective fashion, or after bouncing around the resistance levels, we should see the price continue to the next level.
2009 Bull Market (weekly chart of stock price)
Each count has its own internal extensions, which match the color of the count. Red indicates the extensions of the large cycle count, blue represents the primary count off the 2009 low, and the orange represents the retrace level of 3rd wave within the primary count.
If we dive deeper into Microsoft’s price action on a weekly chart, we can see the uptrend from the 2009 low until now. Keep in mind, the large cycle uptrend that started from the IPO, which is highlighted in red, is composed of its own 5-wave structure. Since 2009, we have been in the final 5th wave of the red cycle count, and that count is comprised of the 5-wave primary count, which is highlighted in blue, circled numbers.
My best estimation of this primary count has us pushing to the end of a 3rd wave and possibly just now entering the 4th wave correction. Third waves are typically accompanied by peak technical and is present in the MACD, which is another indicator that we may be close to topping. Also, the 3rd wave will typically reach the 161.8% extension. In this case, we have an extremely extended 3rd wave that reached the 223.6% extension as well as the top of the trend line in blue.
I’m expecting the 4th Wave to correct to the target zone I’ve highlighted in the green box eventually, which is between the $120 – $92 price range. Keep in mind, the $92 price range, though may seem extreme, but it is only the 23.6% retrace level.
It’s worth noting the big picture ahead of us, and the inevitable downside we will face. However, it’s also worth noting that this could take months to play out before we hit a final bottom in the 4th wave drawdown. In the mean-time, I believe the daily chart offers some clues to the short-term direction of Microsoft’s stock price.
If we zoom-in further using the daily chart, we are looking at the final push of the 5th Wave of the 2009 uptrend. What’s worth noting is how well Microsoft has held up as the bulk of cloud stocks are experiencing significant drawdowns. That alone is a show of short-term strength, which should be noted.
Furthermore, Microsoft is trading into an upward sloping triangle pattern, which is highlighted in blue. Price has virtually been rangebound, sloping upwards in a narrowing band. Notice how the RSI has been moving in its own triangle pattern. When I see this, it tells me that the RSI is resetting for the next move higher. The internals are coiling, building up strength, while price is staying stable.
Seeing consolidation of both the price and RSI at all-time highs is bullish, in the near term. Today, Microsoft gaped through the upward resistance, making all new highs, which means we will likely see a continuation of the extension to new highs.
However, if we close below the $128.5 support region, I expect the 4th wave correction to be in effect. If we break to the upside, and close above the $146. 50 region, I expect the bull market in Microsoft to resume as we extend further in this 3rd Wave push.
Cloud is priced for perfection, even after a large rotation out of the sector that is still in progress. Microsoft’s earnings and short term technicals show that the price probable will extend further, extending the 3rd wave push of the primary count off the 2009 lows. If you want to play the long side, I would place a stop just under the $128.50 support region, and consider that the time to invest for the long haul is not at current prices.
This market environment is about playing momentum with tight stops. Even though the long-term analysis is showing a pullback in the future, there is still some opportunity to ride the remainder of this bull market with momentum, as Microsoft leads the way.
The big picture is to capture the final 5th Wave push after the 4th Wave correction takes place. When we bottom, Microsoft will be one of my core holdings as we get the final push of this 30-year cycle trend.
