- Broad based selling continues – but I want to see more
- VIX trades around 35 – no panic selling yet
- ~$1Trillion of market cap lost in big-tech over 3 sessions
Yesterday’s missive was timely…
I warned the S&P 500 could trade with a “3-handle” soon.
Today it did just that… a level we have not seen since March 2021
May 10 2022
We are now 17% off the all-time high…
However, the selling has been orderly.
Consider the VIX or “fear index”
It’s trading around ~35x.
And whilst it’s elevated relative to historical levels – I want to see this closer to 45x
At that point, investors are will be more panicked.
But over the past 30+ years – it has proven to be a great long-term (e.g. 3 year) entry point.
The hardest part is to buy when no-one else wants to.
The other indicator to highlight is what we see with the Relative Strength Index (RSI) (lower window).
It’s trading around 32.
As a rough rule of thumb – a market is oversold once we fall below the 30 level.
And to be clear, an oversold market can stay that way for weeks (if not months).
At a guess – once we see levels of around 3800 (i.e., ~21% off the highs) – then we will be closer to oversold in the near-term.
What’s more, my assumption here is value (longer-term) investors will be sharpening their pencils at a forward PE of 16.5x
It’s not cheap (that would be below 15x) – but it’s not at an unreasonable valuation from a longer-term perspective.
At the risk of repeating myself – I’m a strong buyer of quality names (growth, health care, financials) – with the market trading between 3800 and 3900.
As an aside, here I’m reminded of the longer-term monthly chart – which warned of downside months ago (see this post from Jan 31 2021)
May 10 2022
The good news is we are inching closer to the all important 35-month EMA zone of ~3800
That’s not to say this level may not be breached (as it was in other sell-downs the past 10 years) — however I will be adding to Index positions here (maintaining a longer-term horizon)
Tech Wreck
In three sessions – we have seen over $1 Trillion of market cap wiped off mega-cap names:
Here’s a graphic from CNBC:
I don’t think we have seen anything like this since 2008…
And in terms of tech – it’s more akin to the dot.com bust of 2000 – where speculative (i.e., high revenie growth / low-to-no earnings) names lost as much as 80% to 90% of their market value.
But let’s check in with the ETF QQQ….
Last time I checked in with the QQQ – I warned of more downside ahead.
It was trading around $330 and I was targeting a move down to the zone of $290 and $300.
Today we hit that zone…
May 10 2022
The last time we saw the QQQ ~27% off its high was in March 2020. At that time, the QQQ plunged 30% before catching a strong bid.
For what it’s worth – we are not likely to see that same “v-shaped” rally as we did two years ago.
At the time, the Fed were about to embark of over $4 Trillion in fresh liquidity whilst anchoring rates at zero for two years.
That’s an environment which is highly conducive for growth names.
We also had a pandemic which forced customers to stay home – accelerating various eCommerce / online names.
That’s also changed.
Now whilst I believe we will see either consolidation and/or a tech rally in the next month or two – don’t expect the all-time highs to be recaptured this year (and maybe not even next)
However, bear in mind our weekly trend is bearish.
The trend shift happened in February at a level of around $350.
Therefore, expect rallies to be sold around the 35-week EMA; and the market to make lower lows.
To change this conviction – we need to see a “higher high” sustained.
That level is almost $380 for the QQQ (almost 26% higher)
Did We Learn Anything Today?
Given the ugly price action of late – what have we learnt?
Not a great deal.
If anything it has only reinforced the themes I’ve been writing about the past 6+ months.
From mine, there are two broad themes consuming investors
- scale and speed of Fed hikes combined with QT; and
- the question of “peak” inflation (paving the way for less hawkish Fed)
On the first point, there is no better mantra than Marty Zweig’s mantra of “don’t fight the Fed”
The Fed are looking to tighten aggressively.
Period.
It’s mostly a moot point as to whether it’s going to be a “50 or 75 basis point” series of hikes over the next few meetings – the point is rates are going to normalise.
And by “normalize” – this is a nominal rate – which is somewhere north of 2.50% to 2.75%
With respect to “peak inflation” – the bigger point is not whether CPI is “9 or 10%”.
The simple fact is inflation is far too high (and will be for most of this year).
And whilst it may have peaked (I think it’s unlikely) – but it needs to come down several orders of magnitude over the next 12-24 months.
In summary, things continue to “trade per the script”
For example, in January I penciled in the possible move down to the 35-month EMA using the monthly chart.
I stressed how ‘extended’ the market was – where the upside return didn’t exceed the downside risks.
All I see is a market starting to (finally) connect a few of the Fed dots on valuations.
Multiples needed to come in and they are.
However, I still want to see more.
Putting it All Together
As an investor who is long names such as:
- Google, Apple, Amazon, Microsoft and Meta
- Bank of America, JP Morgan and Wells Fargo; and speculative names such as
- Salesforce, NVDIA, Shopify and Snowflake
… I am not a seller here.
Most of these are now at reasonable valuations — especially from a free cash flow perspective.
Consider banks…
They are still making strong margins; credit quality is still excellent; and consumers are in great shape.
But I also accept these names / sectors are likely to keep falling.
It’s can be painful.
However, I recognize that I cannot pick bottoms. It’s not something I claim to do.
We might have hit a near-term bottom today?
I don’t know.
That said, if I see the VIX climb closer to 45, I will be adding to positions outlined above (not selling)