Market trend has been set

If we read the stock chart upside down, you will find Nov 19 and Jan 24 are two defining points in this stock market advance since Feb 2009. NOv 19 defined the peak of the market. Before one savors his achieving Forbes 100 moment, market has taken the turn and has not looked back. Jan 24 marked the first valley of this retreat, with faked bounces and superceded by another two lower lows before the Wall Street emphatically annouced arrival of the bear market. Why are I so sure this trend is here to stay. As with any other decline in the market, evetually market would return to its previous highs, but not every stock. And not with a definitive pattern or schedule. The trend began even back in October 2020. For the entire year of 2021, especially the second half, the bluechip non-techs outperformed tech stocks. The high flyers crashed down in March of 2021, the representive of which is ARKK. With investors lackluster interests in small tech, one would relate that to the 1999-2000 stock market reversal. When blue chip outperforms tech, the run to safety is inevitable. Like the ever-rising market from 2009 to 2021 filled with sporadically surprsing large drops, the ever-declining market also could have bounce-backs. But the trend is set. It is set because of high interest rate, inflation rate, max employment rate, and a red-hot housing market. So what to do. Fortunately I did take lesson from 2000s - starting holding large position of cash in January. But that is not enough, especially in a high interest enviornment. A portion needs to be in CD or fixed rate, and a portion needs to buy put options in order to profit from the stock market decline. What are ideal put to buy. ARKK is a desired stock as I can even see it gets dissolved this year. Another one is put on QQQ. Or on IWM. Market indices is probably a better way but gain could be limited.

Are we heading to a crash?

 First let's check the predictions made in January:

• GameStop rocket will stop climbing in one week and start downward spiral

• Correct.  When I made the prediction, the price was 325.  Now it is 101. 
  

• Biden's relief package will pass with the $1,400 (not 2K) for the qualified and $300 per week extended to September

• Partially correct.  Biden could not get this done in Feb.  House passed the relief package on Feb 27.  It is likely to be kicked back to House from Senate removing the minimum wage requirement before Biden signs it.
  

•  Moderna will continue to go up and may double.  The U.S. government ordered 300M doses at 15$ each.   

• Incorrect.  It went from 171 to 154.  It did touch 190 early in Feb but withered with the market correction
  

• February will be a tough month for the equity market

• Correct but not entirely.  February is a tale of two halves.  The first half of Feb equity market continued climbing another 7%.  The second half saw big drops to 7%.  However the individual stocks fared worse and a lot of them went below into negative YTD territories. 

• The real impact of GME saga is that it might have paved the path for more regulations, under which the general market unlikely performs well

• Absolutely true.  Janet Yellen called a meeting with regulators on Feb 4 sending the exactly same signal even though the market performed flawlessly.  Protecting investors is just a synonym for ensuring those interest groups to stay ahead of individual investors. The subsequent congress hearing also put on shows.  The less the politicians are involved, the better the individual investors can gain as on average each of these Washington politicians has two lobbists from the big pharmas and x number of interest groups.   The GME is a gamble of investors, simple like that.  Short-selling is also a very healthy instrument not just for institution but retail investors as well to exploit disconnect in price and valuation.  There is no room for politicians in this efficient market other than screwing thing up.  Coupled with Yellen's comments on Bitcoin, I believe she has completed the metamorphosis from a technocrat into a politician.  And I believe investors will miss Steve Mnuchin, paving ways for Trump-like Republican's comeback.
  

 Are we heading to a crash?  

First the definition of a crash.  From Wiki, 

" A stock market crash is a sudden dramatic decline of stock prices across a major cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic selling and underlying economic factors. They often follow speculation and economic bubbles. ....  

 There is no numerically specific definition of a stock market crash but the term commonly applies to declines of over 10% in a stock market index over a period of several days."

So in this sense, in the past week, although the market is half way to a crash, the in high-flying tech stocks already exceeded this definition of a bona fide crash.  On a YTD basis, some of these names still have generated very handsome returns but those could be gone in a few days if this rate continues.  

 So it is not a question of whether we are heading to a crash but how the ensuing recovery will be.  Encouraging news is that since the gains between Dec 31 and Feb 19 were so large, a majority of these high flyers, having been traded on technical retracement and extension levels, are still not in a free fall stage, seemingly having found support during this crash, namely Fibonacci retracement levels instead of SMA levels.  For example, the high flying TDOC stock, is right at 61.8% retracement, having broken the 50 day MA. 

	2/19-2/26	12/31-2/19	12/31-2/26
Nasdaq	-5%	8%	2%
S&P500	-2%	4%	1%
DJA	-2%	3%	1%

	2/19-2/26	12/31-2/19	12/31-2/26
TDOC	-24%	46%	11%
GBTC	-24%	77%	35%
SQ	-17%	27%	6%
ROKU	-15%	41%	19%
SBE	-15%	-9%	-23%
ARKK	-15%	23%	5%
DOCU	-15%	19%	2%
PTON	-14%	-8%	-21%
TSLA	-14%	11%	-4%
SE	-12%	35%	18%
SNOW	-11%	3%	-8%
ZM	-10%	24%	11%
TER	-10%	19%	7%

 

Of course technical analysis, just like fundamental analysis, or discounted cash flow valuation, are full of subjective assumptions.  Depending where we set the starting point of Fibonacci retracement, we could draw different conclusions.  

One thing for sure is that the market is nervous and sector rotation which began early September is already half year in the making and exacerbated the past week.  It will continue. 

 

 So the question is that should we hold these high flying tech stocks long term or join the sector rotation.  That is a multi-million dollar question.  The technology stocks go up in steps, not a smooth line.  I would argue that one makes money in those steps changes.  By timing the market, one can miss the large spikes when the trend is upward.  I am convinced that long term investment is the only way for a retail investor to generate above market wealth if a portfolio is maintained.  In this kind of "crash" situation, the sensible way might be "do nothing" and guide the energy from the market until it is more stabilized.