Over the previous 12 business cycles, the best money managers during a cycle produced average annual compounded total returns of 25% to, in a few rare cases, 30%. This small group consisted of either growth-stock managers or managers whose most successful investments were in growth stocks plus a few turnaround situations.
The semi-conductor sector is clearly in bearish territory. The superstar chip stock NVDA dropped 18.8% on Friday due to bad earnings and forecast. The chip sector ETF SMH topped in March 2018, but NVDA was the last man standing in chip sector until October 2018.
Since the beginning of the October we have blogged several times that the stock market has entered the 4-year cycle high to low phase. This stock market 4-year cycle high to low phase corresponds to the current cyclical economic de-acceleration while the central bank continues to raise rates.
In the last five trading days, the DOW was able to produce a relief rally that retraced half of the shock drop from 26951.81 to 24122.23. But the S&P 500 and Nasdaq were unable to retrace 50% and the small cap couldn’t even retrace 38% of the down move. Overall the market is weak and it is being popped up by the blue chips. Apple’s earnings report has revealed that Apple is no longer the hyper growth company like it used to be. Amazon’s 28% selloff from 2050.50 to 1476.36 also points to the difference of this correction relative to all the corrections since March 2009.
It would be enticing to try to buy the prior bull market leaders during this correction, getting a discount of the old expensive stocks. But the fact is that many growth leaders in one cycle do not repeat in the next cycle. For example, the dotcom leader Cisco never came back as a market leader even after 18 years. We believe this October high is an import high that signifies the end of a super easy money policy. The market will need some time to heal from the structural damage. The October low will be tested again sometime in the future.
It will worth a while to sit out the market to observe future leaders before the market cycle low is confirmed. There will be many stocks that will have super earnings growth but the stock price will not advance due to the general market weaknesses. Those stocks are the candidates for the next bull market cycle.
Technically, the DOW was supported by the lower channel line while S&P 500 and Nasdaq have violated their lower channel lines respectively. It has only been one week since the low was made. It is way too soon to say that the temporary low is in place and the year end rally will start from here, although it is likely due to the timing with the midterm elections.
