Since the NASDAQ found the bottom around 10500 level, it bounced anemically last week. All three indices managed to produce a weekly gain last week. But the cycle indicators are not presenting a picture of a finished bottom, meaning the bounce from the support level is a mechanism of trading, rather than investors initiating new positions.
The tepid sideways trading is reflective of investors’ mood as wait and see. On one hand, we’ve gotten the unlimited central bank monetary policy support. On the other hand, we have to contend with the presidential election and whether Democrats will get control of both the White House and Congress. The possible fiscal policy regime change could be significant. In a blue wave situation, we believe Joe Biden’s tax policies would likely get passed and put pressure on corporations and individual Americans.
We are also highly concerned about the trajectory of coronavirus infections and deaths. President Trump caught the virus despite having the best possible protection around the clock. Even though President Trump doesn’t like to wear mask and social distancing, but everyone has been tested before they can get near the President. This incident really amplified the fact that nothing is foolproof as long as the Covid pandemic is still with us. We’ve already seen two spikes: The one that peaked in the middle of April, and the one that peaked in the middle of July. A lot of us are bracing for a third spike now that colleges are back in session. But to some degree it may be mitigated if we can continue to make good vaccine progress.
It seems that a lot of uncertainties are in the air while a substantial amount of volatility is certain leading up to the election. The best case scenario is that we get another 10% correction from here. The worst possible scenario is that we get a full on bear market and crash into 2022.
How can the market crash into 2022 since we have unprecedented monetary policy support? First of all, the bull market is a real mature one. The NASDAQ bottomed in 2002 while the Dow and S&P 500 bottomed in 2009. So the NASDAQ has run 18 years and the Dow and S&P 500 have run 11 years. In the last 18 years, buying dips has rewarded investors handsomely. Almost everyone is brainwashed into dip buying. The market has a history of habitually snapping at its faithful. In other words, the bear can show up when the market is mostly unsuspecting. There are well documented 18 and 20 year cycles in the stock market. We are just not sure if the 18-year cycle top is in, or it could run into 2022 to make it a 20-year cycle.
Certainly, if we don’t get a split government after the election, meaning if Democrats do win the White House and Congress, and combined with the uncontrollable Covid-19 pandemic ravaging the economy, we could get the full on bear market and crash all the way into 2022.
A new stimulus package is priced in the market because everyone has been expecting its passage even though it has been delayed over and over. So if we do get a stimulus package before the election, it will not cause the market to rally like it did before. If we don’t get a stimulus package before election, that’s another reason for selloff.
As of this writing, the S&P 500 futures is rallying cheering for President Trump’s recovery. This overnight rally is not indicative how the market would open on Monday morning. This market is highly uncertain and we have gotten out of AAPL position with some profits. It hasn’t been easy trading AAPL in the last two weeks because the volatility has been shrinking.
We opened a small position with the direct listing IPO Palantir PLTR. PLTR is a software company that has two service platforms– the government and corporate. It is known as a spy for the US government. So the social sentiment for the stock is not high like some consumer stocks, but the business is real and sticky. It opened at 10, traded as high as 11.42. It could cut the IPO price in half and reach 5 when the real bottom is in. If it does reach 5, that is the place we will add more. We believe software/data mining sector will continue to take leadership in the next bull market.
In the NASDAQ weekly chart below, you can that it did bounce from the 10500 support level, but the bounce didn’t produce a cycle bottom signal, meaning it is not safe to buy here.
On the NASDAQ daily chart (not shown here), it is showing a daily cycle top. So we are highly skeptical of last week’s advance.