Finally the small caps and value stocks are overbought and the tech stocks have corrected so much as to appear to be cheap. The time for the rotation to big tech and growth stocks is here now. It’s very funny how the street has been blaming the rising treasury yields all along to justify the selloff. Back in the 2000 DOTCOM bubble, the 10-year treasury yield was 6%!
That was much higher than today’s 1.7% 10-year treasury yield. 1.7% 10-tear treasury yield is high when compared to 0.5% during the height of the pandemic, but it is very low when compared to 6%. So everything is relative. In the next few months we will hear about the inflation story over and over. The inflation increase year over year could be 4%, which is high. But you have to consider the base effect. A year ago, the country was under lock down. Oil price briefly went negative and today is over $60. The jump from lock down to a relative normal life style will cause the transitory higher inflation, which would last into the late summer. There will not be any runaway inflation similar to what happened in the 70’s.
The digital revolution, 5G, genomic advances, artificial intelligence and many more innovations not listed here are deflationary in nature. They will drive down cost and enhance productivity. They will be the major forces to counter the inflationary pressure. We believe the inflation scare is a head fake, meaning inflation will dissipate and the great bull market will continue after the market figures out the truth about the inflation scare.
However, the potential tax increase connected with the infrastructure bill will cause the market to go down to some degree. But, the overseas money will come in to save the market because the overseas investors don’t have the US tax issues. Why are we so confident that the overseas money would come in to save the market? Europe is in a hot mess! We are not going to talk about this issue in a great length today, but please keep in mind that the US is relatively strong with a reserve currency status.
That being said about the big picture, let’s turn to the short term market analysis.
Below is the daily NASDAQ chart. In the chart below, you will see that:
- NASDAQ made a higher low on March 25 2021.
- NASDAQ broke out the down trend line and closed above 50-day moving average last week.
The March 25 2021 low is the new weekly cycle low and we have 15000 as the first NASDAQ upside target. In order for the NASDAQ to advance, it has to have the big techs participation. That’s why we say the rotation into the big tech and growth stocks starts now. It’s safe to get back into the big tech and growth stocks now.
Over time, we still believe the big tech and growth stocks will outperform the small caps and value stocks. That’s a contrarian play as main street believes that the traditional sectors such as energy, healthcare and industrial will continue to outperform.
The reason that we hold a contrarian view is because we believe ARK invest’s view is correct. This time is different. There are too many innovations for us to think that we are in the same old world as pre COVID-19. In a different world, we have to use a different investing strategy. In the past, we never invested in Tesla as we believed it was too volatile and the CEO Elon Musk was too crazy to deal with. Now we believe Tesla is still at the beginning of a very big company, maybe the largest company that ever existed. ARK Invest gave Tesla $3000 target in 2025, which didn’t count Tesla’s energy business at all. Right now the energy business only contributes 6% revenue to Tesla’s total revenue. Bloomberg had a report over the weekend on how Tesla has been secretly entering the energy business in Texas. Tesla’s energy business could be as big as the EV business. For that reason, we will open a position in TSLA tomorrow since the correction in NASDAQ is over.
