In our last cycle analysis we pointed out that the market could hold up until the September FMOC meeting. But on Wednesday September 8th the market cracked. We sent out a private email to our subscribers stating that the cycle oscillators have confirmed a daily cycle top. The following day’s intraday trading further confirmed the daily cycle was on its way down.
However, the market gapped up on Friday morning based on the good news that President Biden had a phone call with the Chinese President Xi. The magnitude of the gap was large that negated last Thursday’s negative close. We bought QQQ puts on Thursday afternoon at 3:50 pm based on the negative close on Thursday. The gap up on Friday threw us off, because it should gap down at open, but we quickly added more puts because the Friday morning gap was faded. This time the buying the dip crowd got hurt. Last Friday’s gap up really shows how stubborn the bulls are, they are grasping on any good news to go long. They have been conditioned to go long on any dip because the dip buying has been successful, until it isn’t!
In our cycle analysis, March 2020 low is the start of a new 4-year cycle that has been fueled by unprecedented and extreme easy monetary and fiscal policies. From March 2020 to February 2021 we had an everything rally, meaning all stocks went up. February 2021 was the momentum and breadth peak, coincidentally it was also the M2 money growth peak. With the advent of vaccines in November 2020, the cyclical stocks had a day in the sun. The growth to value rotation peaked in June 2021. The last stretch of the rally (June to September) was powered by quality stocks, the mega tech stocks that offered growth and safety. Now we are 18 months from the March 2020 4-year cycle low, the macros are very different now as stated below:
- The economy is softer and consumers are tired
- The vast fiscal stimulus is coming to an end
- Significant challenges in supply chain such as chip shortages causing auto plants to shutdown
- If, the Fed tightens monetary policy through tapering, that would finally nail the condition for valuation reset
From pure cycle perspective, there is a 2-year cycle within the 4-year cycle under normal circumstance. This September high could be the 2-year cycle high. It is normal to have a 10-20% correction for the mid cycle transition, meaning the 4-year cycle is transitioning from the first half into the later part of the 4-year cycle.
It is very early in the process of the fall correction, the bulls will be in denier who will continue to buy the dips. The bull traps will prove to be good places for traders to short. We recommend our subscribers to stay on the sideline if not shorting, just don’t go long during this uncertain period.
After the valuation reset, the indices and all the individual stocks will be corrected to the levels to match the new set of macro conditions. The growth stocks will be the first to rise above. After all, these disruptive companies can grow, no matter what. We are looking to open new position in PATH, ASAN and ZM.
Below are the DOW weekly chart and NASDAQ daily chart.
From the DOW weekly cycle perspective, it is 12 weeks into the current weekly cycle. We expect at least 6 more weeks of correction in this weekly cycle, which points to the third week of October.
From the NASDAQ daily cycle perspective, it is 15 days into the daily cycle. We expect it to try 14800 support in this daily cycle. It will try to go down in the next 3-5 days to breach the 14800 support level.