The reaction rally against the capitulation low of Jan 24 2022 is progressing as expected so far. The mega techs’ earnings reports drove large swings in the indices last week, but the reaction rally’s chart structure is intact and is on schedule to finish the price and time targets.
Out of the mega techs’ Q1 earnings reports, the losers are Netflix and Facebook and the winners are Apple, Microsoft, Google and Amazon. Netflix and Facebook were sold really hard after earnings reports because both companies have met the barriers for future growth. Netflix is in a white-hot streaming war with Disney plus, Amazon, Apple and CBS viacom, etc.. The content cost is very high for Netflix to hold on to its users. Perhaps Netflix has entered a matured business of streaming and needs to open a new line of business to continue to grow. The investors didn’t react nicely to Netflix’s slight miss because of the prospect of growth is dimmed. Facebook changed its name to Meta shortly after their Q3 2021 earnings report last October. This is the first time Facebook reporting earnings as Meta. Zuckerberg knew that Facebook has grabbed all the facebook users they possibly could on this planet and the future growth in user base is limited, therefore he preemptively change the company name to Meta in a desperate hope to shake off the bad Facebook reputation and open a new business in Metaverse for the next decade. Facebook’s old digital advertising business model is broken. Now Meta is a new growth company with lots of cash. Both Netflix and Facebook stock charts have been severely damaged and it will take some time for them to repair the damage. Any new purchase in these stocks now will be dead money for some time.
Apple’s hardware sector is doing very well against the chip supply shortage backdrop. Apple’s service is also doing extremely well. Some analysts predicted that even if Apple’s hardware business has zero growth, the power of the service sector growth alone will propel the stock to go higher. Both Microsoft and Amazon had amazing growth in cloud. Google is doing well in cloud and digital advertising. So Apple, Microsoft, Google and Amazon will continue to be the glorious tech leaders to lead the indices higher in this 4-year cycle (March 2020-???/2023/24).
Energy sector continues to be doing very well. XLE has rallied 24% year to date. Right now XLE is in the top timing band of the 2nd daily cycle and also could be the weekly alpha cycle top. It would not surprise us to see XLE to sell off a little bit. It’s not a good idea to short the energy sector with a war between Russia and Ukraine could be happening any moment. Oil price is projected to rally into at least Q1 2023. You want to be a dip buyer in energy, never a shorter in a bullish oil market.
Semiconductor sector is trading in sync with the indices. AMD had a great earning report and the future growth is projected to be strong. Intel had a good earnings report but the street is skeptical about Intel’s future growth because the investment cycle is long in semiconductor business. It will take Intel 3-5 years from now to show if their investments in chip manufacturing work. We still believe that Intel will catch up and exceed eventually.
So after this mid cycle transition, the sectors that will work till the top of the current 4-year cycle are energy XLE ETF, semiconductor SMH ETF and the NASDAQ QQQ ETF. It would be very difficult to pick individual stocks during this period because the economic expansion is more challenged (slower growth with tighter monetary policy) during the second phase of the 4-year cycle. The first phase of the current 4-year cycle (March 2020-November 2021) lifted all stocks such as Peloton, Zoom, Netflix, Palantir, Apple, Microsoft, etc.. It’s only when the tide goes out that you learn who has been swimming naked. These COVID stocks such as Peloton stopped performing after COVID accommodation is removed. A true company should be able to continue to perform after COVID. We will see that Peloton may not survive in 1-2 years and Palantir will continue to grow year after year.
We still believe 03/14/2022 is the target time for the correction to finish.
In the S&P 500 daily chart below, you will see:
- The reaction rally made a high at 4595.31, that is just a few points below 4600 before the selling force came.
- Between now and 2/23/2022, it could make a higher higher to take out 4595.31 to create a bull trap. Typically a higher high is bullish, a lower high is bearish. But this market is very good at creating confusions, so a higher high before the second selling wave is a trap.
- This 4600 target could even be lifted to 4700 and the date of the high could be a little before or after 2/23/2022. You need to be a little flexible.