As we anticipated, the NASDAQ made the correction low on March 14th. The subsequent rally after the March 14th low was more than impressive to confirm that the 4-year mid-cycle correction is finally over. Now with the market has to contend with the war in Ukraine, high inflation and tighter monetary policy.
The Fed intends to bring the final Fed funds rate to 2.75% in this rate hike cycle, that’s about 11 times of 25 basis point hikes into mid 2023. In the last rate hike cycle from December 2015 to December 2018, the stock market rallied to September 2018 with the Fed funds rate at 2.00%. The market started a 20% correction in September 2018 because of the Fed’s auto pilot rate hike rhetoric. At the end of the 20% correction, the Fed gave in to the market tantrum and announced the December 2018 rate hike being the last one in that rate hike cycle. The Fed started to lower the Fed funds rate in 2019 because the economy was not in so great shape to afford the 2.00% Fed funds rate. The first part of 2019 was basically rate bound flipping around 200-day moving average. The 4-year cycle final blow off rally came from October 2019 to February 2020. When the pandemic hit, the Fed lowered the Fed funds rate to zero. The last time we had zero Fed funds rate was in 2008 financial crisis. Even though we are dealing with the war in Ukraine, high inflation and slower growth, the Fed has no choice but to normalize the Fed funds rate so if we face another crisis in the future, the Fed would have the abilities to lower it to zero again. It’s a game of chicken between the Fed and the market cycle after cycle.
That being said about the past rate hike cycle, you can see that we are at the very beginning of this rate hike cycle and the equities have some room to run before an inevitable correction.
Based on our prior experience, we expect the final winners of this second half of the 4-year cycle to be energy sector/commodities along withe mega tech stocks. For the immediate reaction to the mid-cycle correction, the most oversold stocks (ARKK type of hyper growth stocks) will bounce from a deep bear market to meet their 200-day moving average. After that, these stocks will flip around their 200-day moving average with the general market. The true bottom of the ARKK type of stocks will occur with the general market’s 4-year cycle bottom which could be sometime around 2024. So we will unload some of our growth stocks down the road to get into TQQQ to participate the rally to the end of the 4-year cycle top. For the meantime, we are buying call options expiring in May with 200-day moving average as the price target for ARKK type of stocks.
We mentioned UPST ticker before. Our scanner found APP ticker. This is a mobile app marketing software platform hyper growth company. It corrected 63% peak to trough, less than the 72% average correction, meaning it is a stronger stock that was corrected less than average. It went IPO in 2021, but it recently announced $750 million stock buyback plan. This company is financially strong to be able to buy back stocks. It is profitable already and the price/sales is a little over 7. Even though this hyper growth stock is healthy, but this type of stock is out of favor, so it is hard to expect this stock to rally to its former high in the second half of this 4-year cycle. It still could rally to take over its 200-day moving average though.
This is the 4-year cycle analysis 03202022 that detailed our thinking on the big picture of the 4-year cycle.
Below is the NASDAQ daily chart that shows the daily and weekly cycle bottom are in.
This March 2022 low is a seasonal low, it is reasonable to expect the rally from this seasonal low to run into August through October, the seasonal high location.
