QQQ Correction aka THIS IS WHY WE Don't Chase Secular Digital Platformity Stocks, OK?
Hey Subscriber,
The question of the day is of course "Why TODAY for the 10% QQQ correction?" because the QQQ IS the stock market of 2020--most everything else from a total market cap perspective does not matter.
Just one hundred stocks in the QQQ has a market cap of $7.5 trillion.
The S&P 500 Index is worth about $28 trillion today and, at 3455 is down 3.8% for the year.
But if the Nasdaq 100 stocks were taken OUT of the SP 500, it would be down approximately -26% for the year (based on quick math).
My point? When just 100 stocks--and really just the top 50 stocks--make the difference between a -26% index loss and -3% loss, the REST of the stock market is STILL IN a bear market. The bull market we have in stocks is the top 55 Nasdaq 100 stocks--which I have pointed out many times are 100% comprised of commercial and consumer Digital Platformity companies that provide either a
1) Digital consumer social media platform
2) Digital consumer e-commerce platform
3) Digital enterprise general or vertical workflow platform mobility
4) A digital platform enabling functionality API (application programming interface) like Ring Central or Twillio for integrated digital communications or Agora for integrated digital video functionality
5) Digital or personal digital platform security
6) PaaS or cloud platform-as-a-service like Fastly, Cloudflare, Amazon, Microsoft and Google.
7) Specialized/Vertical market consumer or commercial digital functionality like Chegg in education or Teledoc in telemedicine
8) Consumer digital entertainment/gaming/esports
Key point: the ENTIRE market cap of the entire publicly traded stock market is $35 trillion. Financial gravity in the stock market comes into play when 500 stocks represent 80% of the entire stock market, and just 55 stocks represent the difference between being down 28% or just 3%.
That is called a financial market bubble and, as I have shared since June, that bubble by definition had to correct simply because of the law of financial gravity--the "weight" of those 55 stocks would eventually become too much for the rest of the 445 SP 500 stocks to hold up--and they would metaphorically just tip over because of financial gravity.
What caused them to tip over today? It certainly was not just little Ciena a major optical networking component maker giving poor guidance for its data center clients.
The warning lights were flashing--our market sentiment readings in our MacroMarket timing index went >50% for only the third time since we started in 2013
The first time we saw this indicator eclipse 50% was January 18, 2018 when it reached 53.4%. The S&P 500 ETF peaked near $273 on January 26, 2018 and then, it retreated to about $246 on February 8, 2018.
The second time we 50%+ sentiment was hit was January 23, 2020. It was one of the reasons we issued our "100% Hedge Your Portfolio with out-of-the-money May XOP, QQQ and SPY PUT OPTIONS" and then went to cash on Feb 24 (but yes our primary indicator was the warnings we got from our China based Transformity Experts network).
We did not pull the trigger in time--frankly, our other indicators were fine (lesson learned--we are now weighting our sentiment indicator highest for non-recessionary short term corrections!).
But this crash in the Golden 55 stocks today was, just like the crash in January 2018, is simple to diagnose:
1) The most beautiful girls in the momentum stock beauty pageant (or the Generals--pick your metaphor)--Tesla, Docusign, Zoom, our beloved NVDA, SHLL (a SPAC we want to to own BTW) and the OG Super SPAC we all dearly love Nikola (especially the All-Access member who sent me copies on his 6 different brokerage accounts made more than a $1 million just on our NKLA trade alone!!) all fell for the same reason:
1) Massive concentration in the Fabulous 55
2) Massive leverage in the momentum hedge funds (remember talking about this is Jan 2018??). Look--Goldman Sachs is the trading desk we run our Transformity Wealth Management business on. They are constantly badgering me to lever up with 2.5% margin ("Toby--all our clients are at least 3-5X levered right now). Well, when you are 5X levered, and your Fabulous 55 stocks drop 10% in a day (and the Super Fab 5 Tesla, Apple, Nvidia, Zoom, ZScaler/Okta/DOCU) crash nearly 18%, your "prime broker" sends you an email that says "You must deposit X $million of cash into your account by 10 am or we will liquidate enough shares to bring you into SEC compliance."
So margin call selling starts the downward spiral rolling. And like any money manager will tell you, you sell that which you have the MOST PROFIT in or largest exposure.
Then market selling begets "market sell stops" on the same stocks. And then market makers who are not short enough the stocks they run sell to keep their margin requirements and cash in their put and call options hedges which creates more forced selling.
As I always try to impress you with this simple concept: the secular growth stock game is fueled by
1) a simply understood investment thesis/narrative ("everyone has to work from home forever" or "Electric vehicles/trucks sales will grow 40-60% a year for the next 5 years" etc.)
2) Those guilded stocks meeting "beat, beat, raise" quarterly reports and
3) Momentum algorithms all based on the same model
and sometimes
4) A new marginal buyer of those stocks.
Today we have a new marginal buyer (i.e., a price-insensitive market order investor like a market-cap-weighted index fund) in the 2020 marke for stocks: The 10 million Robinhood/SoFi/Stripe/ GenZ and Millennial stock market investors who came into the market before and after the February Crash.
For many of these "YOLO" investors, trading stocks was something to do during lockdown since there were no ways to bet on sports or e-games or horses or anything else.
Many got the $1200 Pandemic cash and said "WTF--YOLO baby!"
But I will tell you--when you look at what they actually BOUGHT (based on the Robinhood ownership data) and LOT bought into the teeth of the March meltdown in OLD economy stocks blown up--and the made a killing.
Then you add the social media rocket fuel. You may not follow REDDIT or StockTwits or stay all day in a Discord "trading room" dripping with testosterone and adrenaline but they are the new marginal buyers and sellers of stocks.
And based on the Reddit sectors we follow and the rush of new subscribers into our newsletters, these Millennial/Gen-Z traders made a killing (along with us hated Boomers) in our NKLA moonshot and they are hungry for more.
What to do?
Here is what I advised an All-Access member a few weeks ago when he texted me and said (basically) "Toby--I bought 1,000 shares of NVDA and 10,000 shares of AMD on your table pounding investment thesis in November 2016. I sold some AMD into your Feb market call but I kept the NVDA--my cost basis is literally zero as I have sold and bought call and put options as you have advised over the years.
NOW (NVDA was heading to $500 per share) I have over $500,000 of Nvdia and $400,000 of AMD and I am nervous as hell--what do I do?"
I told him what I always tell someone who is losing sleep over being too overweight ANY stock "First take a breath. Second, decided how much you want to sell that leaves you unworried. Then, 20% out-of-the-money sell call options on both--the premium you get today is SICK--and if those shares get called away--you are now richer and feel better.
Then take some of that premium and buy out of the money put options for Jan 2021--enough to get your 80% of your new wealth protected, take your wife out to a SERIOUS dinner with insanely expensive wine and book a trip you two have always wanted to do!"
I have been doing this for 30+ years--and the ONLY certain fact of life we can depend on is that stock market bubbles correct. Sometimes they pop and take 50-80% of the last bull market gains away (for buy and hold forever shareholders who should NEVER BE in secular growth stocks in the first place IMHO).
There is ALWAYS a seminal event that breaks the "X stocks only go up" mantra.
I remember March 6, 2000 when Microsoft announced crappy forward earnings and missed Q1--everyone who could buy a Microsoft product (no subscription models in 2000 except for Salesforce!) had bought..and then on March 9 my largest personal stock holding Microstrategy (which launched my ChangeWave newsletter BTW--we bought at $10 and it went to $355 on March 8) announced they were recasting their Q3 1999 earnings.
Those two days crushed the "Dotcom stocks only go up" mantra and ended Barbara Streisand's dotcom stock-picking career.
Are we at such a moment? Is this a normal 10-20% correction of a highly out-of-balance stock market (i.e., the Fantastic 55 stocks) or the beginning of a real 20-40% or higher stock crash?
Let me answer that question with these charts. As I told an All-Access member tonight "IF you have $200K+ in our stocks, it really pays to get on www.stockcharts.com and draw support and resistance lines on your stocks. They will show you where the "real buyers" of your stock are--the fundamental buyers not the algo buyers.
Ladies and gentlemen, we have been in a "relative value" stock market since the Fed announced money would free until 2023 at least and then bought $5 trillion of bonds and the $5 trillion went into the financial system. What I mean is "what is the value of 3-5 years secular high growth stocks RELATIVE to investing in 5 year zero-risk bonds that, after 1.5% inflation, are guaranteed to LOSE me money over 5 years (or in the case of European or Japanese investors, lose twice and much.)
It the relativity if you will of owning the stock of a company that is virtually guaranteed to grow at 20-30-40% and higher CAGR for 5 years vs. the guaranteed of LOSING 2-3-4% a year in "no-risk" bonds a bargain relative to the alternative.
Therefore, until we break sharply down 20% in the market as the COVID-19 pandemic is managed with vaccines (getting people to take them is another story--OY!), my judgment is this market correction is one of the 8 market corrections we have had since the Fed in 2010 told us their job was to makes sure financial asset investors never lose money (the wealth effect of unlimited monetary stimulation).
Until "buying the dip" fails to work in a world awash in $20 trillion of free money, we will buy the dip.
Right now, Dow Jones futures and S&P 500 futures are little changed while Nasdaq futures are down another 1% Here are some charts that tell the story better than anyone can put into words. The question we have is "is this a 20-day, 50-day, 100 day or 200-day pull back?"
I can say this--with 26% of stocks over their 200-day moving average, this does not look like a 10% only correction. And I hope we get to the 100-day on our favorite digital platformity stocks--because THAT IS HOW we make MONEY investing in stocks.
But virtually EVERY chart says it’s the 50-day were natural buyers find value in secular growth stocks and below zero no-risk bonds and THAT is where the "BTD aka buy the dip" buyers will be buying.
ACTION TO TAKE: the only chart that is completely broken down is Cloudflare which we just added.
I am putting in a $33 SELL STOP to protect from breaking its 100-day MVA at $33.70
But these charts are so identical is IS sorta scary.
We will produce the same charts for our ULTRA INCOME plays--as their super high dividends and our insanely low-cost basis says HOLD and WAIT for bargains!
Take a deep breath, check the futures in the morning.
We are going into a 3 day weekend--I know that I WILL have our managed accounts properly hedged with a put option on the TQQQ levered QQQ ETF IF we get a bounce of a bottom tomorrow and FAIL to hold $140.
All-Access members--look for a few options plays tomorrow depending on what the tape and technicals reveal!
Tini time--I hear the Gin bottle rattling!