The “dot-com” bubble burst in March 2000.
It was a time when stock valuations were at their highest, investors had a “buy first, ask questions later” state of mind, and people were quitting their day jobs to day trade.
In the beginning of this year, stock valuations were pretty much at the same levels.
From there, the tech heavy Nasdaq 100 index fell 17% to its lows on March 14.
But there were really two parts of this selloff…
First was a result of the market pricing in multiple rate hikes… A necessity that developed since the Fed was so behind the curve on controlling inflation.
But the recent second leg down was all about the Russian war…
Initial war headlines broke on February 10, and the Nasdaq 100 fell an additional 13%
But when it became clear that the effects of the war (in its current form) on U.S. stocks had been priced in, we wrote several essays calling for a relief rally.
So, has the rally now gotten ahead of itself?
This chart comparing the price evolution of the tech sector then and now suggests that we have…
Take a look…
It compares the tech sector then (blue line) to how it’s currently developing (grey line).
The trajectory appears similar. Some may even call it a replay of 1999-2000, including the bear market rally from the spring of 2000.
These types of rallies are notoriously dangerous for investors… pulling them back in when it’s time to be getting out.
You see, the afterglow of the huge rally we’ve had since coming out of the pandemic is still fresh in people’s minds. After all, the market was at all-time highs as early as January 5.
And now, mainstream pundits are starting to cheerlead this rally for more. The financial talking heads are a well-known contrarian indicator.
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This is concerning for investors thinking about rushing back into the tech sector after witnessing a 14% rally from recent lows in less than two weeks.
As I mentioned last week, not only is it a reactionary way of trading, but it also ignores a slew of underlying issues that makes me believe that we’ll see new lows quicker than we’ll see new highs.
The biggest issue – tighter monetary policy from the Fed – is set to get even tighter.
Take a look at this chart…
It shows the number of rate hikes the market is anticipating… Which keeps rising.
If this was the reason for the market to sell-off in the first place, why should we expect new all-time highs if we’re slated for more hikes, not less?
Other issues are starting to pop up as well…
Last week, I mentioned how the biggest component of GDP (consumer spending) is starting to take a hit.
Now, the fixed income market is generating another signal the pundits love to talk about. It’s known as an inverted yield curve (when short term interest rates trade higher than long-term rates) and it’s usually a sign of an impending recession.
But this is a murky indicator, and the Fed distorts the yield curve with its targeted bond buying programs. So, getting a pure read is hard.
But it is consistent at foretelling a recession with a lag… averaging about 18 months.
After this recent rally, investors that took advantage of the situational trading setup to buy stocks should take profits at these levels.
And those more concerned about the long-term picture should use this rally to allocate away from tech and into value.
Because as we envisioned 2022 back in December, this is the year of the value trade.
Regards,
Eric Shamilov
Analyst, Market Minute
Reader Mailbag
Last week, we asked Jeff Clark Alliance members about their recent gains on my new trading strategy. These are some of their responses…
I think that the earnings reversal strategy is a good one. I mostly appreciate the fact that the companies in the earnings situations are simply identified. It’s relatively easy to keep up on a few companies or indexes, but I lack the time to search earnings release schedules and multiple companies.
With respect to the first five releases, I didn’t participate in all five recommendations, but I did take action in two of them: INTC and CWH.
I was able to get in and out of CWH close to the recommended times and recorded a similar 61% gain (67% was posted). With INTC I wasn’t exactly in and out on time and only recorded a 3% gain (19% was posted). However, I followed up on the ensuing dip the following week and recorded a 77.5% gain in two days on the secondary bounce.
I’ve learned a lot about trading following your explanations and advice in both the videos and the newsletters. From January 6 to March 23, my trading account is up 311%. Most of the winners were multiple recommendations in GDX and SPY. Hope we can do that every eleven weeks!
Thank you, Jeff and your whole team!
– Salvatore F.
I’m most enthusiastic about the new strategy on earnings reversal trades. I made all five successfully, with results very close to the ones you have posted. In each trade I have waited for instructions from Jeff to exit. I hope that he is prepared with more of these trades soon.
– Ed P.
I bought Campbell’s at $1.40 and sold $1.71 on March 14. So, I made 22% in three days. Fine with me! Thank you.
– James S.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].