The “Buy the Dip” strategy in tech stocks hasn’t failed — it will just take longer than it used to.
Much of this Nasdaq rally has been represented by the resiliency of large cap tech stocks — every mini dip was bought with a vengeance.
This go-to playbook drove tech shares higher after the March 2020 meltdown.
These past 30 days have really tested that thesis and signals that we, as market participants, have arrived at a crossroads because if the dip isn’t bought soon, we could either fall off a ledge and barrel into a harrowing correction or we could initiate a sideways correction and trade in a fixed range.
It’s hard to ignore the near-term weakness in many of the household names like Apple (AAPL), Amazon (AMZN), and Facebook (FB).
The upper echelon of tech leadership is signaling imminent decelerating growth and tightening financial conditions.
I do believe much of it is in the price, yet it’s cognizant to know there could be meaningful spillover from the Evergrande debt implosion in China into other asset classes.
External events are shaping the narrative around the Nasdaq dip buyers.
It also doesn’t help that a Facebook whistleblower came forward to tell the press about its malpractices and less than ideal tendencies to put profit over safety, but everyone already knew that about Facebook.
What I am surprised about is that investors usually look through the bad Facebook press and prioritize the metrics which hasn’t been happening the past month.
Facebook shares are still waiting to be bought after the dip.
The lack of Facebook shoppers on the pullback is definitely one area of concern because the U.S. government still has done very little to stop Facebook in its stubborn practices.
The U.S. government will not crack down through legislation on social media companies in the short term.
Much of the negative Nasdaq price action in the short term can be attributed to the worries about China taking a machete to its susceptible tech sector and crushing it even more.
Many don’t think the cudgeling is over.
In this scenario, a flight to safety could be in the cards, which would suppress interest rates offering an olive branch for the dip-buyers.
Ultimately, I do believe it’s a matter of time before we get some recovery price action in the leadership tech stocks; but yes, it could take 1-3 weeks.
Much of this second half of the year was consolidating tech shares that overshot themselves last year.
That’s why tech firms like Tesla (TSLA) had almost a zero percent chance of repeating last year’s performance.
Take ad tech stock Roku (ROKU) for instance, shares are down 23% YTD and that doesn’t mean it’s a bad stock.
Hardly so.
When one considers that Roku shares ended 2020 up 300%, then giving back 23% or 50% in 2021 is worth the annoyances.
These stocks can’t go up in a straight line even if they almost feel like they can sometimes.
This all sets up for a brilliant 2022, as many of these high-quality names will finally have gotten through the consolidation phase and will be buttered up to initiate their next leg up in early 2022.
In the broad scheme of things, tech won the pandemic over any other sector, and 2021 is turning into a rest year.
Sometimes one needs to go backwards one step to take the next three forward.
https://www.madhedgefundtrader.com/wp-content/uploads/2021/10/techoct4.png508936Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2021-10-04 15:02:472021-10-08 19:54:05It Will Just Take Longer
Below please find subscribers’ Q&A for the September 8 Mad Hedge Fund TraderGlobal Strategy Webinar broadcast from the safety of Silicon Valley.
Q: Do you think we’ll see the under $130 in the United States Treasury Bond Fund (TLT) before January 2022?
A: I don’t think so; I think we could go below $140, maybe below $135. But $130 would be a brand new low in the move and would be a stretch. We basically lost 4 months on this trade due to the countertrend rally, which just ended. I would come out of your (TLT) $130-$135 vertical bear put spreads right here while they still have time value, but keep the $135-$ 140s, the $140-$145’s, and especially the $150-$155’s. The idea was that you just keep averaging up and up until the market turns, and then you make back any loss. We move into accelerated time decay on those deep out of the money put spreads in December, so I would take the money and then offset it with the gains you made in those positions.
Q: Does Palantir (PLTR) look like it’ll hit $100 by year-end?
A: No, the stock has been dead, and management has not been doing anything to promote it. We did get a move up to $45 but it failed. It’s still a great long-term idea as they are growing at 50% a year. Also, they did buy $50 million worth of gold bars as a hedge. But as a short-term trader, Palantir isn’t working. If you have an options position on that I would probably get out of it or roll it forward to 2023.
Q: PayPal (PYPL) is fluctuating up and down with Bitcoin. Do you like PayPal?
A: Absolutely, but it obviously is being dragged down by Bitcoin. It is a temporary down move caused by a one-time-only event in El Salvador. Buy the dip in PayPal. It is a leader in the whole move into a digital financial system.
Q: When is Freeport McMoRan (FCX) likely to move up?
A: As soon as we shift out of the tech trade into the domestic recovery trade, which could be in weeks or months at the latest. We’ll switch from one side of the barbell to the other.
Q: Where do you see Tesla (TSLA)?
A: It keeps going up, so my guess is we top $800 by the end of the year, and maybe $850. The big news here is that Tesla has gone into the chip business, making its own chips in-house which is easy for them to do in Silicon Valley. But it does make them the first global car maker that is also a chip maker, and therefore the stock deserves a higher premium. The stock went up $30 on the news and is great for all Tesla holders. I hope you have the 2023 LEAPS.
Q: Too late to buy Tesla LEAPS?
A: Unless you’re really deep in the money, with something like a $600-$650; but the return on that will only be about 50% in 2 years.
Q: The Biden administration just set a goal of 45% solar by the end of 2050. Which solar stock should I buy here?
A: The problem with solar is as soon as Biden started winning primaries, every solar stock took off like a rocket, figuring he’d win, which he did. All of them went up 6-fold or more as a result of that, then gave up one-third of their gains and are now moving sideways. So if you look at the charts, the classic one to buy here is the Invesco Solar ETF (TAN), a basked of the top solar companies. All of these peaked in February and have been doing sideways “time” corrections since then, which means they eventually want to go higher. The other two that have charts that look like they’re finally starting to break out to the upside are First Solar (FSLR) and SunPower (SPWR) after 8 months of consolidation.
Q: Why is the second half of September almost always bad? Is it due to institutional repositioning?
A: Not really, the cash comes into the market at certain times of the year, like end of the year, beginning of the year, and end of each quarter. September seems like the month where they kind of just run out of money. But there's actually also a historical reason for that. For most of American history, we had an agricultural economy. Farmers were more than half the population, and the period of maximum distress for farmers is September, where they put all the money into seed and fertilizer and labor into the field, but they haven't harvested it yet. So, traditionally, they always did a lot of borrowing in September, which caused a cash squeeze and interest rate spike, and a stock market panic as a result. So that's the history behind weak Septembers and Octobers. Once the farmers get the crops in and sell them, that resolves the cash squeeze, interest rates fall, and it’s straight up for stocks for the rest of the year most of the time.
Q: SPACs (Special Purpose Acquisition Companies) seem to be losing interest. Do you recommend any or stay away?
A: Stay away—they’re all rip-offs and are simply a means by which managers can increase their fees from 2% to 20%. That's what they did with virtually all of them. This will end in tears.
Q: What's your feeling about satellite internet phone service replacing current internet cell service in the future?
A: It’s in the future, but it may be 10 years off in the future. If it happens sooner, it’s because Elon Musk was able to deliver cheap rocket service. He already has 20,000 satellites in the sky for his own Starlink global cell phone service for internet access.
Q: How does one buy a Bitcoin stock?
A: Well first of all, I highly recommend you buy the Mad Hedge Bitcoin Letter, which you can get in our store. But there's also the Greyscale Bitcoin Trust (GBTC) which allows you to buy a Bitcoin proxy very easily. I’ll even honor the discounted $995 price for my Bitcoin Letter for another day by clicking here.
Q: Is Warren Buffet and his value philosophy something I should be following, or is he outdated?
A: I have to say, buying stocks cheap with high cash flow will never go out of style. Currently, Warren’s big holdings are domestic industrials, banks, and Apple. All of those look like they will do well moving forward. Buffet’s Berkshire Hathaway (BRKB) has a built-in barbell element to it and is the subject of one of our LEAPS recommendations which has already been hugely successful.
Q: Is Home Depot (HD) at $330 a bargain?
A: Well, we just had a selloff and it bounced hard, and now we’re waiting for the domestic post delta recovery. It's hard to imagine both Home Depot and Lowes not doing well in this scenario.
Q: What will happen to tech when interest rates rise?
A: My bet is they go sideways to down small until you get another peak in interest rates (the next peak will be at 1.76% in the ten year US Treasury bond, the 2021 high) and once you hit that, then tech will take off like a rocket again, and in the meantime, you play the domestics while interest rates are rising. That is the game and will continue to be the game for a couple of years.
Q: Should I buy IBM (IBM) on a turnaround story?
A: No, I've been waiting for IBM to turn around for 10 years. They just don’t seem to get it. What they do is whenever a division starts to make money, they sell it and get cash like they did with the PC division and this year with its infrastructure business called Kyndryl. So, they’re not leaving any growth for the actual IBM holders.
Q: Do you like Square (SQ) at $256?
A: Yes, and that would be a great 2023 LEAPS candidate. All of the digital settlement payment systems are going to do well in the Bitcoin future. They also own quite a lot of Bitcoin. They are leading the charge into a digitized financial system.
Q: What’s a good Ethereum ETF?
A: The Greyscale Ethereum Trust (ETHE) is just the ticket.
Q: So you avoid energy, meaning oil and gas?
A: Yes, alternative energy we like, but it’s had an enormous run already so after a 7-month time correction it’s probably safe to get into solar. Traditional oil and gas (USO) is in a long-term secular bear market that started 13 years ago and will eventually go to zero. Last year’s visit to negative futures prices is just a start. Since 2020, the energy market weighting has gone from 15% to 2%.
Q: Is Natural Gas the only rational core fuel for the grid?
A: No, natural gas (UNG) still produces carbon even though it’s only half the amount of oil. This all gets replaced by solar in the next ten years. That’s why I tell people to stay away from energy like the plague. Would you rather buy natural gas at $4.50/btu or get solar electricity for free? Those are basically going to be the choices in ten years.
Q: Who is the biggest Aluminum producer?
A: Alcoa (AA) which we are a buyer on dips. By the way, if we do have to build 200,000 miles of long-distance transmission lines to cover the electrification of the US energy supply, all of that has to be made of aluminum. You don't use copper for long distances, you use aluminum (aluminum for you Brits).
Q: Would you buy Uber (UBER) at $40 today?
A: Probably, yes; it had a nice 40% correction. However, you are buying into the battle over gig workers—whether they should be treated as full-time or part-time workers. That is going to be a continuing drag on the stock until they win.
Q: What do you think of meme stocks?
A: You're better off buying a lottery ticket. Even with a low payoff, you get a 1:10 chance of winning on a $1 lottery ticket. Meme stocks could double or go to zero with no warning whatsoever—there’s no logic to this market at all.
Q: What do you think of Uranium?
A: Three words come to mind: Chernobyl, Fukushima, and Three Mile Island. I think uranium's time has passed, even though China is building a hundred nuclear power plants. It’s just too expensive to compete against solar on a large scale and impossible to insure. If you still like Uranium though, the Uranium Royalty Corp. (UROY) has had a nice pop recently. But the issue is that nuclear technologies can’t keep up with solar and digital. And they blow up.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last ten years are there in all their glory.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
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Michael Burry, the audacious hedge-fund icon who is famous for being represented in the movie “The Big Short,” is aggressively taking the other side of Cathy Woods, a name synonymous with tech growth.
Such prominent names at loggerheads with each other signals a divergence in interest rate expectations and the fallout, or lack of it, for tech growth stocks.
That is fundamentally the crux of the issue, with the stock market levered so heavily that even a quarter rate rise would undermine it.
Woods seems to minimize any ill-effects that broader volatile behavior will have on her niche area of the tech market.
Statistically speaking, growth tech outperforms the broader market when already low-interest rates are expected to trend lower.
The inverse holds true when interest rates are expected to rise, then tech growth stocks will underperform the broader market and even non-growth tech.
This is precisely why in 2020, elevated growth names rode the wave of the pandemic and shelter-at-home trade as the Fed lowered rates to fuel the stock appreciation.
The party is somewhat over now; or at least the low-hanging fruit has been plucked.
Burry disclosed that his firm, Scion Asset Management, held bearish put options against 235,500 shares of Woods’ actively managed ARK Innovation exchange-traded fund (ARKK) at the end of the second quarter.
The new position was valued at almost $31 million, according to the quarterly filing, which is required for hedge funds above a certain size.
Burry also has a growing put position worth $731 million in Tesla (TSLA), which remains Wood's highest conviction stock.
Woods responded saying, “I do not believe that he understands the fundamentals that are creating explosive growth and investment opportunities in the innovation space.”
Woods doesn’t understand that this isn’t a call based on a long-term forecast of growth tech outperforming the broader market but more of a short-term call that even slightly rising interest rates will penalize high beta names more than the rest.
No doubt that Burry has a clearly defined entry and exit point while Woods seems to be in the business of blanket statements disregarding idiosyncratic particulars which is a dangerous game.
There is the premise out there that a slightly rising interest rate will rotate money back into FANG names who can, by and large, stomach the ensuing bond rise opposed to loss-making growth stocks that depend on cheap money to fuel unproven business models.
Last year was sensational for ARK Invest, there is no point to play this down, it raked in billions of new assets from spectacular performances by Wood’s active ETFs focused on high-growth innovation-driven stocks. Several were among 2020’s best-performing funds, with returns of more than 100%.
But the funds have struggled to maintain that momentum this year. Many of their stock holdings are trading at frothy valuations that are betting on outperforming expected growth in the future.
As inflation flares up and interest rates rise, the current value of the growth companies’ future cash flow diminishes.
The ARK Innovation ETF is now 6% down for the year, with $500 million asset outflows in the past month.
Burry hasn’t been always right such as pulling out of GameStop (GME) in 2020 before the frenzied buying, which left a 2,000% surge on the table.
Wood also told us that Burry may not understand the current growth environment, as inflationary pressures are likely to be short-term in nature.
"Most bears seem to believe that inflation will continue to accelerate, shortening investment time horizons and destroying valuations," Wood explained. But Wood thinks supply-chain-related issues will be resolved, helping relieve inflationary pressures.
Wood pointed to a sharp drop in certain commodity prices in recent weeks (including lumber, copper, and oil) in regards to explaining why inflation may not linger for as long as some think. Used-car prices are also beginning to fall after an extraordinary rise, and a strengthening US dollar has also put pressure on commodity prices, according to Wood.
Nevertheless, Woods fails to chime in on China closing one of its biggest ports or Southeast Asian manufacturing hubs like Vietnam, Thailand effectively being shutdown from the delta virus.
Ultimately, Woods offers an overly blasé attitude towards an extremely niche problem. It is almost as if she would say the same thing no matter what condition the broader market is in.
And while cheerleading the stocks you are invested in is not a criminal act, to completely miss that Burry most likely has a different timeline than Woods shows that she has tunnel vision in terms of the phase of the economic cycle we are in.
I would say with conviction that it’s normal for Tesla to retrace after a 600% move up in 2020. There is nothing wrong with it and I see it as healthy market behavior.
Burry is essentially betting on a revision to the mean, which is high risk, ostensibly, Tesla most likely won’t rise another 600% in 2021 as well which is where Burry comes in.
I won’t sit here and advocate to market time mean revisions of tech growth stocks as we are not in that business, but this little skirmish screams to jump back into best-of-breed tech stocks to protect ourselves at frothy levels.
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I finally managed to carve out a few hours to analyze my 2021 H1 trades, and what a year it’s been!
From January 1 to June 30, the Mad Hedge Fund Trader sent you 124 trade alerts completing 64 round trips in four asset classes. These generated a profit of 70.59% in six months, more than we made all of last year.
It is the most prolific performance since we launched Mad Hedge Fund Trader 14 years ago.
In my January 6 Mad Hedge Annual Asset Class Review (click here for the link--you must be logged in to the site), I predicted that the Dow Average ($INDU) would rise 30% for the end of the year. This proved immensely valuable.
That view enabled me to go maximum aggressive, full speed ahead, damn the torpedoes. It’s not that I was so certain that the stock market would go ballistic to the upside. But with the Federal Reserve pumping trillions of dollars of quantitative easing into the economy, record deficit spending, and the pandemic coming under control, I was certain that markets would not go down.
So, I looked into my bag of tricks and pulled out a strategy ideal for this scenario, the in-the-moneyvertical bull call debit spread (click here for the video on how to execute one of these). Such an approach allowed me to make a maximum profit even if the underlying security went up, sideways, or down small. It worked like a charm.
2021 was definitely the year of equities. In fact, the risk/reward for equities was so compelling that it was almost a waste of time to look at anything else. Equity trades accounted for 62.53% of my total profits.
I split my equity selections with my well-known “barbell strategy” with equal allocations split between big technology and domestic recovery stocks. That way, I always had positions that were going up.
Short positions in the bond market (I had only one long trade) accounted for another 34.17% of my performance. This was basically a first-quarter trade where I caught the collapsing bond market by both lapels and shook it for all it was worth, catching a dive from $162 to $132 in the United States Treasury Bond Fund (TLT). I mostly quit bond trading in March, not wanting to visit the trough too many times in an extremely oversold condition. That was a great call.
Commodities delivered another 2.15% of return with a single trade in the SPDR S&P Metals & Mining ETF (XME). I thought exploding economic growth would cause commodity prices to soar, and they did. But there were better plays to be had buying key stocks in the sector directly, such as Freeport McMoRan (FCX).
As an afterthought, I made another 1.15% in precious metals with two trades long gold. I thought gold would go up this year but so far, no luck. The gold (GLD) faded away when US Treasury bonds became the asset class of choice from March onward.
Of 64 round trips, I lost money on only four, giving me a success rate of 93.75%, far and away the best in the industry. One was a short in Tesla (TSLA) in the $800s. It later fell to $550. The next was a long in Tesla. I got stopped out when it fell below $600. That’s OK because I made a 10X return trading Tesla in 2020.
Welcome to show business.
The next hickey came from a long in Microsoft (MSFT) which I got stopped out of. It went straight up afterwards. Then I took a small hit in Delta Airlines (DAL) for the same reason. The higher the market goes, the faster I stop out as part of my risk control discipline.
All in all, it’s been one hell of a year. I cut back my trading dramatically in June and July partly because the market was so incredibly high, but also to give my loyal staff a rest. Imagine working double overtime for a year and a half! How about sending out 13 trade alerts out in one day!
We are now all refreshed and well-rested ready to take on all comers in H2. The harder I work, the luckier I get. It really is true.
As I tell my beginning traders, work in, money out.
To download the entire 2021 H1 trade history, please click here.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Capturing Peak Profits
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(THE NEW AI BOOK THAT INVESTORS ARE SCRAMBLING FOR),
(GOOG), (FB), (AMZN), MSFT), (BABA), (BIDU),
(TENCENT), (TSLA), (NVDA), (AMD), (MU), (LRCX)
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