Only Thing That Matters Is Price; Nasdaq Has Further To Go – Cestrian Capital Research

Summary:

• The NASDAQ has the potential for further upside, with technical analysis suggesting a rally could continue before a potential sell-off.
• The QQQ ETF, which tracks the NASDAQ 100, could reach a range of 418 to 463 before a possible downturn.
• The market is at a critical point, and investors should closely monitor price action and use technical analysis to make informed decisions.
• Intel, Nvidia, Palantir, and what’s really happening with AI mania.

Listen to the podcast above or on the go via Apple Podcasts or Spotify.

Cestrian Capital Research’s Alex King on this hated bull market and why the only thing that matters is price (1:10). Technical analysis, Elliott Wave and Fibonacci charts; base case on QQQ (7:00) Still bullish on Intel despite pretty awful financials (11:30) Nvidia, Palantir, what’s really happening with AI mania and why it’s not a bubble (15:05). How to use ETFs (22:50).

Transcript

Rena Sherbill: Alex King, welcome back to Investing Experts. Great to have you back on the show.

Alex King: Thank you, Rena. Always a pleasure. Thanks for the repeat invite. Much appreciated.

RS: Yeah, absolutely. It’s great to have you back. You’re talking tech with us. You’ve talked tech previously with us at Cestrian Capital Research, that’s Alex’s team at Seeking Alpha, and he runs Growth Investor Pro, which is his Investing Group on Seeking Alpha. I’m interested how you’re looking at the market.

Last time, we were, kind of green shoots everywhere. And now we just had Julian Lin talking to investors about how it’s not a bubble. So, you were also talking about the volatility that’s inherent in this part of the market. I’m interested how you’re looking at the market in general and then vis-à-vis tech.

AK: Yeah, I’m happy to talk it through. We run a service called Growth Investor Pro here on Seeking Alpha and one of the things we do is we cover tech stocks as the name suggests, but we also do a ton of market index work.

If you zoom out, I would say, Rena, that we saw a bottom in the market around this time last year. And we’ve had a really strong bull market all year, certainly in the S&P and the NASDAQ. And it’s been a hated bull market. People have written it off as a bear market rally or this or that, or it’s not real, and of course, none of that matters. The only thing that matters is price, and price has shot up, particularly in the NASDAQ.

Most forms of technical analysis, I think, will tell you that this rally probably has some way to go. And that doesn’t mean it’s going to go up every day. As we speak now, the market’s off a bit, the NASDAQ’s actually down about a point and a quarter. But most forms of, again, technical analysis will say, there’s some way to go yet.

And the way we look at it in our work is, we happen to use Elliott Wave and Fibonacci level analysis. But obviously, there’s many different lenses you can use. And our base case says that there’s a good way to go yet in the NASDAQ.

If we pick the (NASDAQ:QQQ) as a proxy, so that’s the QQQ ETF that tracks the NASDAQ 100, then our base case says that the QQQ could reach somewhere between maybe 418 and 463, something like that before rolling over and selling off. And that’s not any kind of Nostradamus thing. It’s just standard technical analysis, which is just pattern recognition, as everyone knows.

So, it could be right, could be wrong, who knows, it’s just pattern recognition. We’ve been tracking that sort of five waves that move that might terminate there for a few years now. It’s been a pretty righteous chart thus far.

And the big question that we’re asking ourselves right now is not so much, is it going to dump tomorrow? And then we’re just going to revisit the 2022 lows and it’s going to sell off below that, which is what the majority of people seem to think.

Our question is, okay, is our base case bullish enough? Because on a chart, and this is not a complicated chart, but it basically starts at the 2018 lows, which is the last time monetary policy was reversed from tightening to loosening. You then get a run-up pre-COVID crisis, a rundown into the crisis, a big run-up at the end of 2021, a sell off into the rate hike cycle, bounces in Q4 of ‘22 and then a run-up since then.

And so the question is, is that right? Is it going to terminate between, again, 418 and 463 on the QQQ and the equivalent chart on the (NYSEARCA:SPY) would be something like a termination in a similar range of 533 to 583 and is that right?So that would assume there’s a bit more run-up to go, and then we’re going to hit some sort of capital event and then dump because at the end of that sort of five-wave cycle, you would expect a big sell-off.

I mean, anything can happen, but my instinct is that’s not what’s going to happen. My instinct is, is we’re going to see a continued run up in markets through ‘24, certainly up until the presidential election. And we’ll see what happens after that.

And if that happens, then there is a possibility that actually the low that you should be measuring from is the COVID crisis low. And if you measure from that low, again, using many tech analysis methods, but certainly ours, then it says actually, the NASDAQ and the S&P could run up quite a long way from here, numbers that sound silly right now.

So, if I looked at the QQQ, and I took our bull case and it is our bullish case, you’d say it could run up to 650, but that sounds silly now and there’s not really much point saying that. But then the start of large bull markets, if you come up with any price targets, it always sounds silly at the time. So the best thing to do is see how it goes.

So the work for us is, again, in the NASDAQ, look at what happens when it gets into the low 400s on the QQQ. And if the strength through there, if it’s really powering up, well, then I think we’ll think, well, our base case is a bit too visible. And if it’s hard going and it’s faltering and thinking about turning over and hitting resistance levels, then I think we’ll think, okay, the cycle is done, and then we’re back into a bear market sometime next year, probably.

And I don’t have a religious opinion on that. I think we’ll just let the market tell us what it’s going to do. You know if the market is going to dump and you know how you know it because it starts dumping. You don’t have to be any kind of rocket scientist here, it tells you.

So, that’s a long answer. But in essence, I think, base case expectation here is it’s going to run up some more. And if I look at where could we be wrong, I think, where we could be wrong is, and what I’m most concerned about is turning to sell too soon. I’m not concerned about the market, the bottom is going to fall out of the market tomorrow and oh, dear, I didn’t sell anything, because you always get time to hedge or to sell.

My concern is that we were too cautious. And then my own personal holdings and our callings in our research, we’re too bearish. And we say, “Okay, time to step aside and the market keeps on running up.” Because that’s what’s happened to an awful lot of people since this time last year.

They didn’t believe that the bull market was real and they’ve just cost themselves a ton of money as a result needlessly, whereas if they just watched the market and reacted as opposed to try and predict it, they’d have done much better.

All of our work on stock, so we did two kinds of analysis. We do technical analysis, we do fundamental analysis and never the two should meet. If they coincide, it’s quite interesting and it reinforces the one and the other. But for price analysis, we start with technical analysis. And from a technical analysis perspective, we use this Elliott Wave and Fibonacci method. There’s nothing revolutionary about it.

Lots of people use it. Many folks on Seeking Alpha use it. But if I just talk you through it, starting from the 2018 lows, as I just mentioned, suggests that we’re now in a wave five up. That’s a final run-up before a big sell-off. But it doesn’t feel to me that that’s true because the U.S. economy is in pretty good shape. Inflation is coming down. It’s unlikely rates are going to go up. They might come down. Consumers in good health. Poor people aren’t in good health, but they never are.

Rich people are in very good health and rich people drive the market, poor people don’t. It’s not – maybe not nice, but it’s true. And it doesn’t feel like that technical analysis calling for a rollover soon is right.

But if you start those charts, the same method, the same Elliott Wave and Fibonacci charts from the COVID lows, then the sell-off in 2022 looks like what’s called a wave two down. So basically a big correction after initial run-up.

Whereas if you start at 2018, it looks like a wave four down, which is a final sell-off before the final run-up. Now, the 2022 sell-off was so deep in both the NASDAQ and the S&P, that it’s a perfectly righteous wave two, which tend to be pretty deep.

And so what that might mean maybe is that the S&P and the NASDAQ are currently in a wave three up. And if so, wave threes are really powerful and go a lot longer and a lot further and not further up than anyone expects them to. And so, it’s on purely technicals.

So, if you want to get into some very, very boring detail and it is boring. If we look at the base case on QQQ, then 2022 more or less all the year was a 0.618 retrace from the wave three high struck in the end of ‘21. That’s if you start at the 2018 lows, I appreciate this is incredibly boring.

Whereas if you start at the COVID lows, March 2020, and you say that the move up to the end of ‘21 was a wave one, then 2022 was a 0.618 retrace of that move, which again is a perfectly valid wave two. So there’s every chance, I think, that we’re in a wave three right now, not a wave five. And when that becomes not boring is because if it’s a wave five, well, it’s going to roll over soon and sell, and we all need to be on our toes and ready for that.

But if it’s a wave three, it’s got a ton of time to go. And the mistake people will make is getting out too soon. And that is just giving away money for absolutely no reason. And so that’s why I think it, because the chart pattern says it.

And if you look, just look outside the window for a moment, does it look like – does it look and feel like 2021, when a – it’s pretty obvious a big sale was coming at the end of that year. It doesn’t look and feel like that. It looks like the early innings of a bull market, I think. And so, that’s why I think that.

So one, technical analysis, the chart says that that might be the case; and two, look outside the window. It doesn’t look like the end of days. So, that’s nice.

RS: Yeah. Depending on which window you’re looking out of.

AK: But if you’re rich and you’re looking at the window, what’s not to like, and rich people drive the market.

RS: For those who it isn’t boring for, for those interested in a deeper dive into the charts, should they just write you, should they look at Cestrian Capital? What’s the best way if people are looking, I know some people write us afterwards and are like, well, let me dig into the charts.

How do they get these charts? How do they chew it up with you even more?

AK: The best article they can read of ours on this topic, it’s free. It is on the Seeking Alpha site and it’s called The Long Bull Market To Come. And that isn’t an article that goes, we’re all going to go up into the right forever. It’s an article that considers the question. And it includes the two charts that I’ve just talked through, the sort of the base case and the bull case it’s in there.

And if people want to discuss that post comments to the article, we read them all. We do our best to respond really quickly. We really welcome comments, input all of that. The last thing we do here is work on a sort of oracle basis. We figure out that there’s a – there are a ton of smart people that use the Seeking Alpha site. It’s one of the reasons we love publishing here. And we really love getting comments and feedback and questions, and they make us think all the time.

And so, challenging anything we might have put in an article, brilliant, do it. I mean, call us names if you like, but you probably won’t get a sensible response if you give us a silly comment. But if you get a sensible comment, we’ll always think about it and respond and we might agree with you or not, but we love getting the comments that The Long Bull Market to Come. That’s the one to read. And if you just go to our profile on Seeking Alpha, you can find it there.

RS: Yeah, and we’ll include a link to it in the show notes. And yeah, I would say those in the know, those who have spent more than a few minutes on Seeking Alpha know that the comment stream is typically one of the best places to find insight and get a deeper dive and more of a conversation with the analysts. So, full supporter of that process.

Last time you were on, you were talking – well, the past couple of times you were on, you’ve been talking about Intel (NASDAQ:INTC) and that’s also something that you’ve been writing about, a stock that you’ve been writing about. I’m curious where your thoughts are on Intel in general?

AK: So this was a stock that we were really bullish on last time we spoke. And if you look at our – I’m pretty sure we’ve got public coverage of it on the Seeking Alpha site. But just in case anyone can’t reach that, we had it accumulate, which is a buy in our world, between $24 and $34 a stock earlier in the year. And we’re now at, it’s down a bit today, we’re at 42 and a bit today. And it’s run-up really strongly.

We remain house view bullish on Intel. We rate it a hold right now because we think the buying opportunity was, again, 24 to 34 with a stop at 22 or below. And at this point, obviously, the risk reward isn’t as good. But if you’d bought in that zone, even if you bought at 34, you’re a good, nearly 30% up right now.

Guess is we see a bit of weakness in Intel over the next few weeks, just letting off steam after a huge run-up and a fast run-up, but remain bullish on the company. And the reason for that is that the original logic, which is this reshoring of semiconductor manufacturing back to the U.S. and Intel being the only credible player of any scale in the U.S. that’s U.S. owned or the U.S. headquarters, flag carrier for the U.S., however you want to call it. That remains true.

New CEO at Intel, Pat Gelsinger, I think is doing a very good job. It’s a difficult, difficult job. It’s – there’s many difficulties at the company, company of that size you can’t turn that around quickly, it’s not possible and you’re going to hit some snags along the way. But good job’s being done.

The financials at Intel are still pretty awful. But they’re starting to get less bad. And so with corporate turnarounds, it never goes from awful to great in a couple of quarters. It goes awful, more awful, which is when usually a new CEO arrives. And if they’ve got any sense, they go around collecting all the bad stuff, bad news, and then hurl it all out in one, maybe two earnings reports, issue a few write-downs, give a few profit warnings, churn the executive team to the extent they can, and do all the bad stuff over the course of three to six months.

And then it starts to get less bad than it was, as in the bad stuff is getting worse more slowly. And then you start to see a turnaround and I think we’re sort of approaching the point in Intel where we probably start to see bad stuff bottoming and things start to pick up.

And nothing in the macro environment has changed. There’s something of a rapprochement, I would say, between the U.S. and China. But the fact is you have a big strategic competition over the next 50 years about who can make the most advanced semiconductors the most quickly and cheaply.

And that competition is between the U.S. and Taiwan, which plays host as you know to TSMC (TSM) and China. And those are the players. There’s only three players that count. And I would be surprised if the U.S. was going to lose that war.

And so Intel is the stock to ride if you want to ride that tension. So, we remain bullish on Intel. I think the risk reward has worsen because the price has gone up, nothing to do with the company. So, it’s a substantial personal holding of mine. It’s one of the bigger allocations I have. It’s done really, really well this year. I’ve considered trimming it a little bit a couple of weeks ago, decided against it. So, I’m just going to hold it for a while and see how far we can go.

RS: Speaking of kind of a subsector of the tech sector, an obvious one is AI and all the mania it’s seen in this past year.

What would you advise investors in terms of trying to take advantage of that? Is it worth getting into Microsoft (MSFT), NVIDIA (NASDAQ:NVDA)?

Palantir (NYSE:PLTR) is a stock that’s bandied about a lot, it’s a favorite from a few analysts on this podcast. Curious your thoughts on the bigger players and then just the general approach to that part of the sector.

AK: Yeah, sure. I think the first thing to say is, well, the first thing to say, of course, we don’t give any advice, make sure to say that. So, I shan’t be giving any advice.

But the first thing to say about AI is, what it isn’t is a bubble. Obviously, some of the stock prices have rocketed along with that AI narrative, but AI in and of itself isn’t a bubble. And why I say that is because call it what you like, AI, large language models, parallel compute, pick a name, what’s happening here is a CapEx refresh cycle in the data center and beyond.

So about every decade, plus or minus, you see this in tech. So in the mid late 90s, enterprise size companies woke up and went, well, we haven’t got a website, or if we have, it looks like a brochure. We kind of need one. We better find out why we need one and what it needs to do. And, oh dear, none of our IT systems can run this.

Okay, we’re going to spend a lot of money on IT, and they did. And then those assets were depreciated over the next four or five years and became extremely profitable in the 2004/2005 period onwards. It’s 2010 and everyone suddenly requires the internet now to actually work.

And so, more people had broadband connections to their home and offices, more consumer activities were expected to be conducted online, people getting iPhones in ’07, which pushed up bandwidth requirements on the fixed line network, the backbone network massively.

And so another CapEx refresh cycle came around the 2010/2012 period. And that coincided with the rise of social, huge data center growth off the back of Facebook (META) and other social media sites and we’re there again. So, we’re another decade-ish on.

And if you think about the improvements and increases in compute power that arises from having this colossal collection of parallel processing units in the data center, well, what that’s going to need next, what has to happen next is improved networking. Because the only way to get the output from that massively upgraded compute plant that’s in the core of the network, the only way to get that to people’s devices is a network that is faster, lower latency, lower jitter, higher throughput, all those things.

And so what I expect us to see now is a network CapEx refresh. So that means in data center networking, the interlinks at that point, the wide area network, that means all the fiber that’s run by AT&T (T), Verizon (VZ), all the smaller players.

The in-office network, people’s home Wi-Fi networks, the security, so the endpoint devices. So, if you’re running a machine now at home that’s two, three, four years old, it’s going to start creaking because the software requirements and the software demands upon the system are increasing.

So, this isn’t some bubble dreamed up to shift NVIDIA stock, although clearly that’s been a beneficiary, it’s a real thing. And the CapEx spending, I think, is going to percolate way, way, way down through the tech value chain. It’s only really just started, in my opinion.

Now, stocks. We called NVIDIA as an accumulate opportunity between 100 and 150 again, there’s a public article on Seeking Alpha doing that last year, and it fair rocketed out of that zone. It’s hit some resistance right now, but it’s shot up from 150 to almost 500 really quickly. And I don’t think that that’s a bubble. Do I think that’s going to sell off a bit? Yeah, probably before another move higher.

But I think that if you look at the fundamentals of NVIDIA, it’s actually not particularly expensive stock on the basis of a cash flow multiple given the growth in cash flows. This thing is growing at a percentage rate that’s just incredible for the size of business it is. That’s been the, obviously, the stock to back in this area.

Now, of course, there are smaller cap tickers that C3.ai (AI), a bunch of other things that happen to have shot up, but if you look at actual real businesses as opposed to speculative stocks, NVIDIA’s clearly been the one to be in to benefit from that.

There’s plenty of others. I think if you want to benefit from AI, the number one thing you can do is be exposed to tech, because AI will drive, in my opinion, again, CapEx flushing all the way through the tech value chain.

So frankly, being in the NASDAQ, will – you are exposed to AI by doing that. So you don’t have to go and pick some crazy stock that somebody tells you is going to be a big beneficiary of AI somehow miraculously hasn’t been, but it’s about to take off tomorrow and it’s an undiscovered microcap, you don’t need to do that. You can if you want, sure. You don’t need to do that. The NASDAQ alone will give you any windfall benefits that flow from that AI CapEx refresh.

Palantir, I mean, I own Palantir, I own NVIDIA as well. I love Palantir as a fundamental business. It’s not a particularly good business. It looks like an old line enterprise software and services business, which is to say big bespoke projects, so-so margins and cash generation.

I really don’t love the continued founder selling. Every time the stock hits, you can tell the founders do technical analysis because they always sell as it reaches a technical high. Again, I do own it. I expect it to go higher, but I don’t think it’s the North Star for AI investing at all.

I think it’s a reasonably good enterprise software business, where enthusiasm for the stock will probably drive it higher. And I’m personally positioned that way. But it’s not a stock I would personally expect to own in five years’ time, because if you’ve been around enterprise software, just go and look at the numbers.

The numbers aren’t all that wonderful. It tells you that it’s going to struggle to ever be a really truly high-margin business. It kind of can’t grow that fast because the projects are difficult, bespoke, huge customers, government and enterprise customers. It isn’t a flywheel type software business of the kind that we see with pure cloud businesses, for instance.

So, again, AI, I don’t think it’s a bubble. I think it’s a real spending. There’s continued benefit in the NASDAQ at large. NVIDIA stock I think, can keep going up. It wouldn’t surprise me to see some weakness first, but I think it can keep going up. I don’t think you need to get esoteric and overthink tech to get some AI exposure. As you mentioned earlier, Microsoft will give you AI exposure, so will Amazon (AMZN).

The key thing, I think, is technology for as long as I’ve been an investor has always been an incredibly strong performer. And that’s because it’s such a young industry that’s growing so quickly. And so, I think anyone that does not have tech exposure, that’s probably the biggest risk over the long-term. Obviously, you can get hurt in the short-term as 2022 taught everybody, but long-term, I think it’s incorrect, I believe, to have insufficient technology exposure.

RS: And in terms of the ETFs, you were talking about how at Cestrian, you guys traded and used a lot of hedging in that – in those endeavors. For your average retail investor, you were talking a bit about it just now in terms of the QQQ and getting exposure that way.

Would you say, in general, the adage of an ETF being better for a more passive investor, let’s say, is true for the most part?

AK: I would, yeah. I mean, if you think about the – I think there’s two approaches that you can take to investing. If you think back to the Warren Buffett 101, what does he say that you should do if you are not prepared to learn the craft and spend literally all day pouring over company balance sheets and stock charts and whatnot?

His comment a long time ago now was, go find a low-cost S&P tracker, dollar cost average into it, never sell, right, that’s his advice. And if you do that for a lifetime, then for all of recorded history since the S&P 500 began, then you would be incredibly well off.

So, if I look at our various – we run various model portfolios in our various services, we always track them against that, which is DCA the S&P; buy the S&P; buy SPY and do nothing, right? In our modeling, we go on the day the portfolio open, dump all the model money into SPY and do nothing. Collect dividends, reinvest dividends back into SPY and do nothing. And it’s a pretty good investment strategy. And I would guess that the same is true of QQQ.

What you’ll see in QQQ versus SPY, you’ll see everything compressed on the timeline. So the X-axis on everything is forced together and the Y-axis is all stretched out. So, the amplitude in the moves is greater in the NASDAQ both up and down and the timelines are compressed. So, the QQQ ETF can be a scarier thing to own than the SPY. But over the long-term, I mean, it’s only up as you can see.

I think the trick with these things is the Buffett point about dollar cost averaging is a really good one. So, if you suddenly pile all your money into the S&P or the NASDAQ and you happen to choose the wrong time, a market vehicle close to it, then that’s going to hurt for a long time or many years before you’re even.

But if you dollar cost average, if you invest X per month or quarter, you let all those dividends reinvest. Then, again, over the long-term, so far through all of history, when those instruments have existed, it’s worked pretty well.

And I’m not sure that’s going to change in the future. It doesn’t mean there can’t be a bad month or year or quarter, but over the long-term, I think, it can work pretty well.

RS: Would you say in terms of the risks that worry you in this sector, because there’s, right, as you said, there’s obvious kind of growth potential in the tech sector, as we are all well aware of at this point.

But in terms of the risks present, you’re saying in terms of the timelines and who’s to say which quarter is going to lead to which quarter. But would you say in general, the main risks that you’re worried about is the timing of it and not being bullish enough at the right time?

AK: I think we’re coming up to a really important decision point. So, most tech stocks, you can use the NASDAQ to aim off. And so, if the NASDAQ is peaking, then probably so are most tech stocks, obviously not perfectly. And if the NASDAQ is bottoming, then probably so are most tech stocks, not every single one of them all the time, but directionally that’s true.

And so right now, if I look at our work over the last couple of years, if we go back to the COVID lows, we called the COVID lows really well and said, basically buy everything and that turned out to be right. So, I’m pleased with that. 2021 highs, we called the top and said, basically, buckle up. We posted a note in our subscription service to that effect, which is, this looks difficult. All the main indices are peaking, maybe the Dow runs up a bit from here, maybe it doesn’t, but this looks bad.

We were a bit hasty, I would say in calling the 2022 low, nothing too dangerous, but a bit hasty. But then when it did hit a bottom, retested it, we screened it and said, this – there is a righteous buying opportunity now across, I mean, any number of stocks and that turned out to be correct.

And so, pleased with the calls we’ve made and the major market pivots. And so the thing I’m concerned about now in our work is, “Okay, it might be that there is a major market pivot coming up, but I talked about it earlier, and it’s in that article, The Long Bull Market To Come.”

So, it might be that the QQQ is going to hit resistance between 418 and 463 and roll over. If that’s true, then the technical pattern its made means that the rollover that’s coming is pretty brutal to the downside most likely. So one doesn’t want to get that wrong.

But equally, if that’s not correct, and again, to use my boring terminology earlier, we’re in a wave three up, at a five up, then this thing’s going to keep going and it’s going to move for some time and you don’t want to miss that either.

So I think this is quite a difficult point in the market. And we are, I’m going to say a month, two, maybe three months away from figuring out, well, which of those is it? It could be neither, could obviously sell them, drop through the basement tomorrow. But I don’t think that’s likely.

I think what’s likely is either another couple of months up and then a sell-off or it just keeps going. And I want to make sure in our work that we don’t get that wrong.

Now, with the indices, if you invest in ETFs, you’ve got a different level of abstraction on your risk. If you’re DCAing, then it doesn’t really matter. I mean, as long as you’re not, again, putting life-endangering amounts of money in with every check, then if the market sells off, well, that’s what gets you lower costs.

If you’re running on a hedged basis, so in our work for instance, we use (NASDAQ:TQQQ) on the long side and (NASDAQ:SQQQ) on the short side, they are complex instruments. They’re 3x levered daily instruments. They’re not for the faint of heart.

But the benefit they offer you is if you have a long position in TQQQ, let’s say, and you’re wrong, well, you don’t suddenly need to sell it and head for the hills, you can just hedge it with an SQQQ position. And then you suspend time for a moment while you figure out, well, which direction is it going? Is it going up or down? So should I add to the long or add to the short or sell on my long or sell on my short or do something else?

So now there’s two ways to solve for that sort of risk. You either take the Buffett DCA method, in which case, short-term prices coming down can help you. It lowers your next in cost.

Or if you run on a hedge basis, then you just need to have your wits about you about when do I deploy a short hedge if the market’s been running up? When do I sell that shortage to make sure I capture the profit? And when do I dial on additional long positions to profit from a run up? And you can only answer that by just watching the market every day.

RS: What would you say to investors looking at recent earnings in the tech sector were very positive. Magnificent Seven continues to dominate the market returns.

What would you say to investors that maybe they’re missing in all the headlines or that they should be more focused on within all of the good news? I know that you just mentioned a lot of your concerns, but kind of also more market-based or more macro-based.

AK: Yeah, I had a slightly different take on earnings, to be honest. I mean, the thing that surprised me is the majors were all good. But if you look at some of the smaller-cap tech stocks, CrowdStrike (CRWD), Snowflake (SNOW), some of the others, the thing that surprised me was I thought they printed pretty pedestrian earnings, and yet the stocks jumped up anyway.

Now again, they’re down a bit today. But I mean, on earnings, CrowdStrike was up 10% on I thought mediocre earnings. Snowflake up 10% mediocre earnings. Salesforce, ticker (CRM), up 10% on mediocre earnings. My takeaway, to be honest, was that you can print so-so numbers, and the market’s going to take the stock up anyway.

And that, again, plays into that question of, well, how bullish of a bull market are we in? Because typically when you see that, that is a really bullish bull market because people are piling in and buying even okay earnings, whereas in 2022, you could print fabulous earnings, it didn’t matter, the stock got sold anyway.

So yeah, if you go beyond the Magnificent Seven, and their numbers are good. I mean, Microsoft is just a machine, incredible. Meta Platforms, similar. I’ve been surprised by how bullish the energy reaction has been to not wonderful numbers.

I suspect it’s because so few people bought the low. So if you look at the volume by price analysis on the S&P or NASDAQ or Microsoft or the Dow or anything, frankly, and you look at the volumes that were traded at the 2022 lows, it’s tiny and it’s surprisingly low. So it’s surprising, in my opinion, how few people were buying the lows.

Now, you would forgive the part-time investor for missing that, not least because the media at the time was full of everything’s going to zero. But there’s plenty of grown-up fund managers, I think, who missed that, and they shouldn’t have.

And I saw the – my personal interpretation of the July to October correction just now was, well, if you manage money professionally and you miss the 2022 bottom, you need a do over and you need another window of weakness within which to buy. And hey presto, by amazing, for instance, along comes one between July and October, during which volumes have been really high.

So I think any sort of surprise upside reaction, my interpretation is it’s one of – it’s too easy to say FOMO, I don’t really mean that. I mean, it’s not fear of missing out. It’s a fact that people should have been buying at the lows in ‘22 and didn’t.

And if you didn’t and you saw the market run away from you in ‘23, then partly for an individual investor, but really and truly if you’re a professional investor, now you need to be concerned because you are going to get a hard time from your clients when it comes to the ‘23 performance review if you missed that low. That low was a gift. It was a spike low. And all the factors that should have triggered you to buy, you should have been listening to it.

Again, I’m not talking about the average investor who is probably better suited to dollar cost averaging the S&P. I’m talking about professional money managers who should have known and they missed it. So, I think there’s a degree of catch up going on here, which is I didn’t buy what I should have been buying. I’d better buy now, because if it does keep going, I’m going to look an idiot.

And I’ll get away with it this year, because, well, it was a spike low in ‘22, and everyone can explain that way. But next year, if it keeps going up, I won’t get away with it. So, I need to buy. So, I would see it as that, which is a sort of retrospective correction for action that should have been taken a year ago.

RS: I’m curious because of your experience in the markets and managing money and looking at people managing money. And I know that we’re all fallible people and who are we if not full of mistakes. But in terms of in general, like money managers missing that, would you say that’s being too conservative? Would you say it’s not believing enough? What would you point it to? Would it be just loss of the thing that they should be focused on?

AK: I think it’s very easy to get caught up in a crowd mindset and a discipline, I think, that it’s really helpful to develop is switch off Bloomberg, switch off CNBC, don’t read fantastical headlines that come your way, good or bad. I mean there’s a big banner in Bloomberg today that says, should you buy Bitcoin at 40,000 – what you need to know.

And you could have bought Bitcoin at 15K, we don’t cover Bitcoin. I don’t care for what lies beneath. But as a matter of fact, if you wanted to buy Bitcoin, you could have bought it at 15,000 a year ago. You could have bought it at 25,000 in September. But now there’s a flood of media stories going, well, maybe you should buy at 40,000.

And it’s that kind of thing. I think it’s really easy for people to get caught up into both on the upside and the downside. So you go back and you look at any kind of even grown-up financial media in late ‘22, it was all miserable, right? And I’m not just talking about mad money and stuff that retail consume. I’m talking about professional money manager websites and publications and news and general sentiment was incredibly negative in ‘22.

But if you step back from the crowd and you just calmly can look at price, and that’s easier in some environments than other, and the more senior you get, the easier it is for you to do that. And also the less that your world depends on next quarter’s bonus, the easier it is to do that.

If you just step back and look at price, most technical indicators would have told you that, for instance, the COVID low was a spike low, and you could buy that, that the 2021 high was a pretty serious high in the market and you ought to be at least lightening up and maybe going short. But if you can’t go short, you should be lightening up into cash.

And they would have told you that the 2022 lows that were tested, I mean, the S&P basically went sideways from April. It looked like it sold all year, but it didn’t. It went sideways from April to April ‘22, April ‘23, and then it took off. The spike lows down that were hit in October, retested in December and January.

Again, you had a triple test of the lows there that I wouldn’t expect one of my distant relatives who isn’t an investor to spot those things, but a professional money manager should spot those things and should have the confidence to invest as a result. And I think that we had a big swirling cloud of negative emotion last year that meant people couldn’t see clearly.

And I would see the beginnings of a big swirling cloud of positive emotion at the moment that’s going to stop people from thinking clearly. And so if you look at the S&P and the NASDAQ right now, if you were buying those at the lows last year, and let’s say you finished buying by around April, May this year, now is when you are in the Wyckoff so-called markup zone, which is where you sit back, do nothing, and you let other people markup the value of your portfolio as they rush in and buy these things late.

So, your greatest friend right now, if your timing was good, is late money. And so, when I see articles like that, is Bitcoin a 40,000 a good idea? And again, no position on Bitcoin one way or the other. But that kind of article that entices late money into a market.

So, I think what happened in ‘22 was everyone got drowned in bearish sentiment. And if you couldn’t step back and get clarity on price action, you suffered because you couldn’t ever become confident enough to buy. And what we will see, as with any market top, whenever the next market top of is, whether that’s in three months or two years, who knows.

But whenever that top comes, we’ll see the same thing, which is, it’s always going to go up forever. And the key, as always, as everybody knows, but it’s very hard to practice, the key is to step back and take a cold, hard look at price action. And your best friend here as well is find a method of technical analysis that works for you. It isn’t voodoo, it isn’t nonsense.

You have to find a really simple set of tools that work for you. It doesn’t matter what anyone else thinks of them. If it helps you call major market pivots to the up and the downside, that’s just fine, and find them and use them because that’s a much better gauge of what to do than anything you’ll see on the TV.

RS: Those are some golden nuggets for those listening. And those interested, follow along at Cestrian Capital Research, that’s Alex’s team at Seeking Alpha, where you can find their free articles. And he runs Growth Investor Pro, which is his Investing Group on Seeking Alpha, a lot more golden nuggets if you want to seek them out in those two places.

Alex, really appreciate you coming back. I’m happy for you to share the last few words if you want for investors listening, for market watchers, observers, or anything else you want to share with our audience?

AK: Well, Rena, always a pleasure. So, thank you once again for the invite. First of all, I encourage people to use Seeking Alpha to its fullest degree. It’s an incredible set of tools on the platform, much more so than you’ll find in most other places, there’s great quantitative analysis tools.

Seeking Alpha runs its own analytic services, Alpha Picks, a bunch of other things that are really useful and take a really cold, hard view on the markets, free of emotion. So I first of all encourage people to do that.

Secondly, obviously, I would ask people to take a look at our profile on Seeking Alpha site. We run a number of lines there. You can read a ton of our stuff for free. We run a very, very low cost basic tier of service that will cost you $99 for the first year.

And we run a really full real-time service, full tier of Growth Investor Pro. We cover 50, 60 stocks, a bunch of ETFs. You get trade disclosure alerts, real-time chat, all of that. So, if you don’t already, go and spend some time on the Seeking Alpha site. And hopefully, you’ll find your way to our profile and you’ll find something you like from us as well. That’s what I would say.

RS: Agreed. Echo all those points. Appreciate it, Alex. Looking forward to the next time we talk.

AK: Thanks a lot. Talk to you soon.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

---

---