Intel, Elliott Wave, Fibonacci And Wyckoff; How To Approach ETFs With Cestrian Capital Research (Growth Investor Pro)

Summary:

• Timeframes are key to proper portfolio allocation, says Alex King, who runs Growth Investor Pro and Cestrian Capital Research.
• Combining Elliott Wave analysis, Fibonacci levels, and the Wyckoff cycle to analyze stock behavior.
• Intel’s battle for global supremacy in the semiconductor industry is crucial in the context of the US-China conflict.
• 2-pronged approach to ETF investing.

Listen below or on the go via Apple Podcasts or Spotify.

Alex King runs Cestrian Capital Research and Growth Investor Pro and joins us to discuss why timeframes are key to proper portfolio allocation (1:10) combining Elliott Wave analysis, Fibonacci levels and the Wyckoff cycle (3:00). Semiconductor fabrication and Intel’s battle for global supremacy (8:00) 2 pronged approach to ETF investing (14:35). This is an abridged version of our recent conversation, Tech Volatility Is A Feature Not A Bug – Alex King (Growth Investor Pro).

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Transcript

Rena Sherbill: So, how would you synthesize – is there a kind of tech stock that makes sense at this point in the cycle or is it company specific?

Alex King: Well, so I think it all depends on your time frame. So, if you’re putting together a retirement portfolio now and you’re 30, and you’re planning to invest regularly over the course of the next 30 years, does it make sense to be buying small allocations of Microsoft (MSFT) stock now at its all-time high? Probably it does. I mean, no one knows the future, but probably buying little bits now and continuing to buy it over the next 30 years probably isn’t a bad idea.

If you’re trying to make money next week with a highly levered option portfolio, it is buying Microsoft calls now a great idea? Probably not. So, I think the answer is, to be a bit unhelpful, it depends.

The method that we use for what it’s worth is, we, let’s assume we filter out good and bad business. And of course, you can make money with stocks that are issued by bad businesses. Of course you can, but let’s focus on the good quality companies.

So, let’s say we tick the box and say good company as in it’s growing quickly. The growth is predictable, measured by the growth in the remaining performance obligation, the order book growth in deferred revenue, the prepaid orders, gross margins are holding up nicely, cashflow margins are holding up nicely, the balance sheet is solid, all those things. Let’s assume we tick that away and we said, okay, good company.

We then look at, okay, if your timeframe is, let’s say, weeks or months for the sake of argument, we look at a technical chart. And our own preferred method, as anyone knows who reads our stuff is that we use a combination of Elliott Waves, Fibonacci levels, and something called the Wyckoff cycle. So, if that all sounds complicated, it isn’t really. The names are designed to make it sound complicated and put people off, but they’re not. They’re really easy.

So, the Elliott Wave system is just a – it’s a way of tracking emotion. The idea is that we get happy in five waves up, let’s say. So, happy, a bit more sad, very happy, a bit more sad, very happy. And then we’ve ended our happy cycle. And then we get sad in three steps down. So, very sad, a bit happier, very sad, right? So, five waves up, three waves down. And that repeating motif, you can find time and time, time again in highly liquid stocks and ETFs and indices.

It’s much harder in small stocks that are not well traded, but liquid stocks, you can see that emotional pattern. That’s all it is time and again. And then we look at, we use Fibonacci levels. That sounds really esoteric. It isn’t. It’s just a way of measuring the amplitude of the wave we just talked about. So, is that a big wave up? If so, it’s lots of extensions. Is it a big drop? It’s a big retracement.

And there are fairly standard patterns that emerge time and again, not because of some mystical nature of stock markets, or the way in which neurons are structured in the brain. It’s just a language that large account players use.

Now, if you can learn to talk stock market, then you can be a more successful trader and investor because all you’re learning is, what are the rules by which large account investors play. And if you can learn those rules and spot the breadcrumbs in the charts in particular, and you can follow just a little bit behind, you can do really well.

We then use something called the Wyckoff cycle. This is really important. So, this applies to typically over a period of weeks, months, even years, which is, if you – this is not a perfect analogy, this is an idealized motif, but it’s a good method to use.

So, if you manage a truly colossal amount of money, then you can’t make enough money by just buying Microsoft and sitting back and hoping it goes up. Not least because every time you write a check, if you’re not careful, the market moves. The thing you’re buying, the index of the stock you’re buying moves as it does when you sell it.

So, what you see with truly large accounts is, over time accumulation, meaning they’ll buy slowly and they’ll buy in pieces, small pieces over time, nothing happening quickly. If the stock runs up a bit, they’ll maybe sell a little bit to let the air come out of the stock, but you can spot those patterns on a chart.

If you use, anyone can read our work on the free side of Seeking Alpha and you’ll see the volume by price indicators. And you can see as those spike, there’s a big gray set of bars on the right-hand side of our charts. As they spike up at the lows in a big liquid stock after a big market sell-off, it’s probable that that’s large account players accumulating, buying up. And you’ll see the stock moving in a horizontal channel over a period of time, weeks, months usually.

And you’ll then see the stock start to break out. And around that time, so all the way through this accumulation, usually on CNBC, you’re being told how terrible that company is, or the world is, or there’s a recession or a war or whatever it might be.

All of a sudden, when that stock starts to move up through the markup zone, as we call it, which is just borrowed from this Wyckoff motif, miraculously, financial media will be telling you, “Oh, well, things are looking up for that.” And you’ll see, more often than you might think, these stocks then start to move up quite quickly, and eventually reach a place of so-called distribution, where you’ll see that volume spike again. And so, you can see in the Tesla (TSLA) chart just now, for instance.

So, if you look, I have it in front of me, if you fire the chart up and we can post this as a comment to this podcast when it’s posted, there’s clearly accumulation early this year when the stock was sat between about 150 and about 211. And then distribution started when the stock is between about 240 and about 280. And so, if you were watching for that, then even on a relatively short-term trade over the course of a few weeks or months, you can follow those breadcrumbs and make money from it.

So, for us, we separate entirely company and stock behavior. So, first of all, is it a good company? If no, then you’re just, you’re gambling. Nothing wrong with gambling if you’re good at it, right? But if yes, you can be investing. And then the question is, when do you buy and when do you sell? And for us, and there’s million methods of doing this, we claim no genius on this. But our method is, try and see what large account players are doing, and just follow behind them a little bit.

Don’t try and be clever than them. You don’t need to be. Because the advantage you have as an individual investor, or even to be honest, a fair sized hedge fund there isn’t a giant insurance company is, your volumes don’t move the market and theirs do. So, you can see their behavior, but you can typically shield yours. And therefore, you have an advantage. Your lack of giant outsized fund is an advantage. That’s our method.

RS: Very good. Last time you were on, you were talking about Intel (NASDAQ:INTC) and how they had just gotten through the worst quarter of any company that you’ve reviewed.

AK: Ever. Yeah.

RS: Ever, ever, ever. What are you thinking about it now?

AK: Well, it’s up. When was that podcast?

RS: It was in February, beginning of February.

AK: February. All right. Okay. So, let me just – I’ve got the Intel chart right here. Okay. So, at the end of February, the stock was at 26 and we called, you’d have to check back in our service, but we were calling by pretty strongly around that time and slightly before. And what’s it now? It’s at 33 now. So, it’s up quite nicely.

I think Intel – I think there’s two ways to look at Intel. Everyone knows the stock, right? And everyone knows the history. Intel started to make a holy show of operations some years ago. As anyone knows that follows the semiconductor industry or the stock in particular, its process manufacturing just hit the skids for many reasons. Poor management is at the core. And then they missed the move to initially the 10-nanometer process node and then beyond, and they’ve just fallen further and further and further behind.

And that’s a problem if you are: one, a huge market share owner of CPU supply, but it’s an even bigger problem if you are the only U.S.-owned semiconductor fabrication company of any scale at a time when semiconductors are pivotal to the battle between the two great powers, the U.S. and China.

And when the other giant in fabrication TSMC (TSM), China thinks is a Chinese business. No one else thinks it’s a Chinese business, thinks it’s a Taiwanese business. But China clearly has designs on Taiwan.

And so, the slow movement of this battle between the great powers, the things to watch here is not the movement of carrier groups or missile silos, it’s the movement of semiconductor fabrication capital. And so Intel, to us, it absolutely has to succeed. It cannot fail. And this is not like a bank is too big to fail.

This is in the battle for global supremacy, semiconductors to the fore. And if the U.S. is to succeed, Intel must succeed because you can’t build fabrication plants under some other ownership quickly enough with enough accuracy that are trusted by fabulous players, fast enough in order to replace Intel. You can’t. And so, Intel has to win.

So, the Federal government, well, in my opinion, scoop money into Intel for as long as is necessary for it to survive. And so as an investment plan, that’s a fantastic investment opportunity. Because the stock, as you just mentioned, reported what I think we’d say, it was the worst quarter of any company we’d ever seen ever in decades.

Stock went up, because it doesn’t – at this point, right at this moment, it’s not really about the fundamentals of Intel. It’s about a strategic battle between the U.S. and China. And the U.S. obviously means to win, so does China, but the U.S.’s major chip, pun intended, is Intel. And so that was our very simple investment logic for Intel.

I’m long Intel personally, I added to it recently, I think the stock has a great future. I think for what it’s worth, the company probably will come right. I think the new CEO is better. I think they understand their problems better, but that’s not really the dominant investment thesis. The dominant investment thesis is, there’s a cold war going on, both sides mean to win it. And if you think the U.S. has any chance of winning it, you probably want to own Intel.

RS Were you at all surprised by China coming out with their regulations against the chipmakers?

AK: Well, I would say first and foremost, I’m about as far from a China expert as you will find. But I would say that, I think it’s a very hard game for them to play this. The advantage that China has, of course, is it does not have electoral cycles, which is an advantage. It has a command economy of sorts, which is an advantage.

But what it doesn’t have is the extent of intellectual property base that the U.S. has, despite many years of playing catch up, it’s not there yet. And at least in the last century or so, one of the best setups, if you want to be in conflict with another empire, is having a truly free market capitalistic economy and a liberal, small l polity as in a democracy. And those things turn out to be huge advantages.

And China, so, it doesn’t have a truly free economy, it doesn’t have a truly free polity. It doesn’t have the intellectual property. And ultimately, it has less access to capital than does the U.S. And so, it’s a – that’s a tough spot. That’s a hard place from which to win. So, I don’t really know what their winning moves are. I’m sure there are some. And again, ask a China expert, they’ll tell you, and that’s not me. But that they make unpredictable moves, I think is born of the fact that they have, in my opinion, a weak hand.

They tried a very good strategy for them, which is invite U.S. capital over, invite U.S. intellectual property over, attempt to assimilate some of that with some success has to be said. The U.S. has opened its eyes to that and pulled back under two administrations now. I’m not sure what China’s next move is. I’m not sure they’re sure either.

So, yeah, that they make these unpredictable moves, I think is a function of, well, what is the winning play from where they are? It could be the old-fashioned one of, well, if you wait a couple of centuries, then most empires destroy themselves. It’s happened in every country in Europe, English as you can hear, at least by passport, if not by genes. And so, the British Empire spectacularly collapsed under its own self-satisfaction. And there’s every possibility that the U.S. will do that. That’s not going to happen next year or the year after, and probably not in the next 50 years.

So, what does China do? It either waits, 100, 200 years, and that might be a good play, or it tries to accelerate it somehow. And I’m not sure what that accelerant is. But again, you should ask a China expert.

RS: And ETFs, what’s your approach with ETFs?

AK: So, we do two things with ETFs. And again, this is all within our Growth Investor Pro service. The name Growth Investor Pro is a little bit misleading because we do cover things like defense-based telecom. We cover the DAO, those sorts of things. So, the name’s a bit misleading.

We do two things with ETFs. So, first of all, we look at the SPDR sector ETFs, so (NYSEARCA:XLK), (NYSEARCA:XLY), (NYSEARCA:XLC), all of these, the component parts of the S&P for ones with a better term. And we use those to first of all come up with investment ideas and ETFs themselves on that rotation basis, which is, if you look right now, (NYSEARCA:XLF), the financial ETF has been out of favor for some time, it’s likely to move up. And that’s one of the things that drew our attention to the bank single stock ideas.

If you did the same analysis nine months ago, you’d be saying, well, XLK, the tech ETF is looking destroyed, as is XLC, as is XLY. So, C being Comm Services, things like AT&T (T), Meta Platforms (META); and XLY, consumer discretionary, which is Tesla, Amazon (AMZN), things like that.

And so, if you look at the sector ETFs that are on the floor, and digging into the basement, they’re usually pretty compelling places to one, start to accumulate the ETF themselves. Again, the big liquid ones, I mean, obviously there is all sorts of weird and wonderful ETFs holding, tiny weird and wonderful liquid stocks. That’s great. You can make lots of money doing that, but that’s not our focus. Our focus is on the big liquid ones. And then also, if you see the big sector ETF starting to behave in a certain way, you can then use that as a signpost to go look for single stock opportunities.

So, there’s that, the sector rotation analysis we look at. And then the other thing we do is, we use the Index ETF. So that’s the (NASDAQ:QQQ), the (NYSEARCA:SPY), the (NYSEARCA:DIA), (NYSEARCA:IWM). We use those to generate standalone long and short trading opportunity. Now, this isn’t for everyone’s taste, not everyone that subscribes to our service uses this, many don’t, but some use it a lot.

And so we tend to chart those out really carefully every day. And here in our offices, we look at them 20x a day, and come up with long and short index ETF ideas, usually using the 3x levered long and short index ETFs as hedged pairs.

So, in other words, if you were wanting to trade the Nasdaq, we would look at (NASDAQ:TQQQ) as the long and (NASDAQ:SQQQ) as the short. We often have hedged opportunities where we’ll hold both at the same time. And the idea being that as one moves up, try and cash out on the long, and as it moves down, try and cash out on the short. And that’s an adjunct to the work we do. We do pretty well at it, but it’s fairly time intensive. And it’s not something that all of our subscribers like to do, but we do it a lot. And the benefit that it brings across the service is a laser focus from us on what indices are doing?

So we look really closely at each of the indices in the futures hour by hour, minute by minute. And that can tell you a lot about what’s going to happen in some single stock names. So, if you know, for instance, the Nasdaq and the S&P are both running up to key resistance levels, then there’s a good probability that if you own high beta stocks, then if the Nasdaq is hitting its head on resistance, it’s likely to sell off a little bit in the next week or two, then probably those high beta names are going to sell-off more.

So, depending on where you’re positioned, you may want to take profits or if you’re waiting to buy into them, you might think well, a better opportunity will come along in a week or two. So, we use ETFs both for themselves and also signpost for the single stocks that we cover.

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