The Scent of Ascent (FB,C)
We’re going to start this week by claiming unapologetically and without any shame that tech stocks – particularly those sexiest FANG names – are about to spear the meat and offer a taste sensation that will be remembered by the longs for years to come.
Here’s the setup.
First, earnings season is now underway and expectations for the quarter have been revised drastically lower. Between storms and their damage and the effect they’ve had on employment and agriculture and tourism and the like, Wall Street believes aggregate earnings numbers will be far inferior to what was initially expected.
And that could bring a blessing.
Should there be upside surprises, we could see a great many stocks move strongly higher.
Indeed, of late, we’ve seen a slow tick higher in anticipation of better numbers, and even fresh, new highs on all three major averages as late as this week. And that, too, bodes well for the bulls.
We would add that a great many of the biggest tech names are now showing technical signs of impending breakouts, and we’d highlight Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Tyler Technologies (NYSE:TYL), Tesla (NASDAQ:TSLA) and Google (NASDAQ:GOOGL) among the best of them. Netflix (NASDAQ:NFLX), by the way, has already broken to new highs, surpassing its former mark set some ten weeks ago, before a pullback of almost 20% sent her fans reeling.
Of course, these developments will come as a relief to those who’ve held these issues through the last two month ‘dip’. Besides Netflix, both Tesla and Amazon also registered steep losses before clawing their way back to current levels.
And that sets the stage for the next equity shootout alluded to at the outset.
Consider also the news cycle, a phenomenon that manages relentlessly to pull market watchers away from the repeated new highs set since the beginning of the year.
Without diminishing from any single item’s importance, consider the following list of headlines from the last month or so, a collection of mesmerizing stories unprecedented in their power to create a distracting ‘wall of worry’ while the market stealthily ascends.
- Potential conflict with North Korea
- Worst ever hurricanes in our nation’s history
- Worst ever mass homicide in our nation’s history
- NFL anthem crisis
- Chicago/Baltimore murder competition
- Potential conflict with Iran
- Worst wildfires in California’s history
- Robots in the workplace… and the bedroom!
- Ongoing Special Counsel into Russian Interference
- Ongoing inflammatory and often humorous Presidential Tweetfests,
- And more…
Could you ask for a more effective smokescreen for the market to gain altitude?
Add to that the following chart we find significant.
Below, is five years’ worth of fund flows into both Global and American equities, with the latest divergence proving wider than at any other time during the period.
As you’ll see, in roughly March of this year, the shine came off American issues and was redirected to the rest of the world, and our feeling is that a shift back to America is about to commence.
Take a look –
From the election last November through March (between red lines), U.S. stocks were in the ascendant, a mix of fire and vinegar on the ascension of Donald Trump to the Oval Office and the hope that his policies would help invigorate American business.
But after such a steep climb, and amid turmoil in the legislative realm, the fires cooled and the vigor drained. Stocks stalled, and new, foreign markets were found in which to funnel cash (red arrows).
And most importantly, all this coincided with the sexiest names in the market falling out of favor – and the spotlight.
But today, Europe and the Emerging Markets are amply priced, and both monetary and political risk have once again reared their ugly mugs. In Japan, meanwhile, it appears just the Government is buying stocks, and even they appear to have run out of funds to maintain what is an outrageously expensive and exaggerated buying program.
So that leaves America.
We feel the turn to the U.S. shouldn’t take long to gather momentum. We would estimate that over the next week or two, we’ll see new highs on a number of the aforementioned tech issues and continued excitement surrounding Dow 23,000, NASDAQ 7000 (eventually), and fund flows should then be triggered on a tidal scale.
Incidentally, we don’t feel abashed about predicting the following prices for the above mentioned issues. The lift that’s about to occur will catch nearly everyone by surprise.
- Tesla: $500 by next November.
- Facebook: $235 by next November.
- Tyler Technologies: $240 by next July.
- Amazon: $1300 by next July.
Write them down.
(Based on our own Elliot Wave and market cycle counts.)
This Week’s Trade
Statistically, our best trades have been long/short pairings that profit on outperformance rather than pure performance alpha. By matching stocks or sectors, we can be wrong on direction but still achieve a profitable result. So long as our keynote security is climbing faster (or falling slower) than its counterpart, we win.
And today’s trade is no different.
Our penchant for the big tech names is where we’re placing our emphasis. And we’ll pit them against a sector that has been moving tremendously for the last thirty days, the financials.
But we’re going to drill down a little deeper first, in order to find representative securities from each sector for the trade – a riskier prospect, in many ways, but more lucrative if we’re right.
And with that in hand we urge you to consider Facebook from the tech side, and Citigroup Inc. (NYSE:C) from the financials.
Here’s the way they match up over the last month –
Citi’s 14% gain against Facebook’s ½% loss looks like a slam dunk to us.
The gap will close, and we’re playing it like this –- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
Many happy returns,