Don’t try to catch a falling knife
We hope everyone had a Merry Christmas and is enjoying the holiday season. Here’s to a good year!
Markets need a breath of fresh air and a restart. We are heading into a new year, but the markets have little understanding of the timing. Although the markets coincidentally moved from a bullish market environment through the end of 2021 to a bearish market to start 2022, it is unlikely to turn bullish again to start 2023. On the technical side and the on the fundamental side, the market characteristics do not look positive at the moment. .
On the technical side of the markets, here is what we are currently seeing:
- Value is the engine of growth. Typically, in bull markets, growth stocks, such as technology stocks, outperform. Growth stocks dominating the market indicate that investors are willing to take on more perceived risk. With value and defensive sectors in the lead, investors don’t feel very risky heading into the new year.
- The Nasdaq is approaching its lows. The Nasdaq 100 index, composed mostly of technology and growth stocks, is approaching the low points it experienced in October and November. These are the lowest levels the index has seen since mid-2020. Each time the index reached this level, there was an increase in demand for Nasdaq shares (indicated by the ▲ in the chart below). We will see if this trend continues or if the index breaks the support and drops. The Nasdaq is now more than -30% off its peak.
- Most of the major indices have experienced successive highs and lows. Using the Nasdaq as an example, in the chart below the descending trendline has been drawn from the relative highs of the index. You can see that each peak hits the slant line almost perfectly, before descending (indicated by the ▼ in the chart). This is classic bear market behavior.
Source: Canterbury Investment Management. Chart created using Optuma technical analysis software.
Don’t try to catch a falling knife.
Tesla stock is one of the hottest topics in the news. The company’s stock has captured the spotlight for all the wrong reasons. In December alone, the stock is down -32%. This does not include Tuesday’s decline of an additional -11.50%. Since its peak in November 2021, not counting Tuesday, the stock is down -70%.
As far as the company is concerned, nothing seems too unusual. Their 3rd quarterly reports showed positive earnings, and one would think that with high gas prices and some states (California) placing favorable mandates for electric vehicles, the stock should benefit. Is it time to buy Tesla?
Here are three technical sayings about the markets:
- All parabolic advances end the same way.
- Don’t try to catch a falling knife.
- The greater the damage, the longer it takes.
All parabolic advances end the same way
We discussed this at length at the end of last year. All parabolic advances and bubbles, fueled by extreme optimism, will eventually end the same way, with the bubble bursting. From January 2020 to early November 2021, Tesla stock rose 1,351% in less than two years. It is a parabolic advance. Now, almost thirteen months later, the bubble has burst and more than 70% of that gain has been erased.
Don’t try to catch a falling knife
Tesla broke the lower support and the stock only went lower. With high volatility and an irrational stock, trying to buy that stock would be like a gamble, with the odds heavily stacked against you. The stock could still go down. Here’s a good math question: “What’s the difference between a stock down -80% and a stock down -90%?” The answer is not that second stock is down another -10%. For the title which fell -90%, it first fell -80%. He then got cut in half again. Don’t try to catch a falling knife.
The more damage, the longer it takes
The more damaged a stock is, the longer it will take to recover. The current long-term and short-term trend for Tesla stock is down, its volatility is extremely high, and the stock has shown no signs of wanting to rise. With volatility high and following a steep decline, there will most likely be several big “up” days for Tesla stock. This is still not a positive indication, nor does it mean the stock won’t fall further.
Nearly half of Tesla’s trading days have risen this year. Additionally, Tesla stock had 22 days where the stock rose more than +5%. All this in a year when Tesla stock fell nearly -70%. There’s a lot of overhead supply for Tesla stocks. In other words, there are far more current Tesla investors who would like to get out of the stock, or sell in any kind of upside momentum, than there are prospects who want be there. It will take a long time to burn through that overhead and rebuild.
The chart below shows Tesla stock dating back to 2020, including its parabolic rise in price. Now you can see that it has broken technical support dating back to 2020, and it has also broken lower channel support from its series of lower lows and lower highs.
Source: Canterbury Investment Management. Chart created using Optuma technical analysis software.
Brief fundamental opinion
Fed Chairman Powell has had a very busy year. For fundamental opinion and insight, I want to quote our good friend and expert market technician, David Vomund, who has been so helpful to us over the years when it comes to producing our market commentary:
Almost every economic report out there points to a slowing economy, which is Fed Chairman Powell’s goal. He’s trying to fix his colossal mistake of putting too much money in the system for too long. The damage Powell and his company are causing to investors, workers, potential home buyers, and just about everyone else cannot be easily counted, but it is enormous. At least $15 trillion of household net worth is gone. It’s financial assets plus real estate. He was wrong to let inflation spiral out of control, and now I believe history will say he was wrong to tighten too much for too long. History will not treat him well.
Conclusion
Historically, this week has been good for stocks and is referred to as the “Santa Gathering”. The market is oversold, so it would make sense for the markets to see a rally in the new year. Keep in mind, however, that this is a volatile market and markets tend to do the opposite of what most would expect.
Right now, the fundamental and technical outlook points to a continuation of the bear market. The Nasdaq is lagging and major stocks that have seen substantial increases over the past few years are now experiencing the opposite. The objective in this market environment is to maintain the stability of the portfolio, by limiting the aberrant days of the portfolio (days beyond +/-1.50%).
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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