What follows is a portion of this weekend's note sent to Zenolytics clients:
The Nasdaq remains in an overall consolidation phase following the March lows. You can see in the chart above that the Nasdaq experienced expansions in volatility into the lows, followed by the large reversal on March 5th, briefly driving the Nasdaq below the yellow trajectory before reversing to close near the highs of the day.
Notice that since this reversal took place, the Nasdaq daily ranges have steadily been experiencing contractions in volatility. These contractions in volatility following the type of expansionary reversal we experienced earlier this month are indicative of a low being made, with the market now taking its time to carve out a base from which it can move forward.
As we move closer to Q1 earnings being released, it will become less likely that we will come anywhere near the March lows as the quality of earnings out of tech will be superb, with guidance to match. UPST went a long ways towards telling investors this past week that there remains an appetite for exceptional growth in the marketplace.
Of course, the current chatter is all about the reemergence of value. However, if you look at the chart below, you will see that whenever value gets this overextended versus growth, it has been a poor bet.
This is the ratio of the Ishare Value Factor etf versus the QQQ.
The last time we experienced a spike of this nature was in late 2016/early 2017. At that time, the Nasdaq experienced a 7% correction during Q4 2016 from peak to trough. Presently, we have experienced a 12% correction in the Nasdaq from peak to the recent March trough.
When you look at the ratio above what it does is to allow an investor to basically boil the entire market down to one question: Is growth finished as a superior performing asset?
With this type of extension over the 200 day moving day average of value versus growth, every single other incident of this divergence since the bull market started earlier this decade has been an opportunity to throw everything you have, including the bathroom toilet and kitchen sink, at the technology.
The only question an investor has to ask themselves right here is will this time be different? Is this the moment that growth fades for the long-term?
One thought I've had frequently over the past few years is that the modern day, experienced investor has come out of a framework that involved numerous booms and busts. Take myself, for example.
I experienced the 2000 internet bubble top, witnessing wealth get absolutely pummeled in the aftermath.
After that, I experienced the real estate bubble top, with a near collapse of the financial system.
Two historic busts taking place within a decade is rare. How does experiencing these types of events shape perception around pullbacks like the one we are experiencing presently? And will those experiences prolong the next bubble in ways few can imagine as an extreme period of busts from 2000-2010 is countered by an extreme period of booms that we are experiencing now?
In the markets, as in life, rhythm will compensate. The measure of the swing from one side of the pendulum will match the rhythm of the swing to the other side.
Given the economic policies of infinite QE, it is very reasonable to expect that the output of such a grand economic experiment will be extraordinary in scope. What we have experienced thus far is matched or even exceeded by 1999-2000. It may be absolutely reasonable to expect that in the years ahead we will exceed anything experienced in 1999-2000 by many orders of magnitude.
1999-2000 was simply a period of innovation being born and the vision surrounding that innovation taking shape, causing a boom as investors sniffed out the world we are experiencing presently.
The present moment is a materialization of that vision exceeding even the most optimistic views of two decades ago.
Not only that: The materialization is coming laced with historic QE that amplifies everything around us.
To expect growth to wither and die, as investors flock to buy American Airlines and Murphy Oil during such a period is silly at best and completely insane at worst.
What we are experiencing presently is simply a period of adjustment in the markets. It's a simple correction with narratives that are being created daily to further investor fear, causing boogeymen that don't exist to emerge, frightening investors out of positions.
I expect that this is the best buying opportunity for growth since a year ago today. And I expect that investors who capitalize on this opportunity will be rewarded similarly to a year ago today.
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