Big gains from elite tech last Friday… what history suggests on how long tech will be low… Luke Lango’s game plan for today
Friday showed us how explosive gains can be when the bulls regain the upper hand.
The S&P climbed 2.4%, but the real fireworks were in the Nasdaq, which burst 3.8%.
But the crazy thing is that 3.8% don’t even begin to describe the action of a handful of top tech stocks.
After the market closed on Friday, I browsed the Early-stage investor portfolio of our hypergrowth expert Luke Lango.
Measured from last Wednesday or Thursday through the end of Friday, I saw gains of 17%…19%…21%…24%…25%…27%…29%…41%…
There were probably other stocks in the portfolio with similar returns, but I stopped chasing the numbers – you get the idea.
Also, as I write Monday morning, although the Nasdaq is down about 1%, some Luke stocks are still climbing. I watch 5% more, 7% more, even 10% more.
To be fair, these gains come after months of heavy selling pressure, so we’re not bragging about the specific gains. The more pertinent question is, what do these gains mean?
*** Has technology reached an inflection point and has the massive “sudden divergence” that Luke predicted begun?
Let’s go straight to Luke for his answer:
Perhaps. But let’s not be so quick to call it that.
We have been deceived before by bear market rallies. Let’s not be fooled anymore.
The reality is that Treasury yields appear to have peaked, but inflation is still hot and the Fed is still super hawkish.
Remember: we need all three of these factors to turn into tailwinds before the markets begin to stabilize.
Certainly, history and our analysis strongly suggest that our stocks will rebound well before the rest of the market stabilizes, so our stocks will rebound before inflation cools significantly and the Fed turns dovish.
However, it still seems a little “too early”.
As Luke pointed out, the past few days have seen an easing in the 10-year Treasury yield. We are back below 3%, which is psychologically important. As of this writing it is at 2.86%.
On the inflation front, last week’s Consumer Price Index and Producer Price Index reports both marked a slight slowdown in inflation.
It’s far too early to claim any victory, but every reversal has to start somewhere. Next month’s readings will give us more context.
As for the Fed: as we pointed out here in the Digest, Fed members seem to be full of big talk but little action. This underscores the point that Luke has repeatedly made, that the current Fed is inherently accommodative.
Behind the tough talk, they want to be accommodating. Given this, if we see inflation starting to decline organically, the Fed will jump at the chance to ease off the gas.
And when these three variables converge, that’s when Luke sees hypergrowth tech leaders stage a huge rally.
*** Taking all this into account, where are tech stocks today in the context of a recession/boom cycle?
Back to Luke:
We increasingly believe we are seeing a repeat of the dot-com crash.
If yes, it is in fact bullishbecause as we’ve shown you before, the fastest growing stocks in the market have crashed to levels consistent with where this group bottomed in the dot-com crash – in terms of time, percentage of decline and valuation multiples.
To illustrate this point, Luke provides the chart below.
What you see on the x-axis is the number of days since the peak of the dot-com crash (in blue), the Great Financial Crisis crash (in orange), and our current tech crash (in black) .
The Y axis shows the percentage decline of the market from the previous peak.
This graph echoes the Nasdaq statistics that we presented to you last week courtesy of Louis Navellier:
Our friends at Bespoke have shown that when the NASDAQ Composite registers a drop of more than 25% as it did between November 19 and May 9, the previous eight times this has happened, the NASDAQ Composite then increased on average by 1.9% (1 month), 11% (3 months), 20.4% (6 months) and 33.5% (1 year).
It’s also worth noting that the average length of a 25%+ drawdown was 161 days.
Given that the current duration of the 27.6% decline between Nov. 19 and May 9 is 171 days, the current correction in the NASDAQ Composite is getting a little old by historical standards.
*** So how will we know if we have really bottomed or if it is just a bearish rally?
Obviously no one has a crystal ball, but let’s look at the Nasdaq chart to put some levels on your radar.
First, note that the Nasdaq just bounced off its recent five-month support line. I added it below.
The immediate bullish level to watch is the support level that broke earlier this month from around 12,500.
As you can see below, this is the level the Nasdaq bounced back to in March, held briefly in late April/early May, but then gave up.
As I write, the Nasdaq is about 7% below that level.
If technology can pick it up and hold it, that will be an important sign of strength suggesting the start of a sustained tech rally.
But if it doesn’t hold, keep holding on tight and focus on what’s to come. Use the examples we provided at the top of this Digest double-digit gains in just two or three trading sessions, proof of how quickly elite growth stocks can rally when sentiment turns.
Here is Luke’s game plan:
We believe that history is repeating itself entirely today, which means that the best thing we can do for our portfolios right now is to consolidate those portfolios around stocks that we have the greatest belief in and that can soar like Amazon, Apple, eBay and F5. following the dot-com crash.
That said, we will be watching the recent rebound in hypergrowth stocks against the backdrop of a still reeling stock market.
If this trend persists, it will be a significantly bullish signal that the turning point for our portfolios has arrived. If not, we will continue to watch for other signals that we are at or very close to this critical turning point.
One last point before concluding.
*** If you’re a tech investor, you’re probably sitting on substantial losses
I’m willing to bet a handful of those losses are serious.
Now, the math behind the gains needed to break even on a bad loss can be daunting.
For example, if you drop 50% on an investment, you need a 100% gain just to break even. If you lose 95%, you need a gain of 1900% to get the square.
In light of this, you might be wondering how likely your underwater tech games will turn out to be winners.
Well, let me show you the array we ran in the Digest Last week.
It shows the gains of select tech stocks, measured from their Great Financial Crisis lows to their all-time highs in subsequent years.
Hope you see the takeout…
Yes, when you invest in top tech stocks that are growing their top line and bottom line like crazy, you can recoup huge losses and more.
Now, that’s not a license to ignore your stop-losses in the future. But it’s a reason to be optimistic if you’re sitting on big stocks that are deep under water today.
It’s been a brutal time for tech investors, but history shows that too will pass. And when it does, the best hypergrowth stocks will make up for their losses and more.
Here is Luke with the last word:
It’s 2001 again, folks.
Wouldn’t you like to buy Amazon stock at $5 in 2001? You basically have that opportunity again in 2022.
Don’t let it pass.
We’re not saying the sale is over. But we say we are awfully close to the bottom. And when great the turnaround is comingdays like [last Friday] will not be the exception. They will be the norm.
Have a good evening,