My thesis has several layers which provides a margin of safety ;
- Fed policy: Currently the fed is tapering and has said that if inflation persist they may increase the speed they taper. If you look at history every single time the fed tapered the market corrects (20+%). The same can be said when they Fed announces they are increasing QE, the market reverses a downtrend and continues on a bull run. This has proven to be 100% accurate in the US. The market is forward looking and sees this coming, IMO the market has already topped. Of course the Fed could reverse there decision and decide to continue QE for longer, if this occurs I will cover my short.
- Stocks under pressure: ARKK ETF and the vast majority of speculative stocks are down 50-70%, these are the first to be hit when we extend to the end of a bull run, and the stock market participants are looking for a safe, cash flowing companies to ride into the end, that is essentially a flight to safety in anticipation of tapering and an increase in the funds rate.
- Fed announced Taper: On November 3rd the fed announced the taper, since then we've seen stocks get smashed on any miss earnings and just the way the market is reacting to news has drastically changed. Most recent example is the new C19 variant, any potential bad news the market is no longer just brushing off, participants are confused and see the market as being irrational for no reason, where in fact the real reason is because of the TAPER. We will continue to see large draw downs on any negative news.
- Valuation: The FAANG stocks is holding up this market, as they are seen as the safest and best companies the world. This has pushed there valuations to ALL time highs. MSFT is trading at a 37 PE and 14 PS, not seen since the Dot Com bubble. Normal MSFT or AAPL trade at a PE of 12-18 and that was during the last decade where they had a massive run rate of growth ahead of them.
- Shift to small cap from large cap?: I have thought about the possibility of a shift away from large cap, allowing them to correct while small cap coming back into favour, keep the market propped up, however EVERY SINGLE time MSFT has corrected or crashed the market does the same. So unless this is the first time we ever see this happen, It just isn't probable.
- Forward guidance: AAPLE is only expected to grow at 4% in 2022, and MSFT 15ish%. Demand has been pulled forward and we are going to see a reset in their valuations based on forward looking guidance, currently it is completely unsustainable and they have no way to grow into there valuations.
- Economic outlook: Inflation is rising which will put pressure on companies margins if they don't have pricing power. On top of this I expect we see a much weaker consumer in 2022/2023. The cost of living is rising significantly in every aspect of people's lives, leaving them with less disposable income to spend on non essentials. Any correction in the stock market or housing market would further pressure consumer confidence making them think twice about going on that vacation or buying a new Macbook etc..
- China: The Chinese economy is on the brink of collapse, the real estate giants such as Evergrande are barely meeting payments on interest. Evergrande has 300 billion in debt and is selling assets to meet interest obligations. Real estate sales are down 30% in October! The Chinese see the inevitable real estate crash as these giant companies fail, which will cause the economy to collapse and will have a ripple affect on the world. China is the #1 purchaser of commodities from countries around the world, as their economy slows they will purchase less ,which will put pressure on other countries GDP, we have already seen a massive slow down in China doing just this!
- Market is currently crashing: The Russel 2000 peaked a couple weeks ago on November 8th and is already down 10%. In nearly ever case small cap lead a crash (not including black swan events) and the S&P follow behind within a matter of weeks. Also; technical analysis on the FAANG stocks all show they were extremely over extended and have peaked, which would be very consistent with the Russell leading the crash and 2 weeks later (now) the FAANG beginning their crash. Thank you for reading. Please poke holes in this thesis and invest at your own risk. Don't fight the FED, adapt to their policy.
My trade is on the following;
-SARK (Inverse ARKK ETF)
-SPXU (3X Leverage inverse S&P ETF)
-TZA (3X leverage inverse Russell 2000 ETF)
History of QE Cycle