Technical analyst John Burford homes in on one of the tech giants and asks what the insiders are doing as ‘walls of worry’ stack up.
Last week was pivotal in stock markets. On Wednesday, the Federal Reserve confirmed what many people had feared – they would accelerate the pace of 'tapering' (severely cut the Fed's bond-buying programme) and raise policy rates several times next year to 'combat inflation'.
If you believe that the Fed's quantitative easing (QE) programme (releasing tsunamis of 'funny money' into financial markets) that started in 2008 in response to the credit crunch was the main factor behind the aggressive buying of shares, then you may believe its imminent withdrawal might put an end to the bull run in leading shares. Especially so if you believe the old adage “Don't fight the Fed”.
Since the advent of QE in 2008, the S&P that started at 700 traded last week above 4700 and has thus gained an astonishing 570% – a huge rate of almost 50% a year – way above historic norms. Of course, most of us have become inured to these massive and historic gains, especially in the big name tech titans that include Alphabet (NASDAQ:GOOGL), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), Microsoft (NASDAQ:MSFT) and many others.
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Indeed, most investors remain convinced that even greater gains lie ahead – and that belief is entirely normal at major defining tops. Highs in the market are never made when everyone is short (or into cash) or expressing bearish views. Only a few contrarian mavericks do that.
In recent weeks, I have been making my case that taking profits in Facebook/Meta (NASDAQ:FB) (COTW of November 1), Apple (COTW of November 29), Tesla (COTW of December 6) would be a very prudent move. Events of the past week, extending into this week, have strengthened my view.
As another example, below is the Alphabet (Google) chart showing the typical steep rise in recent months since the Corona Crash, when even greater tsunamis of support were unleashed. As a measure of this government 'generosity', many US workers were paid more to be furloughed watching Netflix on the couch at home than they made at work previously.
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No wonder the stay-at-home newbie traders had nothing to do with this largesse except to open a stock trading account on Robinhood – and pile into the most unlikely shares, such as money-losing GameStop (NYSE:GME), which zoomed from sub-$10 to $484 in a matter of days. I consider that a full-blown mania, which characterises many markets today.
And the professional traders likewise jumped on the bandwagon and pushed up the FAANGs and many others with abandon as the FOMO theme worked its usual magic.
Past performance is not a guide to future performance.
But now with the spectre of the Fed tightening next year, do we have multiple whammies staring investors in the face as we head into 2022? And will a new bear trend in Alphabet be marked by a break of my trend-line?
Here are a few Walls of Worry for investors:
- Consumer price inflation is rearing its ugly head again, discouraging retail sales
- Energy costs are high, discouraging the manufacture of goods
- The little-watched carbon credit markets are high, also discouraging manufacturing. But last week, this overblown market likely reversed, indicating the end of the net-zero fantasy, and likely disrupting the 'renewable' energy market
- The Fed and Bank of England will be raising rates next year, encouraging a switch from speculation to conservation (cash levels are now rising)
- The Fed will be rapidly slowing the pace of its balance sheet growth and heralding a deflationary phase (credit growth will reverse)
- And now another lockdown season is upon us with severe implications for economies.
Last but not least, while investment pros and retail investors alike have been scooping up shares for years with little regard to risk, what are the insiders (corporate officers) doing? It's useful to know since they above all should know the true state of their businesses and its prospects. Have they expressed confidence in the future? Here is a very revealing chart:
Past performance is not a guide to future performance.
No! In fact, US insiders are selling their own shares at a record sell/buy ratio going back at least to 1990 (and probably well before that).
Do they know something most of us don't?
John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.
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