Ominous signals have started to emerge in the short-term patterns of tech stocks over the past few weeks.
We have essentially traded a Santa Claus rally to sell the spiked peaks as inflation numbers have come in way too hot for anyone to handle.
The poor inflation numbers have triggered a cascade of algorithmic selling.
Why is this important?
These stock patterns will offer us clues to how tech stocks will react in a quickly changing backdrop where the Fed is backing away from the cheap money cauldron as fast as it can.
For over ten years now, as tech stocks have bulldozed their way to higher highs and as Apple inches closer to $2.9 trillion in market cap and on its way to $3 trillion, investors have been systematically conditioned to buy the dip.
The Fed is doing its best to recreate a new type of conditioning where the dip is not bought and that is awful for tech stock prognosticators.
This effectively means a large layer of buyers on down days will be stripped away from the tech markets.
Any idiot would understand this means that tech stocks will not go as high as they could if dip buying is conditioned.
The tech market is trying to figure out the new rules of the game and that is resulting in choppy patterns almost in whipsawing fashion.
March 2022 is the new consensus for an interest rate rise which is bad news for tech stocks because pulling forward interest rate rises coincides with higher volatility in the short term.
The Fed could make another interest rate move in the second half of 2022.
This means that anyone dallying in the speculative area of the tech market needs to pull the reigns in immediately.
Stocks like Peloton (PTON), essentially a stationary bike with a tablet pasted on the dashboard, will historically underperform in the new environment.
Another tech stock I love to bully is Pinterest (PINS), by far the worst social media platform I have ever seen, will need to face reality without the Fed punchbowl that was most likely their biggest tailwind.
Tech stocks must now stand on their two feet and that’s scary news for all tech stocks not named Tesla, Facebook, Apple, Amazon, Microsoft, and Google.
After these top 5, the quality dwindles fast and expect a slew of rapid downgrades that will throttle the non-elite software stocks.
Adobe’s stock had its second-worst day of the year on Tuesday, as analysts jumped on the higher rates bandwagon and cited high valuations.
Valuations are now “high” even if these business models are the same as they were a few days ago.
Expect poor guidance from management with earnings growth, free cash flow, and annual revenue downgrades in the pipeline.
Other notable sell-offs this week include shares of cybersecurity companies Zscaler and Cloudflare, which crumbled 7.8% and 9%, respectively.
Zscaler had been up 55% for the year, prior to Tuesday, and has an enterprise value to revenue multiple for 2022 of 39. Cloudflare was up 91% and trades at a multiple of 61.
Tech growth works both ways in which they get the benefit of the doubt in a low-rate environment and vice versa in a tightening environment.
Case in point is a company I really like Roku (ROKU) whose shares are down a hideous 230% since mid-July.
The weakness in the secondary names has been biggest secret untold in tech for quite a while and the confirmation of a tough 2022 was what happened in the first two weeks of December.
And it gets worse when looking at the shelter-at-home darlings of 2020 Teledoc (TDOC) and DocuSign (DOCU) who have been totally neglected this year.
This goes to show that every year is different and as the stock market is levered to the skies, the slightest nudge by the Fed does a lot to wobble the trajectory of tech.
Luckily, tech still has the 6 big tech stocks to rally around and even if the best of the rest must go into hibernation in 2022, we still got guys like Mark Zuckerberg, Tim Cook, Elon Musk powering us through the sludge.
