Eagle, CO

Last month when I wrote to you the Nasdaq was in the midst of a proper correction with the technology index down nearly 11%, and many of the best performing constituents over the prior year down much more than that. The S&P 500, which notably has exposure to banks and oil stocks was down less, but still had fallen by about 6% from its prior peak.

Thankfully, we only stopped out of one additional name in the Appreciation Strategy, since then. So, we are currently considering replacements for The Trade Desk (TTD). I still love the company as a long-term investment, so maybe we will simply buy it back when we get the signal to do so.

In other good news – the correction seems to have found a bottom in March, and since then the S&P 500 has even put in a new all-time high. The Nasdaq still has work to do to reclaim its peak as many of the technology stocks remain down big, but the tide has started to turn. The Nasdaq needs to add another 2.4% to get back to its all-time high.

With many of the best performing stocks of the past couple years down so much from highs there are great investment opportunities out there right now, particularly if you think that the technology sector will regain its leadership position, as I do.

On the other hand, if you think that a “great rotation” from growth stocks to value stocks has only just begun, it would be an opportunity to reposition into value.

Last year, when we stopped out of several positions during the initial COVID sell-off in February/March we took the opportunity to add names that would benefit from the economic shifts that were caused by the lockdowns. That worked out well.

This time around, the drawdown is not nearly as severe, and it is only impacting one part of the market: high-growth technology. So, this time is unique, as each time is. But this is time is not necessarily different.

The truth is that these types of drawdowns for technology stocks are just part of the program. For example, the Nasdaq was up 130% in about 1 year from March 1999 through March of 2000. During that time, it also dropped by more than 10% on six separate occasions. Many individual stocks within the index dropped much further and soared even higher. If you had sold any of those dips, you would have missed out on massive upside. The best course of action was to buy those dips.

At the same time, while the S&P 500 was outperforming during these drawdowns for the Nasdaq, the S&P 500 only rose by 18%! That is a difference of over 100% in only one year of time.

As I reminded folks last month, there are only two ways to have cash to buy dips:

Always hold cash and raise some along the way; or,
Ask your client to deposit more money (because you’ve overinvested and have no sell-rules).

I (and obviously our clients) prefer option 1.

Buying the dips is not easy, even if you have the cash to do it.

*2020 Feb/March correction - click to enlarge*

Take for example, the situation last February (2020) when the S&P 500 dropped 12% from its peak before bottoming and rallying from there. A few days later, after climbing nearly 6% the bottom dropped out again and the index dropped another 29%.

*2018 Sep/Dec correction - click to enlarge*

That example may sound extreme, but its not so much different from the dip that occurred during October through December of 2018. The S&P 500 dipped about 10% before “bottoming” and climbing about 6%. Then, the bottom dropped out again and the index dropped 16% from there.

So, it isn’t necessarily the best idea to take all your cash and “buy the dip” every time the market drops 10%.

If you remember, back in my February commentary I said:

“This is the first time in my career that literally everyone I know is talking about stocks. Family and friends that would never ask me about the markets, let alone a specific stock are calling, emailing, and texting about GameStop.
This is what I imagine the euphoric markets leading up to the dotcom bubble must have felt like.”

Based on that, it isn’t so surprising that we are experiencing a bit of a pullback, especially in high-growth names.

And while the speculative mania may have slowed ever so slightly since shares of Gamestop (GME) went to almost $500 (up thousands of percent) in just a few days – retail traders are still buying more call options than pretty much any other time throughout history, according to sentimentrader.com.

SOURCE: Sentimentrader - click to enlarge

In another sign of speculative mania, we recently learned that another hedge fund manager took on too much leverage and blew up his fund. The excesses in this case are sort of hard to believe and they directly contribute to the disproportionate underperformance of high-growth tech stocks we have seen recently.

Many of you would have no reason to have heard of Archegos Capital until the headlines hit late last month. It will take some time before we probably know the truth and details, but I have seen headlines stating that the fund lost as much as $110 Billion in as little as five days.

The fund was known to use 500%, or 5:1 leverage. When some of their best performing stocks started to dip, the fund’s lenders began to sell shares to pay themselves back causing waves of further selling. Not surprisingly (to me), these bank(st)ers unloaded the shares onto other unsuspecting clients of their bank…

This is classic big bank behavior, akin to what you find in the Great Financial Crisis where banks were unloading mortgage-backed securities to get them off the bank’s balance sheet before finally reporting that the mortgages were toxic and failing.

Again, this time may be unique – but this time is not different. It almost never is. The Archegos blow up has led to some good deals on companies we have been watching for a long time. So, maybe it will work in our favor.

Performance

The S&P 500 (SPX) was up 4.24% in March and using the Invesco QQQ Trust ETF (QQQ) as a proxy for the Nasdaq, it was down 1.59%.

The Income Strategy, which aims to capture only about half the upside of the market in normal conditions managed to capture 90% of the upside in March. The rotation into some of these value stocks is welcome and long overdue.

The Appreciation Strategy struggled as you might imagine, with the rest of the Nasdaq. In the long run, we aim to at least match the upside of the SPX in the Appreciation Strategy, but we missed the mark this month. In fact, the Appreciation Strategy was down slightly for March.

The performance of the Appreciation Strategy is disappointing especially after having done so well for so long. There is really no other way to say it. It is especially frustrating to lose money in an aggressive strategy when the overall market is up. At the end of the day, and as I alluded to earlier – drawdowns like this come with the territory of investing in high-growth stocks. I am confident we are positioned to recover strong.

Before I move on, I should point out that we are formally long Oil stocks in both the Appreciation and Income Strategies via the XLE exchange traded fund. I basically hate all oil stocks equally (except maybe EOG) and so we elected to go with the ETF which pays a handsome dividend (over 4%) that aligns well with the Income Strategy and it also adds some diversification and volatility dampening effects for the Appreciation Strategy. Yes, we are a little late to the 2021 Oil & Gas party, but we have started with a small position and we are using a tight stop to protect our capital. And there is a lot of upside left in Oil stocks. XLE still needs to go up 100% to get back to its all-time high.

Outlook

Jamie Dimon is the CEO of JP Morgan Chase bank… the biggest and baddest bank in the world and the only bank holding in either of our strategies at Elevate. Jamie published his annual letter to shareholders this morning and if you don’t have anything better to do, you should read it. It’s a lot better than this little monthly commentary you are reading now! And given his position at the helm of the largest bank in the world, he has insights I couldn’t possibly share. But it seems that he does share my basic outlook which I try to share in each of these monthly commentaries including last month when I said:

“$1.9 Trillion more stimulus was approved over the weekend while vaccinations and economic re-openings including movie theatres continue to gain steam. With all that new money sloshing around, I continue to believe that if people go out and spend it, stocks will rally, and inflation will rise.”

And here is an excerpt from Mr. Dimon, in his letter this morning:

“I have little doubt that with excess savings, new stimulus savings, huge deficit spending, more QE, a new potential infrastructure bill, a successful vaccine and euphoria around the end of the pandemic, the U.S. economy will likely boom. This boom could easily run into 2023 because all the spending could extend well into 2023. The permanent effect of this boom will be fully known only when we see the quality, effectiveness and sustainability of the infrastructure and other government investments.”

Nothing about my outlook from last month has really changed. My only concern now is that if we all see the same thing about to happen, it won’t. Something else will. Hopefully, nothing like a new COVID. Best I can do now is keep my thumb on the pulse of the markets and let you know when something really changes.

As always, thank you for reading!

Shane Fleury, CFA
Chief Investment Officer
Elevate Capital Advisors

Legal Information and Disclosures

This commentary expresses the views of the author as of the date indicated and such views are subject to change without notice. Elevate Capital Advisors, LLC (“Elevate”) has no duty or obligation to update the information contained herein. This information is being made available for educational purposes only. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Elevate believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. This memorandum, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of Elevate. Further, wherever there exists the potential for profit there is also the risk of loss.