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Don't Try to Catch a Falling Knife

We hope that everyone had a Merry Christmas and is enjoying the holiday season. Here is to a Happy New Year!

The markets could use a breath of fresh air and a restart. We are heading into a new year, but markets have little understanding of the calendar. Although the markets coincidentally shifted from a bull market environment to end 2021 to a bear market to begin 2022, it is unlikely to shift back bullish to begin 2023. From the technical side, and the fundamental side, market characteristics are not looking positive right now.

From the technical side of the markets, here is what we are currently seeing:

· Value is leading Growth. Typically, in bull markets, growth stocks, such as technology stocks, outperform. Growth stocks holding market leadership indicate that investors are willing to take on more perceived risk. With value and defensive sectors leading, investors are not feeling very risky heading into the new year.

· The Nasdaq is nearing its lows. The Nasdaq 100 index, which is mostly composed of technology and growth stocks, is nearing the low points it set back in October and November. These are the lowest levels that the index has seen since mid-2020. Each time the index has hit this level, there has been some increased demand for Nasdaq stocks (indicated by the in the chart below). We will see if that trend continues, or if the index breaks support and heads lower. The Nasdaq is now more than -30% off its peak.

· Most major indexes have seen successive lower highs and lower lows. Using the Nasdaq as an example, in the chart below, the downward sloping trendline has been drawn from the index’s relative highs. You can see that each high almost perfectly hits the sloped line, before heading lower (indicated by the ▼ in the chart). This is textbook bear market behavior.

Source: Canterbury Investment Management. Chart created using Optuma Technical Analysis Software.

Don’t try to catch a falling knife.

One hot topic for the news has been Tesla stock. The company’s stock has received attention for all the wrong reasons. In just the month of December, the stock is down -32%. That does not include Tuesday’s decline of an additional -11.50%. From its peak in November 2021, not including Tuesday, the stock is down -70%.

As far as the company is concerned, nothing seems to be too out of the ordinary. Their 3rd quarter reports showed positive earnings, and you would think that with high gas prices and some states (California) placing favorable mandates for electric vehicles, the stock should benefit. Is now the time to buy Tesla?

Here are three technical sayings about markets:

1. All parabolic advances end the same way.

2. Do not try to catch a falling knife.

3. The more the damage, the more time it takes.

All parabolic advances end the same way

We discussed this heavily at the end of the last year. All parabolic advances and bubbles, fueled by extreme optimism, will eventually end the same way—with a bursting of the bubble. From January 2020, through early November 2021, Tesla stock ran up 1,351% in under two years. That is a parabolic advance. Now, almost thirteen months later, the bubble has burst and more than 70% of that gain has been erased.

Do not try to catch a falling knife

Tesla has broken lower support and the stock has only trended lower. With high volatility, and an irrational stock, trying to buy this stock would be like gambling, with the odds heavily stacked against you. The stock could always go lower. Here is a good math question: “what is the difference between a stock that is down -80% and a stock that is down -90%?” The answer is not that the second stock is down an additional -10%. For the stock that fell -90%, it first went down -80%. It then got cut in half again. Do not try to catch a falling knife.

The more damage, the more time it takes

The more damage done to a stock, the more time it will take to work its way out. The current long-term and short-term trend of Tesla stock is down, its volatility is extremely high, and the stock has not shown any sign that it wants to go up. With high volatility and following a sharp decline, there will most likely be several large “up” days for Tesla stock. That is still not a positive indication, nor does it mean that the stock will not drop further.

Almost half of Tesla’s trading days have been up this year. Additionally, Tesla’s stock has seen 22 days where the stock has been up more than +5%. This is all in a year where Tesla’s stock is down nearly -70%. There is a lot of overhead supply for Tesla stock. In other words, there are lot more current Tesla investors who would like to be out of the stock, or sell into any kind of upward momentum, than there are prospects that want to be in it. It will take a significant amount of time to burn off that overhead supply and rebuild itself.

The chart below shows Tesla stock dating back to 2020, including its parabolic rise in price. Now, you can see that it has broken technical support dating back to 2020, and it also it has broken lower channel support from its series of lower lows and lower highs.

Source: Canterbury Investment Management. Chart created using Optuma Technical Analysis Software.

Short Fundamental Opinion

Fed Chairman Powell has had a very busy year. For a fundamental opinion and insight, I want to quote our good friend and expert market technician, David Vomund, who has been so helpful to us over the years when it comes to producing our market commentary:

Nearly every economic report that is released points to a slowing economy, which is Fed Chairman Powell’s goal. He’s trying to fix his colossal mistake of putting too much money in the system for too long. The damage Powell and company are doing to investors, workers, would-be home buyers and virtually every-one cannot be easily tallied, but it’s huge. At least 15 trillion of household net worth disappeared. That’s financial assets plus real estate. He was wrong to let inflation get out of hand, and now I believe history will say that he was wrong to tighten too much and for too long. History will not treat him well.

Bottom Line

Historically, this week has been good for stocks and is referred to as the “Santa Claus Rally.” The market is oversold, so it would make sense the markets could see a rally into the new year. Keep in mind, however, that this is a volatile market and markets tend to do the opposite of what most would expect.

Right now, both fundamental and technical perspectives point to a continuation of the bear market. The Nasdaq is lagging and large securities that have seen substantial increases over the last several years are now experiencing the opposite. The goal in this market environment is to maintain portfolio stability, by limiting the portfolio’s outlier days (days beyond +/-1.50%).


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