Hello there and welcome to the Smart Money Dumb show. And I am your host as usual, Keith Richards, I’m president and chief portfolio manager of ValueTrend Wealth Management. And today we’re going to talk a little bit about change because the market is always filled with change. Rotation, things change, trends change, groups of stocks that were in control may remain in control for a long period of time. And then everything changes, markets go from bullish to bearish. There are all kinds of changes that we can anticipate on the market. In fact, I think someone said that the only thing that is permanent is change itself. That was the rock group Rush. That is my favorite rock group. And that was one of their songs. They said the only thing that stays in place is change. So today’s talk is about a change that is occurring in the NASDAQ, and it’s really a change that’s occurring within the high growth stock era.
If we go back and I’m talking go way back to 2010 on, there was a big revolution in technology names. The stocks really took off. When President Trump was elected, they really arched because he was very accommodated for business and kept the pressure on the Fed to keep monetary interest rates and whatnot low. And that really helps growth stocks. Now, things have changed. We have a high inflation environment now because of COVID and supply chain and other things like borrowing like crazy by governments to fight COVID plus sometimes is borrowing to meet certain political agendas. And I won’t go too deep into that, but whatever the case, we’re seeing a change in the environment that has been very beneficial for growth stocks. And before I get started, I thought I would show you a poster that I keep a picture in my office.
This is my home office. So sometimes you will see these videos recorded in my office at work. And sometimes I do these videos at home. So these, this is my home office and in my home office, I’m turning the camera. You’ll see this picture. Now it may be a little hard to see it, but what you’re seeing here is this man is helping this man light up a cigarette. This is the tour de France in the 1930s. I don’t know the exact year, but it was in the thirties before World War II. And it was considered a benefit to smoke cigarettes before you hit the mountains. Now back then, it is a couple of interesting things you won’t see unless you looked really close, but back then, there were a couple of things that these cyclists dealt with. One thing is they didn’t have gears. So they had a one-by-chain ring.
And the way you change gears to go into the mountains is you flip your wheel around because on one side there would be a bigger cog than the other. So the bigger cog was okay with going into the mountains. If we’re gonna climb, we’re gonna switch the wheel around so the big cog is on the chain. And if it’s flat grounds you use the smaller cog. The other thing in this picture is that the reason these professional bicycle racers of their era were smoking a cigarette before a mountain stage is that the hardest work done in any bike race is on the hills. Anybody that has even just bicycled casually knows it’s hard to climb hills. You pant, you breathe hard. Well, they thought that smoking cigarettes opened up the lungs. Ahh, that fresh tobacco air will just help us breathe better. That was a belief, they believed that tobacco would expand your air capacity within your lungs.
Well, my how things have changed. Because we now know, I’m turning away from the picture now, of course, we know that the worst thing you could do as an aerobic athlete is to smoke cigarettes. I mean, you literally couldn’t pick a habit to reduce your ability to ride on hills on a bicycle, in any sport that requires you to use your aerobic capacity. Tobacco coats the lungs with nicotine and reduces your overall capacity. So we know that now, but back then they thought they were opening up their lungs and make them even stronger on the hills, that’s a sign of change. So because we’ve evolved to believe differently. And it’s the same with the change that I’m seeing on the markets now. And that is that we’re evolving from a market that was focused on the stay inside the trade. And then, and even before that, the growth trade were these very high-quality companies, like not bad companies, such as Amazon and Google and Tesla.
And, you know who they are, Facebook, et cetera, Apple, Microsoft. They took the reins and led the market for good reason. They were good stocks. They were good companies. They’re growing their earnings. They have fabulous products, but they rely, to grow, on low-interest rates because these guys borrow to invest in new technology. Look what Google’s been doing with the self-driving car, Tesla, all these companies are great, great companies, but they borrow. And of course, as investors piled into the stocks, their prices are accelerating faster than their actual earnings growth, which was strong. But the prices were accelerating at a faster rate than their growth. And that’s called multiple expansion, price to earnings ratio expansion. And at the same time, the recent announcements of the Fed raising interest rates to combat inflation in 2022 and beyond has suddenly made investors realize that, hey, I’ve got a basket full of overvalued, possibly overpriced stocks.
And I’m going into an environment where they’re already somewhat, overpriced earnings are going to maybe even be under some pressure because the interest costs on their financing is going to go up. So we’ve seen a rotation. So I wanna bring you to the charts right now and I wanna show you exactly what I’m talking about now before the NASDAQ started pulling back recently at the beginning of December, and even in November on this video, I started talking about how there would be a bit of pressure on the NASDAQ. This is my write-up on December 14th. And in November, I did a video on the same subject, which is the NASDAQ, which was painting a worrisome picture. So if you keep up with my blogs and my videos, you will have heard this before from me. So I’m going now directly to the NASDAQ chart.
And here’s the reason why I explained on both my video back in November and my blog in December, why this selloff on the NASDAQ is not exactly a surprise to me. And here’s why this is what I talked about is that we saw some divergence on these momentum indicators. We saw in particular, the MACD, which is a long-term indicator and divergencies on the MACD which means that the MACD’s momentum was declining, even though at the time the NASDAQ was going up, MACD was trending down. And you probably saw me talk about this on this video, back in November and in the blogs. So it doesn’t surprise me that not only did we have a declining or diverging MACD, but we also had a high level, an over-bought level on some of the slower moving indicators.
We’re also starting to see going back a while ago, this is a relative strength line. This is how the NASDAQ is doing against the S&P 500. Now remember some of the stocks that make up the S&P 500 are the biggies in the NASDAQ as well, but you can see that there were some divergences there that the NASDAQ on a general basis was beginning to underperform the broader S&P 500 let alone the Dow Jones Industrial Average, which is very underweight the technology stocks. So this was another sign. And finally, I want to just point out that this red line is the 200-day moving average. And what you are seeing is the first in a series of high, low, high, lower low, and a possible correction through the 200 days moving average. Now, anybody that follows my work knows that I like to wait a few days, at least before proclaiming the end of an uptrend, because the last significant low is back here in October, and that has not been cracked, but the most more recent, less significant low has been cracked.
And the 200 day is on the verge of being cracked. It is, the market has broken down through the 200 day, but it’s very early in that you can see it’s really more of a tail on this candle. It’s very small. So this is a weekly chart. And in fact, if I were to change this look to a daily chart, here we go. You can see there are the lows it was taken out, but it is kind of moving back into that area. So we, that zone, we don’t wanna draw conclusions that this is a new bear market for the NASDAQ, but I will draw conclusions saying, look, we’ve got, we definitely have lower highs. We probably have lower lows and ignore the moving averages on this. This is transcribing the same periods on the daily chart, which are insignificant. I tend to use the 200 day, and that’s not what we’re looking at here.
So if we’re looking at the look of the bars on this daily chart, you can see there is, is some probable trouble. And we shall see in the next little while. Now in the near term, the Stochastic is a little bit oversold. It’s bouncing up. And so is the RSI. So it may have some reprieve, but you’re seeing that underperformance against the S&P, you’re still seeing that massive divergence, even on the daily chart by MACD. So I am a little concerned about the NASDAQ, and I think it’s like the Tour de France smokers. That was yesterday’s story. That was the way to open your lungs back in the thirties. That was the way to have high-performance cycling. And the NASDAQ has been the way to have a high-performance portfolio for the past few years.
I am wondering if that era for the time being, at least for the next couple of years, may have ended. And if you read my blog regularly, you’ll know that I have been pushing you to at least consider holding some of your assets in materials and inflation-adjusted securities, like commodities such as oil and metals, things like that. I’ve also talked about value stocks. And the other thing we can look at as interest rates are rising, look at the financial sectors that benefit from rising interest rates and inflation, a lower dollar is probably going to be coming your way, a lower US dollar. And that means that eventually even gold and silver will start to look good although they haven’t yet. So these are things we need to keep in our mind, and we need to start to divert our attention away from and divert our portfolio out of the technology growth stocks. That doesn’t mean you can sell them all.
You maybe keep a small amount, but pick the best of the best and pick the least leverage than the lower PE ratio versions of these great growth stocks, but focus and concentrate on value, inflation protection and interest rate sensitive to the positive stocks in your portfolio. So I hope that helps. I think this video is one of the ones that I want to have you ingrain the message into your mind because this is a very improper, or I should say proper message for the current times. And I think for the year, 2022. We’ll see you next week.
