You’ll Regret Missing This Growth Stock Rebound
People are not ready for this.
Hopefully, you will be.
America 2.0 technologies and cryptos are really starting to take over how we do everything. And we’ve finally reached a turning point for growth stocks.
When you zoom out in one, three, five years, you are going to be like, “wow, those stocks were so cheap!” And all this volatility we’ve endured will be so worth it.
We have five charts to show you today that will help drive this point home.
It’s an awesome indicator of things to come. Everything from growth stocks to cannabis to crypto has the potential for new highs!
Watch now to avoid the shock of the growth stock turning point and see how to invest:
Paul Mampilly: Good afternoon, Ian.
Ian Dyer: Hey Paul. How’s it going?
Paul: It’s time to do the IanCast. Are you ready to go?
Paul Comparing S&P 500 to ARKK
Paul: Let’s hit it then. Once again the growth stock market is seemingly for the third or fourth time at a turning point. That’s my sense just from stocks sitting at 52-week lows and catching a bid like Zoom, Teladoc and others. I want to quickly review some charts.
Then I want to put up something from someone I follow on Twitter, Charles Bilello, comparing the S&P 500 to ARKK, ARK Invest’s main ETF which we use as our proxy. That’s our Dow Jones. So let’s quickly go through this. The first chart is from the May bottom of this year.
It compares ARKK against S&P 500 equal weighted, S&P 500 cap weighted, Nasdaq Composite and the Russell. ARKK is up 10%, S&P 500 is up about 3%, S&P 500 cap weighted is up about 6%, then you have Nasdaq Composite up about 10% and the Russell 2000 up about 2%. That is since about May.
Then zoom out, as you like to say, for 2021 the same set of indices. S&P 500 is up 17% for 2021. Equal weighted is up 20%. Somehow the equal weighted has continued to outperform the S&P 500 even while holding equal weights of the big five or six stocks.
Truthfully it’s surprising. It tells you there is still underlying strength under these small names. Then the Nasdaq Composite is up 12%. ARKK is down 11% for 2021. The Russell 2000 is actually up 13%, which is surprising as wellbeing that people are under the impression that a lot of small stocks are down this year.
It could be that it’s a lot of these valueish stocks like small banks. The last chart — well the last couple of charts. Let me not get ahead of myself here.
Since the COVID March 2020 crash, here are the various performance numbers. S&P 500 up 99%, equal weighted up 177%, Nasdaq Composite up 114%, ARKK up 190%, Russell 2000 up 126%.
The last thing to affect your comments and discussion is this chart of the Nasdaq highs and lows over this year.
You will see in a very pronounced way that in February the number of lows plummets and never actually gets there. Since then, the number of highs is also at a peak at the same point in time.
Since then, it’s been muddling out where the number of lows dominate the number of highs. Tell folks what you are seeing. I know you have been telling me stuff about options and other observations. So tell folks what you are seeing.
What’s Ian Seeing In The Stock Market?
Ian: First, with the S&P equal weighted we usually talk about it from a growth angle. It can do well when growth is doing well, but the reopening trade — as we’ve said multiple times — has been huge for this year.
That means that a lot of those smaller companies like department stores, restaurants that were closed during lockdowns have been getting a ton of attention and a ton of money pouring into those stocks.
People don’t expect these stocks to grow at a crazy rate like America 2.0 stocks, but they got beaten down so much that people saw even if they go back up halfway to their normal high you could make a lot of money. I think that trade is starting to come to an end.
I think this correction we are going through right now is turning point from that and back into growth. For example, today we saw some of the indices like the S&P and the Dow were negative. Meanwhile, the last time I looked ARKK was up more than 1%.
We have seen a couple times the past week where ARKK has outperformed the rest of the indices. This is what I was looking for. It’s the same kind of event, just on a way smaller scale than the rebound in growth after the COVID crash in March.
Growth went down more than the rest of the market, but they rebounded a lot stronger and a lot faster than the rest of the market. I believe that’s what’s going to happen here. Obviously it has not been a fun time for growth stocks, but I believe we are at the turning point.
In the option market I have seen some flashes over very strong activity over the past couple of weeks, days where companies with less than $1 billion market cap are getting crazy demand for call options. These are bets usually on the short term that stocks are going to go up a lot.
With earnings season coming up in a month, it seems like people are betting this is going to be the time when there’s a lot of positive reactions to the stocks in their earnings reports.
Paul: The one thing about our companies, even though the stocks have been doing this [moves hand down], their growth particularly in sales have been doing this [moves hand up]. They’ve been annualizing their sales at minimum of 15%, 25%, even 40%.
They are getting cheaper by the day because their growth rates are so. The others lack that. They have no growth. They are getting more expensive with every bid up.
Ian: That’s exactly what we are seeing. I was telling you yesterday that the median distance below the 52-week high on the stocks on my watch list is 40%. These stocks have been crushed, especially the smaller ones which have had solid demand for call options.
When you see money start to go back into those smaller ones, it’s a sign people are willing to take the risk and buy the dip finally. It takes guts because things have gone down so sharply. It’s definitely very good to see those start to get a bid.
Paul: I will add this bit of color from my hedge fund days. At the lows, no one wants to buy. Just like at the highs no one wants to sell. People are all in, which is what creates the highs. I can tell you that part of what you are seeing is market making going on.
Market makers have been short since somewhere near the top because somewhere near the top they can see the demand is starting to peter out. Now, rather than go and show their hand in the market itself, they can pay a decent sized premium in the call option market and get stock delivered to them one or two weeks out at the end of October or November.
Essentially they are going long using the option market. That’s at least part of what you are seeing, in my judgement.
Ian: Right. That could be it. From a stock basis, prior to rebounds in these before I noticed the midway point between earnings seasons can be a bottom of a correction. You will see stocks start to get bid up as earnings get closer. People see these companies are still growing like crazy.
Some of these smaller ones are growing at 100% or 200% in revenue. They are basically startups that the public can invest in. Those stocks right now are definitely starting to get a bid from what I have seen leading up to earnings season.
Paul: If you go back to February, that was also right before the March earnings season was to come. I believe the triple witching — the expiration of stock options, futures and index options all coming together — it creates that brew. We are coming up on that? Or did we just pass that?
Ian: That was two Fridays ago. September 17 was the triple witching.
Will Zoom Still Have a demand with people working back in the office?
Paul: So we’ve gotten a lot of stuff washed out. You do have this big earnings season where not only are people going to be talking about what is going on, but the most important thing is people telling you what they are seeing in their near-term future — three, six, nine months ahead.
That’s what drives stock prices. Our amazing colleague Amber put up something that made me look at something like Zoom that has been crushed since its peak. She said even though people are returning to the office, Zoom is being used more than ever from the office, even sometimes within their office.
Rather than walk, they are using telepresence because it’s easier to get people together from different floors. In other words, people are starting to use these tools in more and different ways rather than stop using them. I believe you are going to start to see companies report that.
Ian: I believe that’s true. Zoom is a company that has crazy growth ahead of it. This is just the beginning. Pretty much every company has somebody at this point who is working from home. The demand is through the roof. There’s no end in sight for the demand for a product like Zoom.
The Old Ways Are Dying…
Paul: The last chart on this entire theme. Charlie Bilello is someone I follow on Twitter. He puts up amazing charts. He does all the work that might take me longer. He puts up this chart and is always tracking ARKK top holdings.
He says ARKK is 30% below its high it hit in February.
The S&P 500 in contrast is 4% below its high from early September. He says one of the more interesting divergence in the market this year has been the gap between the broad indices and these high-growth names. This is a point I have dealt with all year.
Our Profits Unlimited equal-weighted portfolio behaves very similarly to ARKK. We have a slightly smaller cap skew because we have some really small names in there. However, we have Teladoc, Tesla, Zoom and Zillow. We have a very growth-oriented portfolio.
The reasoning for this, in my judgement, is because the cap-weighted S&P 500 is so dominated by Apple. The moment Apple started to make new highs it started to lift the entire index. Then of course everyone starts to buy the SPY. It has this momentum effect, not just for Apple, but the entire cap-weighted index.
Ian: When we started seeing that selling we pointed out in Apple a couple weeks ago, that’s when we started to see the peak. Apple is a big part of all three of the major indices — that S&P, Dow and the Nasdaq. It has a big effect on the indices and how people view the market in general.
When you started seeing selling in Apple after that court decision, it was right around the peak if not the day those indices peaked. Since then, it’s been selling in all those big tech names. They are dragging the indices down.
Meanwhile, we are seeing pockets of strong activity in growth stocks because they are not really correlated to Apple and so on.
When the big indices go down quickly it can scare people in the short term. You might see some selling in the growth stocks too, but like I said, I believe they are going to rebound much faster and lead the market from here on out.
Paul: These are very separate markets. The people who are piling into the S&P 500 are piling into five, six or maybe seven stocks. The stocks that we are in, the people who are buying them are a completely different market. Our stocks are so small. They are puny; they are tiny.
The other ones are so humungous. They are monstrous stocks. A person who is managing $1 trillion can never even think about buying into 3D Systems. I don’t think they could buy into a single 3D printing company. Is there one they could potentially put even one-quarter of a percent in?
Ian: I don’t think so. No actual 3D printing company, no marijuana company, no lidar company — none of these up-and-coming industries. There’s just no way.
Paul: They couldn’t buy Coinbase, Robinhood, Palantir. They are excluded from all of these fast-growing companies that represent, in our opinion, the future of every industry. People may hate it or like it, from our perspective the old way is dying out and our companies are replacing it.
The big money investors are all in on the past.
Ian: As these companies grow, they are going to be one of the big catalysts that fuel that further growth in the stock price because once these companies are big enough for them to buy into, you are going to have some serious money coming in. That’s going to sustain higher prices and be the bedrock of the demand for years.
Paul: That’s the thing people don’t realize. They are frustrated because we have seen this churn in our stocks. We have had people complain about it. However, understand that they can’t even yet get in. Imagine when they come with their hundreds of billions and trillions.
Where will our stocks be? It will be well worth it. This is why we are so bullish, optimistic, positive (BOP) on our stocks and why we say every week it’s well worth it to endure through volatility to be in there.
Our stocks are the standard. When you look back in two or three years you will say, “These stocks were so cheap. I can’t believe I was so impatient.” To close this discussion out, they interviewed three market strategists. The other two are not important to us.
Be Ready for America 1.0 companies to bomb
We, of course, pay attention to what Cathie Wood says a great deal. I will bring up Tim Draper later on. They wanted to know what these strategist were worried about that they felt the market was completely not getting. Cathie says her biggest concern for markets is a deflationary boom.
In reading other tweets and articles she says that people are completely unprepared for this. This is another point we have made on the IanCast and in other updates is that technology, especially revolutionary technology, is deflationary.
It makes no sense for a company or people to adopt something that is less convenient, less productive, is more expensive, doesn’t add to their life in some way.
Ian: Exactly. To me, that risk means people are not going to be prepared for those America 1.0 companies to bomb once that ball gets rolling. Like we say, slowly and then suddenly.
Paul: Also, when you add to the fact — and I think this is what she’s referring to — many America 1.0 companies, especially these consumer staple companies, those stocks have been bought like bonds for many people — Kellogg’s, Proctor & Gamble, Campbell’s Soup, etc.
Then on top of that, they have embedded a grenade in their balance sheets by borrowing money to buy back stock in the billions and billions of dollars. I think that’s what she means. The deflationary threat means that debt is very unlikely to be paid off if the deflationary threat is correct.
In other words, their businesses are going away. They are not even going to be helped by inflation, which is what they’re counting on. In other words, inflation keeps going and even if their growth is minimal, inflation would allow them to keep earning this nominal positive return.
It would allow them to keep paying their debt and maybe even pay their dividend. But if you don’t have that, they are in deep trouble.
Ian: We have been saying the share buybacks are a ticking time bomb for these companies. It’s the only way they can manufacture their stock price to go up. Apple is the biggest culprit of this. We have mentioned this countless times. I won’t get too far into it, but the artificial scarcity is not good for multiple reasons.
Paul: We completely agree with Cathie. We expect all these technologies — 3D printing, Internet of Things, artificial intelligence, blockchain, robotics, new energy — are all deflationary. You are going to see costs cut. The nature of deflationary technology is as you scale up, the price declines.
You have greater and greater adoption at lower and lower costs. The old technologies cannot do that.
Ian: Again, the debt these companies are taking on is bad from both ends. They are buying back shares because they don’t see enough demand and they are adding to their debt that they aren’t going to be able pay off.
Factor in the market share that America 2.0 companies are going to get when these other companies begin to fail and it’s going to be enormous.
Paul: This is why we are 100% focused on these America 2.0, Fourth Industrial Revolution companies. Their technology is super sexy, but if you have a timeframe like we have that is a minimum of one to three years, it makes no sense to be in anything else.
We are BOP on our stocks.
Would you use bitcoin as a payment?
Ian, I saw this tweet.
You sent me another tweet which is that there is a town called Cool Valley — it has the perfect name for this — in Missouri where the mayor is doing an air drop of $1,000 of Bitcoin (BTC) to residents. This is very cool valley.
Then you sent this thing saying the mayor of Miami is looking to explore BTC for tax payments.
I’ve been thinking maybe our publisher would be willing to pay us in BTC. What do you think? Would you take that?
Ian: I would. I considered asking about that.
Paul: Contract negotiations come up soon. We should try it out.
Ian: I would 100% be for that.
Paul: The crypto revolution is now. People will say, “Oh Paul, it’s just Miami. It’s not going to happen. It’s just Cool Valley. How many people live there? What difference does it make?” But then you have Panama, El Salvador, Argentina is talking about it.
Suddenly it’s all gone quiet about troubles in El Salvador. You aren’t hearing anything. In fact, I have heard something like one-third of people there have already used their wallets. No more sounds of protests.
Ian: Not at all. At first, just to have a refresher of what BTC was, it was some rouge online community of people trading some weird digital money thing. Now it’s only that you can pay your taxes with and it’s only that a country adopted it as legal tender.
So that’s as exponential growth as you see in the price over time. Where’s it going? To me, it’s not going anywhere but up.
Paul: I went and looked up coin market cap and sent you a picture talking about where the crypto market was three years ago today. What was BTC’s market cap three years ago? Was it $130 billion?
Ian: It was mid-$100 billion range.
Paul: So the entire crypto market, let’s just round it out, was around $200 billion-ish. It’s 10x in three years. What has done that? There’s no technology, currency, investment that has had that rate of appreciation in human history.
Ian: Just over a decade ago it was pretty much only BTC. Now you have Ethereum (ETH) which is $300 billion asset. It has a whole parallel financial system running. The amount it’s been developed in the past decade is insane.
Paul: Then going back to Cathie Wood’s point about being deflationary, crypto is extraordinarily deflationary. A lot of inflation that’s manufactured is manufactured for the benefit of the financial system.
Ian: You need people using the network to make more BTC, so it’s perfect. Then you have ETH where the more people who use the network the more ETH gets burned. If people continue to use it, it becomes deflationary. I think it’s going to be the trend.
Over the long run, it’s genius how they came up with this. It’s the total opposite of what we have with the current financial system.
Paul: It’s an interesting confluence that you have the tangible world with these huge megatrend technologies having this deflationary impact. Then, simultaneously, we have a parallel financial system that’s also come to adopt a deflationary system.
I would not want too much exposure to the old world. Cathie is right. It’s going to shock people as these technologies take the lead in doing everything and as crypto starts to take over from the financial system. Bottom line, we are BOP on crypto, BTC and ETH.
We won’t repeat our predictions for once. If you are interested in getting an education and exposure and understanding of this, you have to check out Ian’s Crypto Flash Trader. This is a trading service where it teaches you about these amazing DeFi coins. It’s great information.
I think your dogs are protesting that we did not mention Doge.
Ian: They always want that brought up.
Positive Pot Stocks
Paul: The last thing before we close this out, Aurora Cannabis increasingly looks like it will be a leader in cannabis, at least from a stock perspective. I know Tilray is out there. They reported. Before they did, you texted and said Aurora was reporting and it was going to be super interesting.
I went and read it. If you read just the report it didn’t sound super bullish, but I always look to see what the stock market is doing and that’s the opinion that matters. The market liked it and liked it a lot. Tell folks why you think that’s positive.
Ian: Especially in this kind of market, when you see earnings being reported you want to look for where companies don’t meet expectations or have a bland earnings report but you see the stock being bought. That’s exactly what happened with Aurora Cannabis.
What that tells me is that at these prices there is zero selling pressure. The volume was way up after earnings. The price was up 8% on a day where everything else tanked. That tells me people weren’t shorting that. It has gone up since. It’s up today on relatively high volume.
It could be a short squeeze because I bet a lot of people are short pot stocks at this point because they have done nothing but go down for the past couple months. To me, it looks like the perfect storm for where you could get a huge rally/short squeeze which is what kicked off the last rally in pot stocks.
Tilray, another big one, reports in a couple weeks. After that you have Canopy, Organigram, Hexo and other big ones that report. It could be a very good fourth quarter for pot stocks. Action I have seen so far in Aurora suggests we will have a few solid months.
Paul: If you look at the edge of the chart for Aurora, that move up is all post earnings.
As Ian says, when you see a stock start to move and you look at the news but don’t understand, it’s a bullish indicator. If Aurora goes up and Tilray does something similar, it’s going to start to carry the whole sector with it.
Ian: And I don’t think many people own pot stocks at this point. To me that means market makers have a lot. They want to run the price up so they can sell it higher. To me it looks like selling pressure has been gone a while, nobody has come in to buy and this earnings season could be a catalyst to drive that demand.
Once that demand gets going, there’s still not going to be that much selling pressure because there aren’t going to be that many people who bought in at the bottom to take profits. I think we’re going to see a solid run.
Market makers want to drive the price up when they see that demand as much as they can so they can sell high.
Paul: One look at that chart and I can guarantee what you are saying is right. All the people who want fast, quick gains or even some number of the believers have given up on it. That’s one of the best setups you can find in terms of gains.
Just to reiterate, we are very BOP on all the things we’ve covered in this IanCast: America 2.0, Fourth Industrial Revolution, growth stocks, crypto, BTC, ETH and all the coins Ian trades in Crypto Flash Trader. We didn’t cover Tesla, but we will do that next week.
Ian, let’s close this out. You say goodbye and I will say goodbye after you.
Ian: Everybody, thank you so much for watching. Happy Friday. Have a great weekend. We will see you next week.
Paul: That’s right, come back next week. This is Paul saying bye.
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Editor, Crypto Flash Trader