XLC - Tech Volatility Is A Feature Not A Bug - Alex King (Growth Investor Pro)

2023-07-25 08:15:00 ET

Summary

• Alex King runs Cestrian Capital Research and Growth Investor Pro and returns to the show to discuss tech's incredible run and why Nasdaq has more to go.
• Intel and the strategic battle between U.S. and China.
• Financials' recent earnings.
• Sector and index ETF strategy.

Listen below or download on the go via Apple Podcasts or Spotify .

Alex King returns to discuss running Cestrian Capital Research and Growth Investor Pro (1:30), tech's incredible run, why they think Nasdaq has more to go (5:00), Intel and the strategic battle between U.S. and China (22:00), financials' recent earnings (28:20) and their sector and index ETF strategy (31:00).

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Transcript

Rena Sherbill: Alex King, welcome back to Investing Experts. My first time talking to you, but I believe your third time on the show. So, thanks so much for joining us.

Alex King: Not all. Delighted to be here. Thank you, as always, for the invitation. Very kind.

RS: Absolutely. It's always good to have you on the show. I always enjoy listening to your appearances here and reading your articles. You write under Cestrian Capital Research and your investing group is called Growth Investor Pro . Do you want to share - I know that you've shared a bit about this in your previous appearances, but maybe give listeners a bit of a taste about what you focus on, what your specialty is, and how you're looking at the markets as we are here July 20?

AK: Yeah, of course. Very happy to. So, just briefly, just to clarify all the branding and whatnot. So, just a little bit of background. So, it's Alex King speaking. I'm the Founder and the Chief Executive of Cestrian. Cestrian Capital Research is an SEC regulated, independent investment research business. We've been going for a few years now.

And we've had a really successful run, unusually so for an independent research shop, but we run a high growth, highly profitable business that's done really well through basically saying what we think. And we've put together a really strong team of analysts, not your normal bench, straight out of college, that sort of thing, but a team of experienced investors that have been brought together on the basis of different kinds of senior experience.

So, we have Yimin who writes our macro work, he's a former professional rates trader. We have Jay who does our options work, who is a professor of data science and options trader. We have Nick who writes our operational insights, he's formerly a turnaround executive, and so on and so on and so on.

So, we've basically built a group of people that have got plenty of miles under the belt, as do I. It's not their first rodeo and aren't much kitted by anything they happen to see on CNBC, and all of whom think independently and think differently. And all of our work reflects that spirit. So, our motto is sort of fiercely independent and we stick to that.

RS: I guess that's why we get along so well here at Seeking Alpha.

AK: Yeah, we do. We do well together. So, we've done fantastically well from Seeking Alpha. We started out on Seeking Alpha and it's been a great run. We'd love working with you guys. You do a terrific job.

RS Likewise.

AK: Yeah, and we run, as you know, two services on the Seeking Alpha platform, both called Growth Investor Pro. We have a Lite version, which is a $99 for your first year service. It's just very simple buy and sell ideas. And then we have the Full Growth Investor Pro service, which is a real-time coverage, real-money, as in we tell you in advance what trades are happening in Cestrian staff personal accounts before those trades are placed in the stocks and ETFs that we cover. There's a live chat room. There's a whole gamut of content from equities to ETFs to options to bond market insights and so on and so forth. So, it's a full-service service, if you like.

Take on the markets right now. Well, everybody has good runs and bad runs. We've had a pretty good run in the last couple of years. If I look at the highlights and low lights, so we called the COVID lows pretty well. We called the November 21 highs pretty well. We were a bit hasty I would say in calling the bottom in 2022, but we got it right in the end.

And then we called by a lot in the third and fourth quarter of 2022, pretty well. And that's obviously paid off. Most of our coverage in that service is tech, not all of it, but most of it. And that's paid off pretty well. And we've been able to harvest both in our own personal accounts and with cell calls in the service, a number of 50% to 60% gains across many, many stocks, tech stocks that were written off as, forever losers in the 2022.

So, good so far for us. And now, of course, is the point of maximum risk because now is the time which you think, oh, well, we must be geniuses, and that's when it all goes wrong, obviously.

So, what we're focused on right now is, okay, tech has had an incredible run. We think the Nasdaq has more to go. We think it can make new all-time highs within a few months, and we think it can push on beyond that. But the easy money in tech has gone now. The easy money was grit your teeth, hold on for dear life and buy at the end of 2022. And then either lock in gains by selling or hedging or whatever you like in the end of the first half of 2023. And so what we're looking at now is, well, if you want to deploy new capital today, where's the best risk reward?

And there are some laggards in tech that haven't really taken off. So, Autodesk ( ADSK ), for instance, which is published as a buy idea in the Lite service, we think that's just not really participated in the bull run, but we think it can do as people realize that maybe that recession risk is a bit lower than they thought.

And the other place that we're looking is across – in our company, in our business is, things like financial stocks, consumer stocks that have been left behind those sorts of things. And so for instance, another pick in that Lite service recently was BlackRock ( BLK ), which has shot up, it's up about 10 points in a week or so.

And we look for the same pattern each time. We're looking for really strong companies, fundamentally good companies, but then using technical analysis to say, well, can we see some breadcrumbs whereby it looks like larger account players are buying heavily, accumulating, or selling heavily, distributing? And can we try and follow along from that?

So, we're just looking for clues in the stock chart, basically, and try to follow those. And that's - which worked well so far, so we'll see what happens tomorrow, right?

RS: Yeah, indeed. I wanted to touch on the fact that, one of your primary focuses is tech .

What are your thoughts about the Nasdaq rebalancing and how tech has thrown some stuff out of whack ?

AK: Yeah, I mean, I'm a three-decade professional investor, and I spent that time in pretty much all in tech, so in venture capital, leverage buyouts, and now in public securities.

And what I can say is that for my whole career, people always think that tech is overvalued, a Ponzi scheme, a scam, you pick the label. And then in those brief periods of time when tech dumps and when it dumps, it dumps hard, as we all know. People are triumphant. I told you all along, it was a scam, sort of thing. And it always bounces back really hard.

The fact of tech is, it's high beta. It overreacts to the upside and it overreacts to the downside. And the reason for that is that tech is a really young industry. If you pick any of the big tech companies, they're growing at improbably high rates, despite the fact that they have huge revenue numbers, and you just don't find that in other industries.

And the reason is, that famous comment about software is how we see in the world is, railroad is a, I don't know, 150-year-old industry. Auto is 120-year-old industry. Tech is, at best, it's half that. And really, if you look at, well, when did, for instance, software and semiconductors and systems and services really all become disentangled and feature a plethora of independent vendors, that's probably not more than 40 years. It's a really young industry.

And therefore it's taking more and more spend within the economy. And so as a result, it's not really surprising that the stocks are continually a good bet, and it's not really surprising that the surprises tend to come to the upside. Of course, every now and then there's a huge crash.

So, in my career, I've invested through the dot-com crisis of 2000 to 2002. Now people think of that as a generational life-changing event, but it was a two-year correction. Sure, some companies didn't recover, but many did. And in 2003 onwards, the Nasdaq started to put in a really good performance.

I've invested through the mortgage crisis of 2007 to 2009. Again, people think of it as a generational change. But from the first quarter of 2009, the Nasdaq started to moon, and it hasn't really looked back since. And then, of course, through the recent COVID crisis, and then the, I'm not going to call it a crisis, but the rate rise reset of 2022. And so, the volatility in the tech market is to borrow a much used phrase, it's a feature, it's not a bug. And so, you have to learn to live with it.

So, you can either live with it by not over allocating, you can live with it by hedging, you can live with it by taking gains at the top and reinvesting at the bottom, lots of ways to do it. But if you can ride out those waves, it's a great sector. As regards to the rebalancing, I'm not sure it's probably our ignorance on these topics. But if I'm absolutely honest, we never spend too much time looking at the way that the indices are built up.

When a stock joins or gets kicked out of any of the major indices, there's always obviously a short-term disturbance in that stock for better or worse. But in the end, the stock will perform how the stock's going to perform and the index will perform how the index performs. So, that's probably a blind spot on our part to be honest, but we pay too much attention to it.

RS: Is it a blind spot? Or do you think the media pays too much attention to it?

AK: Well, I know that we don't pay enough attention to it. So, I'm not…

RS: Fair enough. So, maybe it's somewhere in the middle.

AK: Yeah, because you can't cover everything. And we tend to look at two things really. So, two things really matter to us. So when it comes to underlying companies, the DNA in our business is very strongly built on fundamental analysis. So, my own background in leverage buyouts obviously feeds into that. And the other folks that do work for us are similarly detail-oriented.

So, we have a good feel for what is a good company and a bad company, that's different to the stock, of course. But that's the foundation. And then the next part we look at is, well, what does the stock chart look like? So, we look at the underlying company, and then if it's a single name stock, we look at the stock chart.

Obviously, there's lots of other things you can do. There's many other angles to bring to the party here, but those are our two and they work for us. And right now, that's pretty much all, that's all the brain space that we have. I'm sure there are many tricks that we miss and probably index rebalancing is one of them, but it's just not something we focus on too much.

RS: Been a lot of talk recently on the show about the difference between a company and a stock and the saliency of noting the fact that there is a difference.

AK: Right.

RS: Yeah. So, the Financial Times just came out recently and said that hedge funds are pivoting to Europe on doubts that the U.S. rally led by the tech sector has legs. What are your thoughts on a statement like that?

AK: Okay, well, first of all, I never read any financial media ever. I make it a point of religion to not read the FT. I don't read the Wall Street Journal.

RS: Why?

AK: I don't watch CNBC, or why would you? How is it going to help you? These things are, at best, they're amateur commentary, at best. And at worst, they're promulgating a narrative that isn't there to help you the individual investor, it's there to help somebody else. And so, what possible benefit could you have from reading these things? I think, when you're a kid and you're learning about these things, it's okay to read the paper for fun and watch CNBC for entertainment, but really and truly, who makes any money by reading the FT and watching CNBC and acting on them?

I mean, that's the whole point of sites like Seeking Alpha, which is the independence of thought that you get from the many fantastic analysts that are on the platform, from Seeking Alpha's own services. It's much better work, or at least the best content on Seeking Alpha is light years better than anything you'll find on CNBC or FT.

So, one, I make a point of not reading it. And ever since I stopped, I found that my investing performance improved, because I had more time to think for myself. And also, I found my brain less poisoned by somebody else's narrative, right?

As regards to pivoting to Europe, I don't know. I think that, again, I've done this for a long time, there's people that have done it for longer, but I've done this for a long time. And the U.S. always leads. I mean, sure, there are times when Europe offers opportunities in energy or mining or whatever it might be, but tech is always the leading sector, except in those one or two years every now and then when it dumps .

And the U.S. remains the leading place that generates the best quality tech companies, and the most liquid tech stocks, the most volatile in a good way, tech opportunities as in volatility to the upside. And so, for three decades, I've heard this thing about the U.S., the sun is setting on Silicon Valley or on the U.S. in general and well, maybe it'll happen one day, but I don't think it's happened yet.

RS: So, how would you synthesize the kind of – are there a kind of tech stock that makes sense at this point in the cycle or is it company specific?

AK: Well, so I think it all depends on your time frame. So, if you're putting together a retirement portfolio now and you're 30, and you're planning to invest regularly over the course of the next 30 years, does it make sense to be buying small allocations of Microsoft ( MSFT ) stock now at its all-time high? Probably it does . I mean, no one knows the future, but probably buying little bits now and continuing to buy it over the next 30 years probably isn't a bad idea.

If you're trying to make money next week with a highly levered option portfolio, it is buying Microsoft calls now a great idea? Probably not. So, I think the answer is, to be a bit unhelpful, it depends. The method that we use for what it's worth is, we, let's assume we filter out good and bad business. And of course, you can make money with stocks that are issued by bad businesses. Of course you can, but let's focus on the good quality companies.

So, let's say we tick the box and say good company as in it’s growing quickly. The growth is predictable, measured by the growth in the remaining performance obligation, the order book growth in deferred revenue, the prepaid orders, gross margins are holding up nicely, cashflow margins are holding up nicely, the balance sheet is solid, all those things. Let's assume we tick that away and we said, okay, good company.

We then look at, okay, if your timeframe is, let's say, weeks or months for the sake of argument, we look at a technical chart. And our own preferred method, as anyone knows who reads our stuff is that we use a combination of Elliott Waves, Fibonacci levels, and something called the Wyckoff cycle. So, if that all sounds complicated, it isn't really. The names are designed to make it sound complicated and put people off, but they're not. They're really easy.

So, the Elliott Wave system is just a – it’s a way of tracking emotion. The idea is that we get happy in five waves up, let's say. So, happy, a bit more sad, very happy, a bit more sad, very happy. And then we've ended our happy cycle. And then we get sad in three steps down. So, very sad, a bit happier, very sad, right? So, five waves up, three waves down. And that repeating motif, you can find time and time, time again in highly liquid stocks and ETFs and indices.

It's much harder in small stocks that are not well traded, but liquid stocks, you can see that emotional pattern. That's all it is time and again. And then we look at, we use Fibonacci levels. That sounds really esoteric. It isn't. It's just a way of measuring the amplitude of the wave we just talked about. So, is that a big wave up? If so, it's lots of extensions. Is it a big drop? It's a big retracement. And there are fairly standard patterns that emerge time and again, not because of some mystical nature of stock markets, or the way in which neurons are structured in the brain. It's just a language that large account players use.

Now, if you can learn to talk stock market, then you can be a more successful trader and investor because all you're learning is, what are the rules by which large account investors play. And if you can learn those rules and spot the breadcrumbs in the charts in particular, and you can follow just a little bit behind, you can do really well. We then use something called the Wyckoff cycle. This is really important. So, this applies to typically over a period of weeks, months, even years, which is, if you – this is not a perfect analogy, this is an idealized motif, but it's a good method to use.

So, if you manage a truly colossal amount of money, then you can't make enough money by just buying Microsoft and sitting back and hoping it goes up. Not least because every time you write a check, if you're not careful, the market moves. The thing you're buying, the index of the stock you're buying moves as it does when you sell it.

So, what you see with truly large accounts is, over time accumulation, meaning they'll buy slowly and they'll buy in pieces, small pieces over time, nothing happening quickly. If the stock runs up a bit, they'll maybe sell a little bit to let the air come out of the stock, but you can spot those patterns on a chart.

If you use, anyone can read our work on the free side of Seeking Alpha and you'll see the volume by price indicators. And you can see as those spike, there’s a big gray set of bars on the right-hand side of our charts. As they spike up at the lows in a big liquid stock after a big market sell-off, it's probable that that's large account players accumulating, buying up. And you'll see the stock moving in a horizontal channel over a period of time, weeks, months usually.

And you'll then see the stock start to break out. And around that time, so all the way through this accumulation, usually on CNBC, you're being told how terrible that company is, or the world is, or there's a recession or a war or whatever it might be.

All of a sudden, when that stock starts to move up through the markup zone, as we call it, which is just borrowed from this Wyckoff motif, miraculously, financial media will be telling you, “Oh, well, things are looking up for that.” And you'll see, more often than you might think, these stocks then start to move up quite quickly, and eventually reach a place of so-called distribution, where you'll see that volume spike again. And so, you can see in the Tesla ( TSLA ) chart just now, for instance.

So, if you look, I have it in front of me, if you fire the chart up and we can post this as a comment to this podcast when it's posted, there's clearly accumulation early this year when the stock was sat between about 150 and about 211. And then distribution started when the stock is between about 240 and about 280. And so, if you were watching for that, then even on a relatively short-term trade over the course of a few weeks or months, you can follow those breadcrumbs and make money from it.

So, for us, we separate entirely company and stock behavior. So, first of all, is it a good company? If no, then you're just, you're gambling. Nothing wrong with gambling if you're good at it, right? But if yes, you can be investing. And then the question is, when do you buy and when do you sell? And for us, and there's million methods of doing this, we claim no genius on this. But our method is, try and see what large account players are doing, and just follow behind them a little bit.

Don't try and be clever than them. You don't need to be. Because the advantage you have as an individual investor, or even to be honest, a fair sized hedge fund there isn't a giant insurance company is, your volumes don't move the market and theirs do. So, you can see their behavior, but you can typically shield yours. And therefore, you have an advantage. Your lack of giant outsized fund is an advantage. That's our method.

RS: Very good. Last time you were on, you were talking about Intel ( INTC ) and how they had just gotten through the worst quarter of any company that you've reviewed.

AK: Ever. Yeah.

RS: Ever, ever, ever. What are you thinking about it now?

AK: Well, it's up. When was that podcast?

RS: It was in February, beginning of February.

AK: February. All right. Okay. So, let me just - I've got the Intel chart right here. Okay. So, at the end of February, the stock was at 26 and we called, you'd have to check back in our service, but we were calling by pretty strongly around that time and slightly before. And what's it now? It's at 33 now. So, it's up quite nicely.

I think Intel - I think there's two ways to look at Intel. Everyone knows the stock, right? And everyone knows the history. Intel started to make a holy show of operations some years ago. As anyone knows that follows the semiconductor industry or the stock in particular, its process manufacturing just hit the skids for many reasons. Poor management is at the core. And then they missed the move to initially the 10-nanometer process node and then beyond, and they've just fallen further and further and further behind.

And that's a problem if you are: one, a huge market share owner of CPU supply, but it's an even bigger problem if you are the only U.S.-owned semiconductor fabrication company of any scale at a time when semiconductors are pivotal to the battle between the two great powers, the U.S. and China.

And when the other giant in fabrication TSMC ( TSM ), China thinks is a Chinese business. No one else thinks it's a Chinese business, thinks it's a Taiwanese business. But China clearly has designs on Taiwan.

And so, the slow movement of this battle between the great powers, the things to watch here is not the movement of carrier groups or missile silos, it's the movement of semiconductor fabrication capital. And so Intel, to us, it absolutely has to succeed. It cannot fail. And this is not like a bank is too big to fail.

This is in the battle for global supremacy, semiconductors to the fore. And if the U.S. is to succeed, Intel must succeed because you can't build fabrication plants under some other ownership quickly enough with enough accuracy that are trusted by fabulous players, fast enough in order to replace Intel. You can't. And so, Intel has to win.

So, the Federal government, well, in my opinion, scoop money into Intel for as long as is necessary for it to survive. And so as an investment plan, that's a fantastic investment opportunity. Because the stock, as you just mentioned, reported what I think we'd say, it was the worst quarter of any company we'd ever seen ever in decades.

Stock went up, because it doesn't – at this point, right at this moment, it's not really about the fundamentals of Intel. It's about a strategic battle between the U.S. and China. And the U.S. obviously means to win, so does China, but the U.S.'s major chip, pun intended, is Intel. And so that was our very simple investment logic for Intel.

I'm long Intel personally, I added to it recently, I think the stock has a great future. I think for what it's worth, the company probably will come right. I think the new CEO is better. I think they understand their problems better, but that's not really the dominant investment thesis. The dominant investment thesis is, there's a cold war going on, both sides mean to win it. And if you think the U.S. has any chance of winning it, you probably want to own Intel.

RS Were you at all surprised by China coming out with their regulations against the chipmakers?

AK: Well, I would say first and foremost, I'm about as far from a China expert as you will find. But I would say that, I think it's a very hard game for them to play this. The advantage that China has, of course, is it does not have electoral cycles, which is an advantage. It has a command economy of sorts, which is an advantage.

But what it doesn't have is the extent of intellectual property base that the U.S. has, despite many years of playing catch up, it's not there yet. And at least in the last century or so, one of the best setups, if you want to be in conflict with another empire, is having a truly free market capitalistic economy and a liberal, small l polity as in a democracy. And those things turn out to be huge advantages.

And China, so, it doesn't have a truly free economy, it doesn't have a truly free polity. It doesn't have the intellectual property. And ultimately, it has less access to capital than does the U.S. And so, it's a – that's a tough spot. That's a hard place from which to win. So, I don't really know what their winning moves are. I'm sure there are some. And again, ask a China expert, they'll tell you, and that's not me. But that they make unpredictable moves, I think is born of the fact that they have, in my opinion, a weak hand.

They tried a very good strategy for them, which is invite U.S. capital over, invite U.S. intellectual property over, attempt to assimilate some of that with some success has to be said. The U.S. has opened its eyes to that and pulled back under two administrations now. I'm not sure what China's next move is. I'm not sure they're sure either.

So, yeah, that they make these unpredictable moves, I think is a function of, well, what is the winning play from where they are? It could be the old-fashioned one of, well, if you wait a couple of centuries, then most empires destroy themselves. It's happened in every country in Europe, English as you can hear, at least by passport, if not by genes. And so, the British Empire spectacularly collapsed under its own self-satisfaction. And there's every possibility that the U.S. will do that. That's not going to happen next year or the year after, and probably not in the next 50 years.

So, what does China do? It either waits, 100, 200 years, and that might be a good play, or it tries to accelerate it somehow. And I'm not sure what that accelerant is. But again, you should ask a China expert.

RS: Yeah. In terms of looking at the – what's going on in the market, you mentioned that you're looking at some financials now. I'm curious what your thoughts are. And we can talk about tech financials and another sector, too, if you want, but I'm curious about the financials and the tech, the recent earnings that have come out. What's been your take and what do you think the takeaway is for investors?

AK: Well, again, I'm going to tell you that we're not finance experts at all. Our interest in the financial stocks is purely on a rotation play. So, what we looked at was, coming into the second half of June this year, we'd say, well, look, a lot of these tech stocks are, they've run up a lot and we think they can run up further, but if you're looking at risk reward, particularly if you were buying in the second half of 2022 and you're up 50%, 60%, then sure, you can hold on for more and you might get more. But risk management says you probably want to be taking some or all of your profits or hedging or something. Don't let that - don't let those go and slip away.

And as regards putting new capital to work, well, where would you put it? And so what we did was we looked around sector by sector to say, well, where can we see the same sorts of accumulation at the lows that we saw in tech in Q3 and Q4 2022?

And there were a couple of sectors that showed up, but financials was for sure one of them, particularly because the recent regional banking crisis had pummeled a lot of stocks, including the bigger and better. Those stocks are the bigger and better companies.

So, I don't claim any special insight into bank earnings analysis, far from it. You have far better financial stock analysts on your platform than us, but we're pretty handy with a Wyckoff chart. And so far in our Seeking Alpha services, we've got BlackRock as a pick. And that's, again, that's done really, really well. Some of the stocks that we cover in our non-Seeking Alpha services are things like the Chicago Mercantile Exchange ( CME ), Citigroup ( C ), Bank of New York ( BK ). And these also look good. As for disclosure, I own all these names, I had long positions in all these names personally. They all look good on that accumulation basis.

And so, that's my interest, which is when large accounts are taking profits on tech and rotating them back into somewhere else to generate their own gains, where are they going? And there's two or three sectors. I think going into our financials is one of them. So, we called that a couple of weeks ago and started putting some names out there on our various services. And yeah, in our Lite Seeking Alpha service, I think BlackRock is up 10% in 10 days or something. So, that's luck to be up that much that quickly, but that is going up, isn't a surprise.

RS: And ETFs, is it a similar - what's your approach with ETFs?

AK: So, we do two things with ETFs. And again, this is all within our Growth Investor Pro service. The name Growth Investor Pro is a little bit misleading because we do cover things like defense-based telecom. We cover the DAO, those sorts of things. So, the name's a bit misleading. We did two things with ETFs. So, first of all, we look at the SPDR sector ETFs, so ( XLK ), ( XLY ), ( XLC ), all of these, the component parts of the S&P for ones with a better term.

And we use those to first of all come up with investment ideas and ETFs themselves on that rotation basis, which is, if you look right now, ( XLF ), the financial ETF has been out of favor for some time, it's likely to move up. And that's one of the things that drew our attention to the bank single stock ideas.

If you did the same analysis nine months ago, you'd be saying, well, XLK, the tech ETF is looking destroyed, as is XLC, as is XLY. So, C being Comm Services, things like AT&T ( T ), Meta Platforms ( META ); and XLY, consumer discretionary, which is Tesla, Amazon ( AMZN ), things like that.

And so, if you look at the sector ETFs that are on the floor, and digging into the basement, they're usually pretty compelling places to one, start to accumulate the ETF themselves. Again, the big liquid ones, I mean, obviously there is all sorts of weird and wonderful ETFs holding, tiny weird and wonderful liquid stocks. That's great. You can make lots of money doing that, but that's not our focus. Our focus is on the big liquid ones. And then also, if you see the big sector ETF starting to behave in a certain way, you can then use that as a signpost to go look for single stock opportunities.

So, there's that, the sector rotation analysis we look at. And then the other thing we do is, we use the Index ETF. So that's the ( QQQ ), the ( SPY ), the ( DIA ), ( IWM ). We use those to generate standalone long and short trading opportunity. Now, this isn't for everyone's taste, not everyone that subscribes to our service uses this, many don't, but some use it a lot. And so we tend to chart those out really carefully every day. And here in our offices, we look at them 20x a day, and come up with long and short index ETF ideas , usually using the 3x levered long and short index ETFs as hedged pairs.

So, in other words, if you were wanting to trade the Nasdaq, we would look at ( TQQQ ) as the long and ( SQQQ ) as the short. We often have hedged opportunities where we'll hold both at the same time. And the idea being that as one moves up, try and cash out on the long, and as it moves down, try and cash out on the short. And that's an adjunct to the work we do. We do pretty well at it, but it's fairly time intensive. And it's not something that all of our subscribers like to do, but we do it a lot. And the benefit that it brings across the service is a laser focus from us on what indices are doing?

So we look really closely at each of the indices in the futures hour by hour, minute by minute. And that can tell you a lot about what's going to happen in some single stock names. So, if you know, for instance, the Nasdaq and the S&P are both running up to key resistance levels, then there's a good probability that if you own high beta stocks, then if the Nasdaq is hitting its head on resistance, it's likely to sell off a little bit in the next week or two, then probably those high beta names are going to sell-off more.

So, depending on where you're positioned, you may want to take profits or if you're waiting to buy into them, you might think well, a better opportunity will come along in a week or two. So, we use ETFs both for themselves and also signpost for the single stocks that we cover.

RS: Very good. Anything that you feel like you would want to share with listeners in terms of anything to do with the macro picture? I mean, it doesn't sound like there's a lot of focus there, but any thoughts there or takes?

AK: Yeah, I mean, we have a fantastic macro analyst in our business, Yimin Xu, who writes a series what is called Macro Musings. Again, he's a former pro-rates trader who does a great job for us. He covers Federal Reserve analysis, rates market analysis, implications for the 10-year yield, implications for equities. So, he does a great job for us. That's not my, well, it's not my focus, but he does a great job for us. And again, that can be used as a read across as a signpost for what to do in equities.

I'd say, we as a firm, we're pretty high level on macro stuff. If you look back at the last podcast that we did with you guys, we were really very, very clear and said, we don't see any signs of a recession, none whatsoever. Don't believe it. I do not believe the narrative that is all over CNBC and the Financial Times and the Wall Street Journal. We don't believe it because there isn't any evidence of it, right?

And so, so far that's proven to be just the narrative, not a reality. And of course, that could change next month. We don't know. But for now, anyone who followed that narrative and was fearful in going long stocks has either been punished if they were short or they've missed out on great opportunities because, frankly, they were fed a narrative. And it's not their fault.

I mean, if you don't know you're being fed a narrative, if you don't know that you need to think for yourself, then we all get an expensive education every now and then, right? And all of us do, every month, every year, it happens to us in different ways. All of us, it doesn't matter how smart we think we are.

RS: For sure.

AK: And so, we were clear on that. Economies don't go up in a straight line forever. My guess for what it's worth is, we get a decent run until the U.S. presidential election, because, like any administration, the whole of DC will be doing everything they can to keep everything going up and to the right up into the election. That's not a party political statement, any administration in any country does that. And so, I think we have a reasonably clear run for the next year 15, 18 months, something like that. And then we'll see. We'll see how the world adapts to money that costs something.

I don't think we're going back to the zero interest rate environment. I don't think we're going back into hand over fist QE. So, we'll see how the world adapts to all of that. But so far, so good. So, we'll see.

RS: Do you feel that the market is overconfident about the Fed engineering a soft landing?

AK: I don't, to be honest. No. It's a good question and it's obviously a highly charged question at the moment. I think that – if you look at the Nasdaq, the Nasdaq has obviously run up crazy, but then it sold off too hard, if you like. I mean, if you look at it on a Fibonacci scale, so it's put in a really nicely simple chart pattern since the end of 2018. So, December 2018 was a key moment for - certainly for the Nasdaq and the S&P, because it marked a reversal in Federal Reserve policy, right?

So, through 2018, you got tightening monetary policy, so a reduction in the supply of money and an increase in the cost of money. End of 2018, the Fed reversed course, more money became available, and it was cheaper. So, you got a run up that lasted to right before the COVID crisis hits. You then got an almost perfect 78.6% Fibonacci retracement down to the COVID lows. And that is not an accident. Again, it's not mysticism and it's not some weird artifact of brain structure. It's just the language. It's a deep sell-off.

Q1 2020, we then get options expiry, dealer hedge rebalancing, a flood of federal liquidity, Nasdaq puts in a 2.618 wave 3 extension up to November 21. And then it puts in a huge retrace, right? So, okay, rates went up. But I mean, they didn't go up that much. If you're more than 35 years old, you can remember a time when rates were much higher than this. And yet the Nasdaq gave up 6, slightly more than 60% of the gains it had achieved from the COVID lows to the 2021 high, so it sold off too much. So that it went up. Fast is just a function of what it sold of too much.

So, is the market overoptimistic? I don't think it is. I think right now, again, on the evidence, is the U.S. going to hit a hard recession? Probably not. It might do, but probably not. And folks are still, from what I can glean, underweight equities by and large, there's still lots of fear in the market. And okay, the Nasdaq might have mooned, but the Russell 2000 hasn't. The Russell 2000 looks like it's going to break out to the upside sometimes soon. And so, there's plenty of opportunities still, to make money, again, the easy money in the Nasdaq, that's probably gone.

Yeah, that easy money was there, if you bought in the grip of fear in Q3, Q4 last year, but look at the Russell 2000. Look at the chart, the IWM. It's under heavy accumulation. It looks like it started to break to the upside. And if it does, it's going to break up pretty quickly. So, no, I think markets are rational. And I think that the move up from the October lows is going to be proven correct. I think that the real economy will bear out the market's confidence, I think.

RS: And in terms of a recession, are there data points in the macro sense that you feel like are more pertinent than others? And also in terms of recession being backward looking, how - when do you think at the point we'll know that we are there if we do get there?

AK: Well, again, if you want macro expertise, ask a macro expert, and that's not me, but our lens is corporate earnings. And if you look at the stocks that we cover, earnings turned around already. So, if you - let's pick the big tech names, pick – Microsoft's a great example.

Microsoft’s stock held up much better early in 2022 than it should have done because the earnings it was printing were pretty awful. I mean, Apple ( AAPL ) earnings , terrible, really. I know that's heresy and you're not allowed to say it. And, brickbats will land on my desk for saying it. But I mean, Apple's fundamental performance has been awful.

Growth, terrible; cash flow margins down, there's nothing good to see there, but the stocks held up really well. But those, as always, the stocks rebounded before earnings did. But if you look at the earnings that Microsoft printed in its most recent quarter, you can see things starting to improve already.

And so, if the biggest companies in the economy are showing improving earnings, sure, perhaps we get a recession based on the technical measures that people call a recession. But do we have an unhealthy economy if the biggest companies are showing earnings growth that already bottomed and turned around? I don't think so.

And so the R word doesn't scare me particularly, whilst we see that ongoing earnings growth in those biggest companies. Small companies will live and fall, live and die by their own product set and marketing skill and whatnot. And so, you can't look at any individual small tech company or a MongoDB ( MDB ) or a CrowdStrike ( CRWD ) or any of those, doesn't tell you anything about the economy. That tells you something about the skill of their own staff. But the biggest companies, if they're showing earnings turnarounds, doesn't give me much to fear in the macro environment.

RS: Did you see that Goldman came out with a note talking about potential uplift in earnings?

AK: No, I don't read any sell-side analysis.

RS: Okay. Yeah.

AK: For the same reason.

RS: I thought that was going to be your answer.

AK: But it's not written to help me, is it?

RS: Yeah. Yeah. Yeah.

AK: But it's not written to help any of us. So, I think sell-side analysis is useful in so far as, some of it moves the market. And if you know the way in which it's going to move the market, great. You can react accordingly, but don't think that something that an investment bank produces for free is designed to help you, because, I mean, let's remember the famous Tim Apple quote, which is, if the product is free, the product is you, right. And the same is true of sell-side research and financial media. Yeah, that's why, again, I mean, I hate to play the hash tune here, but Seeking Alpha does a fantastic job.

It promotes independent thought. It has its own independent content, your Premium service is terrific, your Alpha Picks service is really good. And then you host a score of independent analysts like ourselves that have their own ideas to publish and folks will be right or wrong. But no one, at least I hope, no one is pushing a standard Wall Street narrative. But if you look to Goldman Sachs research notes for your investing insights, you're going to have problems.

RS: Yes.

AK: Because guess what? They didn't tell you first.

RS: Well, I'm enjoying these unwitting alley-oops. I appreciate them very much. I mean, I completely agree with them and I find them compelling... It's funny. Sometimes I'll read a comment, that'll be something like, oh, the Seeking Alpha agenda or the Seeking Alpha... And I'm like, oh, if you only knew, it's truly, truly, there's truly no agenda.

AK: Well, Seeking Alpha has an agenda, which is to grow its business, right? But it won't grow its business if it says the same things that Goldman does. It will grow its business to the extent it produces useful content that people want to pay to read.

And generally speaking, at least direction of travel, there has to be more often right than wrong in the end, right? I mean, we’ll all be right and wrong on any given day, but in the end, the content has to be good. And the education has to be good and has to be an enjoyable experience. And you have to feel that actually this is helping me, the individual investors, or the funds that subscribe to your stuff as well.

So, yeah, I mean, of course Seeking Alpha has got an agenda, grow its business. Cestrian Capital Research has an agenda, grow its business, but what we don't have is a narrative to push. And you can tell that because we ourselves are, we're always transparent in what we own in staff personal accounts. We'll say that in anything we publish. And for those folks who subscribe to our full Growth Investor Pro service, we make a trade in covered stocks, we'll tell people before the trade is placed.

So, people can trade before us if we want to. Seeking Alpha, if you look at anything Seeking Alpha publishes, the disclosures are all over the place. You can't write a word on Seeking Alpha without having to disclose what you own and all of that. So, that's not to say that everything published on the platform is right, of course, it isn't. But I personally, there's plenty of Seeking Alpha authors I read. I don't read any Wall Street Research.

RS: Well, I mean, wow, we had you here for your analysis, but I'll keep you for the free promos.

AK: Yeah. Well, I'd be honest with you, we publish across many platforms. We publish on Seeking Alpha, we publish on Substack, we publish on our own Ghost platform. We have lots of lines of business, but it is a great pleasure to work with the Seeking Alpha team. We're not economically dependent on Seeking Alpha. We do lots of other things. We're successful elsewhere. But it's a great platform, great environment, and we love working with you guys.

RS: Well, we really appreciate it. And we feel likewise that I know I speak for a bunch of people behind the scenes that feel that way about working with you guys. So, I appreciate you coming on today. I appreciate you sharing the love and the wealth. And here's to many more conversations and to more salient analysis.

AK: It's always a pleasure to come on. So, thanks very much for the opportunity and yeah, look forward to speaking to you soon, Rena. Thank you.

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Tech Volatility Is A Feature Not A Bug - Alex King (Growth Investor Pro)