The Bear Is About To Hibernate, I Share 3 Emerging Trends And Stocks

Summary

• I believe we are past the worst of it. We may have a bit of overhead resistance in a few days.
• My plan was to select some high-quality, high-priced stocks that have fallen hard this past month, and build positions that will hopefully return 20% to 30% by year-end.
• It's important to identify emerging trends as soon as possible. This is the way to find the winners before the crowd.
• If you understand a trend you can identify, the factors that must come together for a trend to really become visible. A great example is the Space sector and the lower cost of getting to space.

HAKINMHAN/iStock via Getty Images

Two Weeks Ago My Trading Plan Went a Bit Awry

The actual behavior of the market was completely opposite of what I predicted it would be. I thought we would get the dip buyers to boost the index first, then the sell off. Instead stocks slammed down and then at the end of the week appeared to find firmer footing. Whatever happens tomorrow we are at the end of this phase of selling. We have finally achieved a +5% sell-off. Perhaps we will see the bear sputter and roar but it will turn into a yawn as it prepares to hibernate. October is known as the most volatile month of the year and many of the worst dives in the history of the stock exchange happened at the beginning of October. However, October turns into a very bullish climate as does the rest of the year. I am in fact looking for Friday's action to continue tomorrow. It will be just as volatile but in the end the best stocks will end higher.

I Managed to Limit the Damage

Midweek, I sent out an email that listed many of the actions that I thought I got wrong. A high-performing individual needs to assess honestly so that they can correct their tactics if needed. I aspire to be such a trader. I am thankful that the market's volatility was up as well as down. This allowed me to do some fast trades, repositioning, and managed to whittle down my loss to a bit under 8%. My actions let me add more to the stocks that I believe will provide Alpha into the end of the year. No one likes to fall back in the value of their portfolio; however, when you are catching a falling knife (in my case knives), your overall score is going to suffer in the short term. The maxim "never try to catch a falling knife" is true if you want to day trade. I try to counteract the harm of diving stocks by buying in small increments. Still, at the end of the day, it does damage anyway. The fact is I have a 40 point range in buying MNDY, 20 points in PYPL, 35 points in ROKU, 25 points in TWLO, etc. No matter how small your increments are, if you want to build a decent sized position that kind of fall is going to hurt now, hopefully for a benefit later. The aim is to turn this 7ish% drop into 25% to 35% gain by the end of the year. I basically did dollar cost averaging but at a shortened timescale than a typical investor. I managed to create some cash on Friday so as long as these names are below their cost basis I am still buying.

Am I Sure That The Downside is Over? No, Actually We May Have a Little Turbulence

I wanted to take a look at the S&P 500 using the SPY ETF after I revealed what my instincts were telling me. It has been my experience when you have nearly vertical down and up volatility in a few short days that usually means (to me) a change in direction. So since we have been going down for a month that action should mean we are going to rebound. The chart attests to that, but it also shows that we will likely face resistance in a few days. Perhaps the thrust of the market breaks right through or we could also go sideways. Anyway, let's take a look.

There is a lot of information here. The black line is the 50 DMA, the blue and red lines are trend lines drawn by me. Remember that resistance becomes support after a stock breaks above. The blue arrow is showing that SPY broke right through those lines of resistance. Where I believe we will have renewed resistance is that 50 DMA. It looks like we have 1% of upside to that resistance, so perhaps we will see some turbulence in 1 to 3 days.

The Main Takeaway For Me is That We Likely Have Broken the Downtrend

Energy is Working and I Am Not Talking About it. Why Not?

Occidental (OXY), Diamondback (FANG), Devon (DVN), Marathon Oil (MRO) all finished last week up between 10% and nearly 12%, and I missed that. Perhaps some of you were lucky enough to grab that ride. I can't tell you how many times I've tried to trade these names, and gotten badly burned. I have to be frank and admit I don't know how to time this sector. There just are too many variables for me, such as the whim of the OPEC cartel to take into consideration, and the movement of the dollar. I have to concentrate my energies to where my chances for alpha are best served and it's not oil. Now I am hearing that some traders are betting on $100 Brent Crude, which would take WTI to $95? What happens if our frackers decide to drill baby drill again, while at the same time OPEC starts to cheat in earnest, and we have a mild winter. Right now, it only pays to do some fast money trading in oil. I will say that LNG and NatGas are interesting, and that LNG may have a sustainable uptrend. Perhaps if this was a different time I would try again. Right now I am on a different plan and I don't want to dilute it.

New Trends That Bear Watching

The three emerging trends are possible by technology advancement and also regulatory innovation. This country still has the ability to be the home of innovation, and entrepreneurialism. I hope the creep of regulation and the looming increase of taxation that will stunt the impetus for wealth creation will be turned back.

The 3 Trends are:

Low Code No Code software

In a world where there are over 10 Million Job openings for 9 Million unemployed, the demand of corporate computer applications development is outstripping the supply of fully trained Software Engineers. The concept of an ordinary person developing software using programming and needing little knowledge or none at all is very appealing. Yes, there are overseas resources for development, but what if the algorithm or the data is very sensitive. Or, you need to work very closely with the end users, or the business is a pilot and doesn't have the budget for full support. There are a myriad of reasons to use easy application development, aside from a lack of labor. Giving the end-user the ability to modify an application or build their own might make the IT department a bit nervous. I suspect that low-code and no code programming will still be IT driven but the personnel may very well be "embedded" into the end-user group. I bet, though I haven't searched it yet, that LinkedIn has tons of Low-Code jobs and specialists out there already. I am listing this first because it only dawned on me recently how huge this opportunity is. I unfortunately don't fully understand yet who the leaders are, and also there are likely specific cloud applications that have a low-code capability. I believe that ServiceNow (NOW) and monday.com have a low-code capability. I don't think that is the way to go. If I were an IT executive, I would want a best-of-breed standalone low-code/no code (LC/NC) workstation that can work with any business application and that the output code conforms to a universal standard. Learning a myriad of LC/NC environments is just not efficient. One final caveat, which I already touched on, I am just beginning to research this trend, even though it has been around for years. So I am sure that I don't have every name on this list, or even the best name as yet. So please don't go off and buy the first name listed, or the whole group. Look through the list and do your own research. I will add to this list when I find new names and hopefully be able to crown the winning name.

Turns out there are quite a number of them:

• Appian Corporation (APPN)
• Pegasystems (PEGA)
• Microsoft Power Apps (MSFT)
• Salesforce Lightning (CRM)
• SAP AppGyver (SAP)
• ServiceNow
• Twilio Studio - I own shares
• monday.com - I own shares

Well, as you can see there are very few standalone low-code/no code public companies or I just couldn't find them as yet. Still, I think this trend is so important that I am leaving this up here. Clearly, a successful Power Apps will not create meaningful alpha for a Microsoft investor. There are a lot of these application specific LC/NC capabilities out there. That still does not shake my faith that some kind of universal tool that plugs into a wide range of business applications is out there. I think we all should keep our eyes peeled for any new entrant that in fact is a pure LC/NC workstation that is a stand-alone product. If such a company IPOs, it will have my attention.

Commercial Space trail-blazers

Space is now the final frontier - for business. Ever since NASA changed its MO from all government activities to an outsourcing model, this sector has exploded with new businesses. The first new leader is SpaceX but unfortunately it isn't public yet. Most of the new names are public through a SPAC. As an aside SPACs are a tool, they are not a monolithic asset class. I think that with the hindsight of a few years hence we will look upon this SPAC era as one of great creative fecundity. Until recently the oft heard complaint was that too many companies go IPO after all the value creation is done and the public is left holding the bag. The likes of UBER come to mind as the prime cautionary example. Now the complaint is that many of the companies that used the SPAC weren't fully baked. I for one would rather choose between the tadpoles to find the one most likely to turn into a Bullfrog than an IPO with all the juice already squeezed out. There are several at the bottom of the list that are older names that have been around for years if not decades. Some of the new companies below are already growing revenue, like the first on the list below:

• Rocket Lab (RKLB) - I have shares in this name. I am looking to add more
• Astra (ASTR) - I have shares in this name. I may cut this position further
• Spire (SPIR) I have shares in this name. Very small position
• BlackSky (BKSY) - I have shares in this name. Very small position
• Redwire (RDW) - I have shares in this name. Very small position
• Virgin Galactic (SPCE)
• AST SpaceMobile (ASTS)
• Momentus (MNTS)
• Aerojet Rocketdyne (AJRD)
• Globalstar (GSAT)
• Iridium (IRDM)
• Viasat (VSAT)

There are many other non-public space-related companies in a very fertile development phase. There are probably hundreds of rocket companies, satellite builders, satellite components, satellite operators and software analytic companies. We will likely see many more companies go public. Most are about observing the globe. Some are about in-space activity. I am going to maintain several small positions to see how this sector evolves.

eVTOL "Flying Taxis"

This trend is the most improbable emerging sector to highlight while at the same time it has the most potential to change our lives, or at least change what we see in the sky. eVTOLs are projected to begin commercial flights by 2024-2025. eVTOLs are compact, low-noise, vertical-takeoff vehicles that will have a pilot in the beginning but at some point soon will be robotic and pilotless. The flight range would be about 100 miles, and fly over 100 mph. Cost per flight? How does $40 to $50 sound? Why so little? With the eVTOL, you do away with a turbine-driven vehicle with all the complex machinery and expensive jet fuel, and highly and extensively trained pilot. Instead of tens of millions of dollars for a helicopter, the cost should be at the level of an exotic supercar. An eVTOL will have battery powered electric motors and many propellers or ducted fans. Because of the multiple propellers, the wingspan can be much smaller. Right now the cabins can fit up to 4 to 5 passengers and one pilot. The Pilot eventually will need no more training than a long haul trucker as landing and takeoff will be largely automatic, and in a few years thereafter no pilot at all. As batteries improve their energy density and the aerodynamics improve, the passenger capacity, range and speed will likely expand. Still never being in a traffic jam again on the way to the airport sounds mighty fine. A trip to Boston from NYC might be in range within the next generation or two. Also since it will fly no higher than 5,000 feet, it will not have to be a concern of the FAA, and some more automated flight traffic control can be implemented. I could imagine the sky around New York and the tri-state area would have hundreds of such vehicles. In fact, every metro area here and across the globe will be buzzing with them albeit at a much reduced noise level than what we expect flying machines to have. I know that if you aren't familiar with this technology it may seem like a hoax but it's not. There are actually a lot of new public companies that already have actual vehicles going through their paces and approval processes. There are as many as 30 non-public companies that are developing eVTOLs right now.

• Joby (JOBY) - I own shares
• Lilium (LILM) - I own shares
• Archer (ACHR) - I own shares
• Blade (BLDE) - I own shares
• Wheels Up (UP) - I own shares

All the above companies went public via SPAC, so I know many of you might still scoff. If I were to tell you that Airbus (OTCPK:EADSY), Boeing (BA), and Textron's Bell are in the game as well, would that help? Also, the US Air Force is trial testing them, and several US airlines are already investors. BLDE is going to act as the "Sky Uber" and I suspect that UP will get in the game, right now they are more concentrated in fractional ownership of a variety of planes.

My Trades:

I Added a New Name that I Recently Bought During this Sell Off; Sprout Social (SPT)

I was in this stock a year ago, I was trading it way lower than where it is now. Here is another name that I should have kept a core position in. SPT is a tool for enterprises to manage their social media communications. During September it like many other good growth tech names took a hit and I am taking advantage. I know this contradicts my plan of shrinking the number of positions I have in my trading account. I have no defense other than I like their business model and I think it has years of growth ahead of it. Here is a very simple chart, showing the drop and the rapid bounce that is forming. I am expecting it to eventually get back to its ATH going into the fourth quarter. Since I have a late start, I may not manage to build more than a core holding and that's just fine with me.

Recently Morgan Stanley gave SPT a new price target of $146, which is already at its recent 52-week high of $145. I wouldn't be surprised if SPT continues to break higher.

Still Executing On My Plan

The stock positions that I built during the September sell off should be familiar by now; however, there are a smaller number of names now that I bought specifically for the sell-off than when I started. Let me enumerate them: Affirm (AFRM), Asana (ASAN), Confluent (CFLT), DraftKings (DKNG), DocuSign (DOCU), GXO Logistics (GXO), monday.com, PayPal, Roku, SentinelOne (S), Twilio, XPO Logistics (XPO), Zillow (Z).

The bolded names above are names I chose as new positions to take advantage of the sell off. The other names are ones that I had from before but added to during the dive.

I have my eye on Upstart (UPST) which fell 40 points from its ATH mostly during the last week. If it falls another 30 to 40 points, I will start adding to my core position again. UPST had two prior sell-offs where it lost about ⅓ of its value. I am hoping it happens again so I can buy it at a discount.

Please remember that what I publish on Seeking Alpha is largely a chronicle of my trading, my tactics, strategies and thoughts regarding where I think the market is going as well as stocks that I have bought or intend to buy. In no way am I recommending that you buy any stock. If you are inspired by what I write please take full responsibility for it. Do your own research and understand the risks. I generally talk about trading high beta stocks, which means they can dive deeply when the overall market is selling off. In turn, that means that it can be risky and is not suitable if you can't afford to lose your investment. I do invest for the long term in a separate account and I hardly ever trade in that account. You should look for solid, dividend-paying stocks that are in sustainable businesses for long-term investing…

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SPT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

AFRM, ASAN, CFLT, DKNG, DOCU, GXO, MNDY, PYPL, ROKU, S, TWLO, XPO, Z, UPST, JOBY, LILM, ACHR, BLDE, UP, SPIR, RDW, BKSY, ASTR, RKLB

Comments

[Charlied717]

Dave, now the bear has gone into hibernation! All good things going forward thru earnings season. My only comment on your stock recommendations is that you seem to be too heavy in “potential” stocks that have not fully proven themselves as long term winners. I think some MFST, NVDA, AAPL, LRCX, AVGO, GOOG and other mega tech companies need to be part of your overall portfolio to balance out your growth opportunities. Be safe and good luck investing!

[RAKESH LAKHOTIA]

Your investment strategy and stock selection is very bad. You need to have good luck riding with you to save you. For instance, crude oil/petrol prices are very hard to predict. Consequently relative stocks are better off the buying list. But once in a while, opportunity knocks at your door and you have to take advantage. A couple of months ago, I was convinced that price per barrel was on the rise. I bought CVX, EOG. MPLX. CLR. Goldman Sachs last month gave credence to my decision that the year will end at a price exceeding $90. Resultantly I put 3 more oil stocks on watch list. Almost all stocks I hold for a few weeks to a few months. Normally I hold 70 to 80 stocks at any given time. Even in the present turbulent times, I generate a good amount of money and am able to put healthy foods at the table.

[Market Map]

Since 1933, 4th quarter returns during 1st Presidential term years have been decent when the S&P 500 has resided above it's monthly basis moving average on June 30th * ( https://imgur.com/a/EQlZWxP )

As 2021 is a first Presidential term year and with the SP500 price residing "above" it's moving average value on June 30th https://imgur.com/a/aOpRvzY .

Further out, the moving average configuration mentioned has led to positive 48 month forward returns in 11 out of 12 instances ( 92% ) dependent on strategy conditions remaining "offensive" over the entire 48 months ( Table 2 Appendix * )

* see https://tinyurl.com/yyf48e4q

[The Real Cavalier]

The author must have an extraordinarily high risk tolerance if this is his portfolio. I hope it works out.

[helliott]

Thanks for the article. A lot of information to unpack.

I think you are dead wrong on oil. In the last 18 months big oil has drastically reduced Capex. It takes a long time for new wells to become operational, and takes a lot of money. I think oil runs for the next 2-3 years based on the cutbacks all these majors had to make. Just my opinion, but I am betting heavily on it.

[Charlied717]

David, you wrote this at 12:50 am and unfortunately the market had an terrible day and hit yearly lows. I hope that today may have been the washout, but I just don’t know. I guess we will see what happens tomorrow. Good investing to you!

[PrAcharya]

Ouch! $SPT dropped 11.8%

[thumb.ai]

@Kasyap while the Quant SA rating was Very Bullish 4.90 out of 5. Yep.

[7716391]

There are more opinions as to where we are in markets than there are...... I don't know, you fill in the blank. One thing is certain - uncertainty is elevated.

[RWilliam]

I use a weekly chart (stock charts) of the SPX, the 15 WMA has held for all the little self offs. The 27 WMA is the bottom support on 4 big sell offs since March 2020. Both are breached. On the chart put up RSI (50/50 not overbought or sold) MACD (momentum on the downside is increasing and %williams. %williams is telling it’s only been this low in March of 2020. Build the chart and look.

Fundamentals are weak, debt limit, tapper talk, high cape etc. This bear might just arriving from hibernation.

For the last month I’ve trimmed to near nothing all high p/s stocks looking for value and dividend payers in rising rate future. 85% invested in stocks or equivalents. Im looking for fundamentals too improve, looking at the chart for 4318.84 to hold we closed below that. If we close below that this week I need to draw a new support line lower.

[Tao Jaxx]

"Whatever happens tomorrow we are at the end of this phase of selling.

I am in fact looking for Friday's action to continue tomorrow."
The only thing more difficult than long term forecasts are short term forecasts.
:)

[Tao Jaxx]

@Tao Jaxx Just saw that the author added: "I am getting out of the short term market prognostication business. Clearly the volatility is not over."
Smart move!

[RWilliam]

@Tao Jaxx based on what? The weekly RSI is 50.66 not oversold. A weekly Chart will bring you back before the crash. Build the chart I describe above and we broken both support lines.

[RWilliam]

@Tao Jaxx I tried got in after the first wave from selling high p/s stocks put it in VOO, got stopped out. Bought the dip tentatively. This very shaky, Twain, China tech, China housing, tapper talk, debt limits………

[Clauser1960]

Inflation has arrived, interest rates will go up and stocks will go down. Stop whistling "singing in the rain" and get defensive!

[Tulip hoard]

Thank you for your work great starting off point to conduct d/d, however your early on most of these names here however I would like to roll some of my commodity profits into one or two specs. ty. Agree with another member looking like 2018 again😁

[ttanphat]

The bear just about to get out of hibernation lol

[Diesel]

At this rate we'll hit the 200 day MA in a matter of days. This is looking more and more like the 2018 correction that lasted until Christmas eve.

[RWilliam]

@Diesel we got hit the 150 first it’s a ways down. Remember in March 2020 we blew through the 200 dma like a knife in warm butter.

[Diesel]

March 2020 was an exceptional time though. We literally had the entire world economy shutdown with tons of uncertainty.

[Carol888]

I just don't know. I fear that none of these high tech names will work until and unless the long bond gets a bid.

More and more it is looking like a sea change in inflation is taking hold and that could mean a whole new change in leaders.

What to do? Energy names are very strong. Also very difficult to play as you pointed out because of unpredictable factors.

If I add to anything in here it has to be a value name that pays me something because this could go on for longer than I would like.

[marketnoob]

Hi David -
I continue to enjoy reading your stream of consciousness like articles on trading volatile names.
Thoughts on GTE as an energy play?
Best-
MN

[Kanikoski]

Thank you for the eVTOL coverage. I had done a little research on this trend already, but you have turned up a couple of names that I must have missed as they went through the SPAC process. Food for thought. Maybe I'll dip in with a couple of shares as a sort of enhanced watch list.

[dalerb]

I don't know how much the stocks you highlighted reflect your overall portfolio, but no one over the age of 50 should be concentrated in such small cap technology names. Wipeouts like today are hard to tolerate.

[cdgingrich]

@dalerb So, you are only planning to live to age 55???

[dalerb]

@cdgingrich How many of those stocks do you think will still be around in 5 years? Historical trends would suggest very few. Very high beta, high risk, speculation only, and for those with a strong stomach.

[ActLikeYouGotSomeSense]

@dalerb:

If you’re a new reader, this author keeps a “trading account” and a “buy-and-hold account” with traditional dividend payers.

There is a column he wrote back in Nov. 2019 about traditional investing as opposed to trading which I sort of wish would be linked to at the bottom of the columns so people understand this is a very “boutique” way of doing it.

[TheHarlequin]

I am betting the hunt for yield is still alive and bullish. I believe the current volatility is not driven by a rush to the exit but by de-risking (banking gains) ahead of an anticipated hike in interest rates which will increase the discount rate on future cash flows reducing the pv and consequently the mv of equities, particularly growth stocks. In addition to that I feel there is a move towards increasing cash levels to prepare for a rotation into a bond bull run - hence the sell off in FAGM all highly liquid stocks that have done well this year. Bond yields are more likely to rise than fall over the next twelve months. The question then is what happens as the overhang of share sales decline and prices stabilize. Will investors view lower prices as a buying opportunity or will they sit back and hope for further falls. This is a process than can go on for some time making it difficult to call the bottom of the market. Bob Farrell (often quoted) certainly said that markets tend to revert to the mean. He also said "exponential rapidly rising or falling markets usually go further than logic suggests, but they never correct sideways". Another way of putting this is at any point in time you have to decide whether you are a bull, a bear or a pig (we all know what happens to the pigs).

[David H. Lerner]

I bought more SNAP, AFRM, ASAN, PYPL, and SPT today... I am not backing off my plan.

[Siswati]

@David H. Lerner Great - but u should qualify for those that are not regular readers , that these stocks are your “boutique basket” of stocks and that u have a separate portfolio of dividend/value stocks. Importantly some great stocks mentioned in this article if bought 3+ Months ago - but not at current prices

[ttanphat]

@David H. Lerner
Afrm hahahah